The painful knowledge of monetary history

As a Market Montarist it is hard not to be quite excited these days. In the US the Federal Reserve after four years of utter failure is finally moving in the direction of a rule-based monetary policy and necessary monetary easing and even better in the UK there is a real debate about NGDP level targeting that might well lead to some form of NGDP level targeting being implemented (fingers crossed…)

I just have one problem – this all reminds me far too much of the 1930s. In 1931 the UK was the first major industrialized country in the world to give up the gold standard and in 1933 the US followed suit. In that way the Anglo-Saxon countries were leading the pack and showed the way out of deflation and depression. However, in continental Europe the commitment to the gold standard remained intact until the second half of the 1930s and at that point the social fabric of many European countries had been damaged and Europe disintegrated into war and destruction. It is very clear that had it not been for the utterly damaging effects of the gold standard on Germany’s economic and social well-being then Hitler and his Nazi party would never have gotten to power in 1933.

So while the UK and the USA started to move out of the crisis and started economic and social recovery the result was nonetheless that both countries got dragged into a World War. I am not saying that that will happen again, but I certainly see the same commitment in continental Europe today to failed monetary policies as was the case in the 1930s.

Luckily I am no Marxist because then I would have had to hang myself – however, unlike Marxists I don’t think history is predetermined. Ideas matter and good ideas matter more. Ideals can change the faith of nations and continents. Thanks to people like Scott Sumner policy makers in the UK and the USA are getting inspired to do the right thing. I hope somebody in Frankfurt will also learn a lesson from history and from reading Scott’s blog.

But I am not optimistic. In the UK the Chancellor of the Exchequer calls NGDP level targeting an “innovative” idea, while in the euro zone the commitment to failed monetary policies seems as strong as a year ago (and in 1933). I hope that Mario Draghi and his colleagues in the ECB will learn the lesson from history. Deflationary monetary policies will not only destroy economies, but also threaten the social fabric of society and can ultimately lead to war.

Merry Chrismas – and sorry to ruining the party.

Update: Scott Sumner also picks up on the European tragedy.


Dear Mario Draghi here is a few blog posts on 1930s economic and monetary history:

The Tragic year: 1931
Germany 1931, Argentina 2001 – Greece 2011?
Brüning (1931) and Papandreou (2011)
Lorenzo on Tooze – and a bit on 1931
“Meantime people wrangle about fiscal remedies”
“Incredible Europeans” have learned nothing from history
The Hoover (Merkel/Sarkozy) Moratorium
80 years on – here we go again…
“Our Monetary ills Laid to Puritanism”
Monetary policy and banking crisis – lessons from the Great Depression

“The gold standard remains the best available monetary mechanism”
Hjalmar Schacht’s echo – it all feels a lot more like 1932 than 1923
Greek and French political news slipped into the financial section
Political news kept slipping into the financial section – European style
November 1932: Hitler, FDR and European central bankers
Please listen to Nicholas Craft!
Needed: Rooseveltian Resolve
Gold, France and book recommendations
“…political news kept slipping into the financial section”
Gideon Gono, a time machine and the liquidity trap
France caused the Great Depression – who caused the Great Recession?

Who did most for the US stock market? FDR or Bernanke?
“The Bacon Standard” (the PIG PEG) would have saved Denmark from the Great Depression
Remember the mistakes of 1937? A lesson for today’s policy makers
I am blaming Murray Rothbard for my writer’s block
Irving Fisher and the New Normal

%d bloggers like this: