[#3Fan]

In the last decades of the 1800s the U.S. money supply shrank by at least a third and deflation was a gigantic problem leading to the creation of several political parties trying to deal with its crushing impact on the farmers and the west. It was not a percent here or there.

What was it then? It took decades to shrink by a third? That doesn't sound bad at all. Inflation runs higher than that now, doesn't it? Looks like we had more problems than currency. Looks like there was a railroad bubble or something. LOL

[justshutupandtakeit]

No this was the attempt to return the U.S. to a gold standard which destroyed the greenbacks and shrank the money supply. Loans taken out by farmers in 1870 became unrepayable when the money supply shrank and prices fell as a result. If your loan is at a 5% interest rate and the return to gold causes prices to fall by 5% a yr. your "real" interest rate is doubled while the prices of farm products collapse destroying the revenue stream to repay them.

It was these problems which provoked the farmers to demand a central bank to remove monetary control from the hands of the eastern money center banks. Bankers resisted any idea of a central bank until the Panic of 1907 made them realize that there wouldn't always be a J.P Morgan available with the ability to stop a panic and its runs on banks.

Review U.S. history from 1875 to 1900 to get a clear idea of what happened here.