Saul comments on the UK economy during the long period of price deflation from 1873 to 1896:
“one major source of finance for industry was industrial profits and variations in their level were of high importance in determining the trends in industrial investment. Evidence for the years after 1870 suggests that such investment varied more than proportionately with changes in profits. When profits fell, for instance, industrial investment declined to a greater extent. Probably at those times entrepreneurs used such profits as they made to buy foreign securities or to maintain dividends. Now, as we have already seen, a major feature of the British economy after 1876 was the low level of such profits.” (Saul 1985: 41).Even more interesting is Saul’s conclusion about the
“Lower prices squeezed profits to the benefit of wages and probably this led to lower industrial investment.” (Saul 1985: 53).So here price deflation’s effects may have been good for real wages of labour at certain times, but bad for business, which in the end only decreased aggregate investment and employment.
So much for the great claims made for this period of late 19th century deflation! Business seems to have hated it and the deflation depressed their expectations and investment levels.
Saul, S. B. 1985. The Myth of the Great Depression, 1873–1896 (2nd edn.). Macmillan, London.