“[Interviewer:] Does that mean we should be happy about deflation?Really? The deflationary period of the 19th century generated “the greatest increase in prosperity in history”? What is the evidence for that?
[Huerta de Soto]: Certainly. It is particularly beneficial when it results from an interplay of a stable money supply and increasing productivity. A fine example is the gold standard in the 19th century. Back then, the money supply only grew by one to two percent per year. At the same time, industrial societies generated the greatest increase in prosperity in history.”
Jesús Huerta de Soto, “Deflating the Inflation Myth,” Cobden Centre, 7 December 14.
Now it is true that there was in virtually all nations a long-run deflationary trend for most of the 19th century, even if punctuated by inflationary booms outside the 1873 to 1896 period (which was marked by almost persistent deflation).
Huerta de Soto’s statement can only mean that the gold standard era had an historically unprecedented real per capita GDP growth rate compared to all other eras both before and since.
Let us look at the average OECD real per capita GDP growth rate estimates and data for various periods over the past three centuries:
1700–1820 – 0.2%Uh oh.
1820–1913 – 1.2%
1919–1940 – 1.9%
1950–1973 – 4.9%
1973–1990 – 2.5%
(Davidson 1999: 22).
This is what happens when an Austrian economist puts his foot in his mouth and makes statements in accordance with Austrian ideology but not backed by the empirical evidence.
As we can see, the industrial revolution of the 19th century under the gold standard most probably generated the greatest increase in real per capita wealth in history up to that time, but its record has since been surpassed. The best period of real per capita GDP growth was the 1950–1973 era: the time of Keynesian economics and modern macroeconomic management and also a much higher level of government intervention in the economy, both before and since.
But, the critic might counter-argue, didn’t Huerta de Soto really mean it was that specific deflationary period of the 19th century – which is normally taken to be the 1873 to 1896 era – that generated “the greatest increase in prosperity in history”? Possibly that is what he meant.
We can look at the data for the UK, the US and Germany below from 1873–1896 (with data from Maddison 2003):
UK Average per capita GDP Growth Rate 1873–1896: 1.057%Since these were the most advanced, fastest growing economies of the late 19th century, it is unlikely any other nations achieved an average per capita GDP growth rate higher than them, and certainly not in numbers large enough to affect the average for that era.
US Average per capita GDP Growth Rate 1873–1896: 1.422%
German Average per capita GDP Growth Rate 1873–1896: 1.495%.
So even within the 1873 to 1896 era the figures do not seem deviate too far from the 1820–1913 OECD average. They were also inferior to the Keynesian golden age of capitalism from 1950–1973, which remains the best period in human history for real per capita output growth.
One can also note that the deflationary era of 1873 to 1896 produced deep business pessimism at the least in the UK (and possibly other nations too) resulting from the “profit deflation” or profit squeeze of that era, and there were also protracted economic problems in the 1870s and 1890s. In the US, this period coincided with the free silver movement and bimetallist political movement that opposed the gold standard, arising in part from the debt deflationary distress to debtors in that era.
In short, the idea that under the gold standard the industrial nations “generated the greatest increase in prosperity in history” at any time before or since is untrue, and is nothing but a libertarian myth.
Davidson, P. 1999. “Global Employment and Open Economy Macroeconomics,” in J. Deprez and J. T. Harvey (eds), Foundations of International Economics: Post Keynesian Perspectives, Routledge, London and New York. 9–34.
Maddison, Angus. 2003. The World Economy: Historical Statistics. OECD Publishing, Paris.