Does the value of a dollar increase during an economic depression?

In deflation, prices drop because the value of a dollar increases because the government prints less money. In a depression, prices also drop so would that mean the value of a dollar also increases in a depression? Why or why not? Sources?

Category: Discussion

2 Responses to “Does the value of a dollar increase during an economic depression?”

  1. A depression does not necessarily mean deflation. If the depression were accompanied by a rapid increase in the money supply, exactly the opposite would occur. In fact this is exactly what happened in Germany during the 1920s.

  2. Several issues to clear up:

    In deflation, it is not the government that is “printing” less money. Money is created by banks, and the banks are lending (creating) insufficient money to grow the money supply. Plus in a true deflation you also have money supply shrinking due to bankruptcies and bad loans being written off, and maybe even banks failing (all these things make money disappear from existence).

    Prices do not NECESSARILY drop during a depression, but that’s a strong possibility.

    What do you mean by “value of the dollar”? There are two issues: domestic inflation/deflation, and exchange rate against other countries’ currencies. USUALLY when people speak of the dollar increasing or decreasing they are talking about the exchange rate, which is (largely) independent of domestic inflation ore deflation.

    Yes, deflation (falling prices) does mean the value of the dollar versus domestic prices in increasing, but people usually stick with the terms inflation or deflation to avoid ambiguity. If you are wondering whether the exchange rate value of the dollar increases or decreases during a depression, it could go either way — particularly since, if the US were in a true depression, most of the rest of the world would be also.