All in all, he thinks deflation is either good or at worst harmless. For example:
When the stock of money is not increased, falling
prices are a normal result of increased production and economic
progress. They need not bring recession, because the falling prices
are themselves the result of falling production costs. Real profit
margins are not reduced. Money wage-rates may not increase, but
real wages will increase because the same money will buy more.
Falling prices with continued or rising prosperity have occurred
frequently in our history.
But every once in a while he mentions 'devastating deflation". Like here [emphasis mine]:
If the world, or at least this country, ever returns to its senses,
and decides to reestablish a gold standard, the fractional reserve
system ought to be abandoned. If by some miracle the U.S. gov-
ernment were to make this decision tomorrow, it could not of
course wipe out the already existing supply of fiduciary money
and credit, or any substantial part of it, without bringing on a
devastating and needless deflation.
As long as we were operating on a fractional-reserve gold standard,
any attempt to return to a pure, or 100 percent, gold standard
would have involved a devastating deflation, a ruinous fall of
Here he calls a fall in prices a problem and a mistake [emphasis mine]:
When the First World War ended, some of the belligerents went
back to the gold standard. England again is the outstanding ex-
ample of the problems of doing this and of the mistakes that were
made. Resumption of gold payments was undertaken at the prewar
rate for the pound in 1925. But two greatly changed circumstances
were overlooked. First, there had been an enormous expansion
meanwhile in the issuance of British currency and credit, that is,
in the amount of paper promises that people might want to convert
into gold. And second, as a result of that, prices had risen substan-
tially. If in 1925 the currency had been made convertible only at
a correspondingly higher "price" for gold, the resumption of gold
payments might have worked. But the resumption at the old rate
made gold too much of a bargain, and forced a contraction of
British credit and a fall in prices.
So what gives? Is inflation good, bad, ugly, or maybe even devastating?
The answer lurks in his other book, What You Should Know About Inflation.
Here's the quote, emphasis mine:
"The case of Great Britain is clear. It had gone off gold
in World War I. The pound had dropped from a gold
parity of $4.86 to a low of $3.18 in February 1920, and had
returned in late 1924 to approximately 10 per cent below the
gold parity. But wholesale prices in Britain in 1924 were
still 70 per cent above their prewar level.
The British Government decided to resume the gold standard at the old
par in 1925. The result was a steady fall in wholesale prices
over the next seven years from an index number of 171.1
(1913 equals 100) in January 1925 to 99.2 in September 1931,
the month in which England abandoned the gold standard.
As the British all during this period were unwilling to make
corresponding cuts in retail prices and wage rates, the result
was falling exports, stagnation, and unemployment.
And it was the gold standard itself, not the false rate (or the in-
ternal inflexibility of wages), that got the blame."
So there you have it. Bottom line: Deflation [=decrease in amount of paper flying around, or if there is a gold standard, the rise of the value of the currency in terms of gold] is not in an of itself a bad thing. Lower prices are not a bad thing, nor are lower wages, if prices of everything go down.
The trouble with deflation happens when it is induced from the outside, with something like reintroducing the gold standard [without taking appropriate steps, as Hazlitt details in the book]. Even then all it does is lead to lower prices of everything, and that is not necessarily bad either.
The real horror of deflation happens when people are then unwilling to make
corresponding cuts in retail prices and wage rates. This of course, results in stagnation, and unemployment.
[I left out "falling exports" in my summary, because I don't really get what's wrong with falling exports. Maybe he means that other countries are unwilling to trade, which is of course, a bad thing].