| The late 1800s had some rather severe panics that were caused by deflation - specifically, the Panics of 1873 and 1893. The problem with fixed-supply currencies is that if the economy is growing, and the supply of currency stays constant, currency is worth more. If your debt is measured in that currency, your debt just increased, and you might no longer be able to pay it. Large numbers of foreclosures are bad. Incidentally, one of the biggest political movements in response to these panics was a push to put the US onto the silver standard. Silver is more common, so it's easier for the supply of currency to increase (read: inflation) as the economy increases. A guy named William Jennings Bryan made a rather famous speech[1] about it. Today, we eschew a metallic standard entirely and just focus on achieving a constant rate of inflation. Zero inflation would be fine, but it's hard to achieve, and any missteps might lead to deflation. So, the Fed aims for 2% inflation - low enough for the value of the dollar to be pretty stable, but high enough that if the economy does something weird, we don't enter a deflationary state. [1] https://en.wikipedia.org/wiki/Cross_of_Gold_speech |