7 causes of deflation during a currency collapse

I've been pondering the deflation (in real / gold terms) which occurs during currency collapse and I can find 7 reasons for it, so far:

1) Continuation of existing deflation. Currency failures tend to occur in the midst of terrible economies. After all, if there is more and more paper and less and less production, a loss of confidence in that paper is just a matter of time. Or, as I've heard it said recently: "Deflation is the midwife of hyperinflation." If you had an unhealthy economy before, it is not going to be reinvigorated by a failing currency.

2) Disruption of business due to price instability. Businesses fail to take into account escalating price inflation and wind up bankrupt. Businesses close, jobs are lost, and production declines.

3) Money supply is shrinking in real terms. There's a point of no return, a sort of event horizon, beyond which prices increase faster than the rate of money printing. Say the government is printing so fast that the money supply will increase 20-fold this year. If you are past the point of no return (characterized by sky-high money velocity), then prices will go up more than 20-fold, perhaps more like 30- or 50-fold. Which means that in terms of "stuff," or gold, there is less total money in circulation. (Note that a decrease in the supply of money is the Austrian definition of deflation.)

4) Price controls destroy production. Governments always attempt to demonize merchants and pass laws capping prices, which causes factories and farms to simply shut down, because it would cost more to produce their goods than they would ever get back.

5) Capital is destroyed. Businesses and many wealthy families have their savings wiped out, meaning there is less capital to invest in means of production.

6) Capital goes on strike. Even when capital is preserved by being moved off-shore or into gold, silver, antiques, landed estates, etc, this capital is not available to industry. Gold has sometimes been called "capital on strike," since the rich move into gold when economic conditions are dire or chaotic, as there are no viable investments. The elites are merely interested in wealth preservation, not in traditional forms of investment, which no longer make any sense. Thus, any remaining capital is sunk into unproductive stores of value and production suffers.

7) Fatalism sets in. There are fascinating descriptions of the psychology of Germans in the Weimar era, and of other times and places which have gone through hyperinflation. Saving and planning for the future have failed as savings are wiped out, and chaos now reigns, so people stop planning. Society begins breaking down: crime increases, moral or behavioral standards go out the window, and people live in the moment. When this happens on a societal scale I can only assume it hampers production.


What happens to prices in nominal terms doesn't matter, not once middle class savings have been destroyed and pensions have been made worthless. By that point, a price or a wage or the total money supply as measured in the currency are all irrelevant. What matters is how many minutes of labor are required to buy X units of "stuff," and there you will find that more and more labor is required to buy less and less stuff. And to the man and woman on the street that's all that matters.