Over the past nine months there has been a growing number of articles written about the possibility of a serious deflation in the U.S. Articles have appeared in a wide range of respected business publications... What is extraordinary about virtually all the popular discussions of this topic is the total absence of any mention of the role of domestic monetary policy and the utter failure to distinguish between the behavior of relative prices and the overall price level. Sustained inflation is always a monetary phenomenon. Similarly, sustained deflation is also a monetary phenomenon. The Great Depression is the obvious case in point. Between 1929 and 1933 the price level fell by 22 percent. However, the money supply during the same period fell by 25 percent. It is highly unlikely that the Federal Reserve would ever engage in such a contractionary activity again. And unless the Federal Reserve becomes substantially more stingy with the growth in money than it has been, significant deflation is simply not in the cards.
