Deflationary Depression

The second definition of depression is: a period of time when the distortions and misallocations of capital in an economy are liquidated. Every administration for the last seventy years has been confronted with the choice of either propping up the economy to give the impression of more prosperity or allowing it to collapse and liquidate so things can restructure themselves. That, however, would cause bancrupcies, unemployment, and a lot of unpleasantness.

The Business Cycle

It is recognized that the most destructive single consequence of inflation is the business cycle. What is meant by business cycle? Business cycle is the process in which the economy is artificially expanded by increases in the money supply and then followed by its uncontrolled contraction. However, the business cycle could not exist in pure capitalism. There could be no inflation since the money supply- in the form of gold- would be constant relative to everything else. With no inflation there would be no business cycle- and no inflationary booms. Depressions would be rare and localized events that occured only during war or a severe natural disaster.