We know so little. This is one of the major themes of this site, hence the frequent rebukes to those speaking with great confidence about things far beyond our ken — based on the available data and tested theories. In the realm of public policy that is nowhere more salient than economics. Which brings us to what might be the primary similarity between our situation today and the Great Depression.
Contents
- History
- That was then; what about now?
- Afterword and for more information
History
During the Great Depression policy makers were bound by what economist Barry Eichengreen called “golden fetters.” For reasons too complex to discuss here, nations could not take the necessary stimulus measures until they unplugged from the gold standard. That is, going off the gold standard was a necessary (but not sufficient) prerequisite for recovery. Under the force of events governments did so, but fearfully — not knowing what lay beyond this step into the unknown. (After WWI, with difficulty they went back onto a gold standard in 1922)
“As a result, individual countries were able to escape the deflationary vortex only by unilaterally abandoning the gold standard and re-establishing domestic monetary stability, a process that dragged on in a halting and uncoordinated manner until France and the other Gold Bloc countries finally left gold in 1936.”
— Ben Bernanke, Essays on the Great Depression (2005)
“What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy – even in the face of total catastrophe.”
— Paul Krugman, “What’s our gold standard?“, blogging at the New York Times, 27 March 2009
Notes on these:
(1) “E&T” refers to “The Gold Standard and the Great Depression“, Eichengreen and Peter Temin, June 1997
(2) For more about this see Government policy errors as a cause of the Great Depression (1 November 2008)
With the clarity of hindsight, we can see what was mysterious to them. As in this graph from Brad Delong’s site, “The Earlier You Abandon the Gold Standard and Start Your New Deal, the Better“, 26 March 2009 (the lines in color show industrial production after going off gold):
Paul Krugman’s blog has a similar graph showing that the gold standard constrained monetary policy.
That was then. What about now?
In 1930 mainstream economists were confident they knew what to do. Now we know that most were wrong. If our situation was exactly like that of 1930, today’s economists would know exactly what to do. But that was then; this is now. The world has changed, but one thing remains the same: many economists are confident in their solutions.
“{W}e know what to do and how to do it to keep the world economy out of a depression.”
— Brad Delong, “Are We Handcuffed by Golden Fetters?“, posted at his blog, 27 March 2009
Our leaders have implemented the conventional remedies. Over the next 6 – 9 months we will see the results (lags are long in complex modern economies). They seek to restore the status quo ante-Depression, the post-WWII financial regime. Perhaps they will be successful. But I doubt it.
Might there be an equivalent set of cognitive fetters — as there was in the Great Depression — so that we cannot see the systemic factor that must be changed in order to end the downturn?
Paul Krugman speculates that “the mystique of finance is playing a somewhat similar role” (i.e., like the gold standard in the 1930’s), expanding on his thoughts in “The Market Mystique“, op-ed in the New York Times, 26 March 2009.
I believe there is an obvious candidate, one similar to that of the 1930 gold standard: the US dollar as the reserve currency. This is a foundational element of the post-WWII world. Just as the US is the global hegemon, the US currency is the primary medium of trade and store of value. But that era is ending. As we move to a multi-polar world, the US can no longer maintain the twin burdens of hegemony: monetary and militarily.
We do not want to let go that role. Nor does most of the world want us to do so. Almost every nation has adapted to the current world order and fears the large, unknown changes that will follow its ending. The last such transition was 1914 – 1945; nobody enjoyed it.
The clock is running on the “developed world” — Japan, Europe, and America. All face some combination of demographic decline, bankrupt social retirement systems, and unsustainable government debt loads. A new world looms ahead. We close our eyes to this transition, hoping that it will go away — and we’ll open our eyes to the old world, shiny and new again.
For more information from the FM site
To read other articles about these things, see the FM reference page on the right side menu bar. Of esp interest these days:
- about the Financial crisis – what’s happening? how will this end?
- about the End of the post-WWII geopolitical regime
- and some Good news about America, a collection of articles!
Some posts about the transition to a new world:
- Prof Nouriel Roubini describes “The Decline of the American Empire”, 18 August 2008
- “A shattering moment in America’s fall from power”, 19 November 2008
- “End of Empire” by David Roche, 29 November 2008
- The transition between Imperial reigns: what will it mean for America?, 16 December 2008
- This financial crisis is the transition to a new world; like birth, it is painful, 11 February 2009
- To understand the Imperial Unconscious, Tom provides the Dictionary of American Empire-Speak, 6 March 2009
- A look at the new world – after the downturn, 19 March 2009
Afterword — and an important note about comments to this post
This is not a post about the gold standard, and comments about its wonderfulness are off-topic and will be deleted.
Please share your comments by posting below. Per the FM site’s Comment Policy, please make them brief (250 words max), civil, and relevant to this post. Or email me at fabmaximus at hotmail dot com (note the spam-protected spelling).
For information about this site see the About page, at the top of the right-side menu bar.