Editing Deflation (section)

===Money supply-side deflation===
From a monetarist perspective, deflation is caused primarily by a reduction in the [[velocity of money]] or the amount of [[money supply]] per person.

A historical analysis of money velocity and [[monetary base]] shows an inverse correlation: for a given percentage decrease in the [[monetary base]] the result is a nearly equal percentage increase in money velocity.<ref name="Hussman2010"/> This is to be expected because monetary base ({{math|{{var|M}}{{sub|{{var|B}}}})}}, [[velocity of money|velocity]] of base money ({{math|{{var|V}}{{sub|{{var|B}}}})}}, price level ({{mvar|P}}) and real output ({{mvar|Y}}) are related by definition: {{math|{{var|M}}{{sub|{{var|B}}}}{{mvar|V}}{{sub|{{var|B}}}} {{=}} {{var|P}}{{var|Y}}}}.<ref>{{cite book|title=Money Mischief: Episodes in Monetary History|last=Friedman|first=Milton|year=1994|publisher=Houghton Mifflin Harcourt|isbn=9780547542225 |pages=38}}</ref> However, the monetary base is a much narrower definition of money than [[M2 (economics)|M2 money supply]]. Additionally, the velocity of the monetary base is interest-rate sensitive, the highest velocity being at the highest interest rates.<ref name="Hussman2010"/>

In the early history of the United States, there was no national currency and an insufficient supply of coinage.<ref name=" David Ginsburg">{{cite book|url=https://books.google.com/books?id=nFkJTM2Rzc0C&q=how+gold+coins+circulated+in+nineteenth+century+america+ginsberg&pg=PA25|title=Gold Coins of the New Orleans Mint: How Gold Coins Circulated in 19th Century America|first= David|last= Ginsburg|year=2006| pages=25–33|publisher=Zyrus Press |isbn=9780974237169}}</ref> Banknotes were the majority of the money in circulation. During [[financial crises]], many banks failed and their notes became worthless. Also, banknotes were discounted relative to gold and silver, the discount depended on the financial strength of the bank.<ref name=" Taylor 1951"/>

In recent years changes in the money supply have historically taken a long time to show up in the price level, with a rule of thumb lag of at least 18 months. More recently Alan Greenspan cited the time lag as taking between 12 and 13 quarters.<ref>Greenspan interview on CNBC, 3 December 2010</ref>{{full citation needed|date=November 2022}} Bonds, equities and commodities have been suggested as reservoirs for buffering changes in the money supply.<ref>{{cite book|title=You Can Profit from a Monetary Crisis|last=Browne|first=Harry|year=1981|publisher=Ishi Press International |isbn=4-87187-322-6 }}</ref>