“The second situation in which it is true that an increase of employment requires an increase in aggregate demand,” Hayek (1974, p. 5) now maintains, “is found in the later stages of a depression when, in consequence of the appearance of extensive unemployment, the economy frequently is subjected to a cumulative process of contraction. . . . of secondary deflation, which may go on for a very long time.” He concludes:
I am today the last to deny—that, in these circumstances, monetary counteractions, deliberate attempts to maintain the money stream, are appropriate…, I have to admit that I took a different attitude forty years ago, at the beginning of the Great Depression. At that time I believed that a process of deflation of some short duration might break the rigidity of wages which I thought was incompatible with a functioning economy. Perhaps I should even then have understood that this possibility no longer existed. . . . I still believe that we shall not get a functioning economy until wages again become flexible, hut I think that we shall have to find different techniques for that purpose…. Today I believe that deflation has no recognizable function whatever, and that there is no justification for supporting or permitting a process of deflation [1974, p. 5].