Editing Deflation (section)

====Historical examples of credit deflation====
In the early economic history of the United States, cycles of inflation and deflation correlated with capital flows between regions, with money being loaned from the financial center in the Northeast to the commodity producing regions of the (mid)-West and South. In a [[procyclical]] manner, prices of commodities rose when capital was flowing in, that is, when banks were willing to lend, and fell in the depression years of 1818 and 1839 when banks called in loans.<ref name="North1966">
{{cite book |title      = The Economic Growth of the United States 1790–1860
 |last       = North
 |first      = Douglas C.
 |year       = 1966
 |publisher  = W. W. Norton & Company
 |location   = New York, London
 |isbn       = 978-0-393-00346-8
 |url-access = registration
 |url        = https://archive.org/details/economicgrowthof00doug
}}
</ref> Also, there was no national paper currency at the time and there was a scarcity of coins. Most money circulated as banknotes, which typically sold at a discount according to distance from the issuing bank and the bank's perceived financial strength.

When banks failed their notes were redeemed for bank reserves, which often did not result in payment at [[par value]], and sometimes the notes became worthless. Notes of weak surviving banks traded at steep discounts.<ref name="David Ginsburg"/><ref name="Taylor 1951"/> During the Great Depression, people who owed money to a bank whose deposits had been frozen would sometimes buy bank books (deposits of other people at the bank) at a discount and use them to pay off their debt at par value.<ref>Benjamin Roth, ed. James Ledbetter and Daniel B. Roth, ''The Great Depression: A Diary''. Perseus Books, 2009, p. 36. "A market for buying bank 'passbooks' also cropped up in places like Youngstown. If you were desperate enough in 1931 for money to buy basic necessities, you could get 60 to 70 cents on the dollar for your passbooks' value. Local newspapers even printed the weekly rates for buying and selling these passbooks as they became a commodity; Roth pasted one such rate chart into his diary."</ref>

Deflation occurred periodically in the U.S. during the 19th century (the most important exception was during the Civil War). This deflation was at times caused by technological progress that created significant economic growth, but at other times it was triggered by [[Financial crisis#19th century|financial crises]] – notably the [[Panic of 1837]] which caused deflation through 1844, and the [[Panic of 1873]] which triggered the [[Long Depression]] that lasted until 1879.<ref name="Wells1890"/><ref name="Taylor 1951"/><ref name="North1966"/> These deflationary periods preceded the establishment of the U.S. [[Federal Reserve System]] and its active management of monetary matters. Episodes of deflation have been rare and brief since the Federal Reserve was created (a notable exception being the [[Great Depression]]) while U.S. economic progress has been unprecedented.

A financial crisis in England in 1818 caused banks to call in loans and curtail new lending, draining specie out of the U.S.{{citation needed|date=February 2021}} The Bank of the United States also reduced its lending. Prices for cotton and tobacco fell. The price of agricultural commodities also was pressured by a return of normal harvests following 1816, the ''[[year without a summer]]'', that caused large scale famine and high agricultural prices.<ref>{{Harvnb|Taylor|1951|pp=336}}</ref>

There were several causes of the deflation of the severe depression of 1839–1843, which included an oversupply of agricultural commodities (importantly cotton) as new cropland came into production following large federal land sales a few years earlier, banks requiring payment in gold or silver, the failure of several banks, default by several states on their bonds and British banks cutting back on specie flow to the U.S.<ref name="North1966"/><ref>{{cite web
 | last1 = Wallis
 | first1 = Hohn Joseph
 | last2 = National Bureau of Economic Research
 | title = The Depression of 1839 to 1843
 | url = http://www.startabank.com/history/200809_TheDepression/depression1839.pdf
 | access-date = 2011-12-17
 | archive-date = 2012-03-07
 | archive-url = https://web.archive.org/web/20120307144159/http://www.startabank.com/history/200809_TheDepression/depression1839.pdf
 | url-status = dead
 }}</ref>

This cycle has been traced out on a broad scale during the [[Great Depression]]. Partly because of overcapacity and market saturation and partly as a result of the [[Smoot–Hawley Tariff Act]], international trade contracted sharply, severely reducing demand for goods, thereby idling a great deal of capacity, and setting off a string of bank failures.<ref name="Beaudreau1996" /> A similar situation in Japan, beginning with the stock and real estate market collapse in the early 1990s, was arrested by the Japanese government preventing the collapse of most banks and taking over direct control of several in the worst condition.