This expansion sparked off a boom and misdirected production. Eventually the boom bust, credit contracted and the economy fell into depression. Confusing these two phenomena could have dangerous consequences. It has been argued that to allow prices to fall indefinitely would cause interest to fall close to zero and thus make it impossible for a government to use interest rate cuts to stimulate economic activity. This is just pure nonsense.
Interest is a product of time preference.
For it to fall to zero people would literally have to give up every kind of current consumption in favour of distant consumption. Not a very practical thing to do. If, for example, the social rate of time preference remained unchanged, falling prices would lead to a nominal fall in interest rates while the real rate would remain unchanged. This means that if time preference brings about a 5 per cent interest rate then a an annual 2 per cent price fall would create a nominal 3 per cent interest rate. In any case, falling prices would eventually see the market respond by expanding the money supply as it did in the nineteenth century.