[skookumchuck]

> The deflationary forces spiral the economy lower and lower.

With free banking, there won't be net deflation either, as the market forces on the creation/destruction of money prevent it.

As pretty strong evidence, there was no net deflation or inflation in the US dollar from 1800 to 1914, while the economy grew from subsistence farming to superpower.

To argue that this cannot work, one must explain that.

[bildung]

Inflation was as high as 25% a year in the 1860s, and deflation as high as 10% in the 1840s; where is your idea of zero inflation in the 19th century coming from?

The one thing that changed in the 20th century is the absence of severe deflationary crises. Inflation in the 20th century is actually way less volatile than in the 19th century, but absent deflational periods those low levels of inflation compound over the decades.

source: http://liberalarts.oregonstate.edu/sites/liberalarts.oregons...