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The article challenges the hypothesis that the Great Deflation was an inevitable outcome of the resumption of gold convertibility at prewar parities.Thealternative that the relative prices of gold tended to gravitate one to another is derived from the conventional gold standard model and Cassel’s insights into purchasing power of currency. It is demonstrated that (1) although the relative price of gold returned to its prewar level the adjustment was driven by differences between countries rather than the absolute deviation from the prewar level; (2) mutually inconsistent monetary policies of major central banks were important for deflation dynamics.
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