The Interwar Period, 1914-1944 | New World Economics

All through this year, we’ve been exploring various things that have been said about the Interwar Period, which I call 1914-1944 although you could extend it perhaps to 1950. The Bretton Woods Agreement dates from 1944, but there was still a lot of turmoil afterwards, including hyperinflation in Germany, Japan and China (plus the victory of the communists in China) before all three countries established a new gold standard basis in 1949-1950. Even the Bretton Woods signatories had a lot of turmoil, including a wave of devaluations worldwide led by Britain in 1949, and also a bit of a floating dollar in the U.S. before the Fed Accord of 1951.

But, this is really about the 1914-1939 era, in particular the Great Depression. The trauma associated with that experience is still around with us today, and tends to take the form of an intense attachment to floating fiat currencies, by both the left-leaning Keynesians and the right-leaning Monetarists. This attachment tends to have a (somewhat irrational) basis in two related ideas: first, that a floating currency, or the tool of monetary distortion, is a necessary element of government. The second is that the gold standard systems of the time somehow didn’t work properly, although this is never very well explained.

Both of these ideas are related to the “Tyranny of Prices, Interest and Money,” which economists fell into beginning in the 1870s and haven’t really escaped even to the present day. Once economics has been reduced to these three elements, you just naturally end up with the conclusions that people came to in the 1930s and afterwards.

July 10, 2016: The Tyranny of Prices, Interest, and Money

The way out of the box is to see that economies don’t just self-destruct due to an “autonomous decline in aggregate demand,” a term that has no meaning except: “there’s a recession.” (“Autonomous” means “for no reason”.) An enormous number of easily-identified nonmonetary disasters — in other words, not related to Prices, Interest and Money — were taking place, beginning with a worldwide tariff war set off by the threat (and later passage) of the Smoot-Hawley Tariff in the U.S., and followed by major domestic tax hikes by many governments, among many things. These are obvious enough that we certainly don’t need to rely on any “it-came-from-a-blue-sky” fantasies that Keynesians entertained for decades. Second, there wasn’t any problem with the money. There was a problem with virtually everything else, from tariff and tax policy, to systemic issues including bank solvency and sovereign default, to regulatory attacks on business, to political instability on a broader scale. And, of course, all kinds of monetary chaos after the British devaluation of September 1931. But, the gold standard system itself, in 1925-1931 and among its adherents after 1931, was basically fine — a conclusion which was conventional wisdom until the 1960s.

Following the September 1931 British devaluation, another twenty-two countries also devalued by the end of 1931 (including British commonwealth countries), leaving only twenty-two countries (out of fifty-four) remaining on a gold standard. By this point, anyone continuing with a gold standard without devaluation was subject to a variety of pressures. This included, of course, direct trade consequences: a flood of cheap imports undermining domestic industries, and a collapse of foreign export markets. But, it also included other things, such as: any financial institution with assets that had been devalued (like foreign bonds), but liabilities that had not (like domestic deposits), were now insolvent. Issues such as these, once a large number of countries devalue, tend to cause other countries to devalue alongside to normalize exchange rates. This was true after 1931, and also after 1971. Nobody wanted the U.S. to devalue and float the dollar in 1971 — they wanted to keep the gold-based Bretton Woods system. However, the result was that all other countries floated and devalued too.

A proper understanding of the Interwar Period helps release the trauma associated with the time, and also the irrational death-grip on floating currencies as some kind of solution to the problem that they didn’t understand. Most currencies were devalued and floated by the end of 1931, and yet the Great Depression ground on for years afterwards. Once you see that the Great Depression had identifiable causes, you can then go about fixing those problems directly, or avoiding them in the first place, rather than grasping for funny-money as a solution for world-economy-destroying disasters that seem to arise out of thin air. Also, once you see that the Great Depression had identifiable causes, you don’t have to go blaming some kind of nonexistent monetary cause, which has led both the Monetarists and Austrians to invent a lot of nonsense theory, because you simply can’t get there otherwise.

If the gold standard of the time was fine, then it could be fine to use it again. Also, you have to clear out all the nonsense theory, necessary to invent a monetary cause that didn’t exist, to allow for the revival of a correct theoretical foundation that will allow a gold standard system to re-emerge in the future.

Before this year, we looked at elements of the Interwar Period in a number of items, including:

February 24, 2013: Japan: the Yen 1914-1941

December 23, 2012: The Federal Reserve in the 1920s 4: The Historical Record
December 16, 2012: The Federal Reserve in the 1920s 3: Balance Sheet and Base Money
November 25, 2012: The Federal Reserve in the 1920s 2: Interest Rates
November 18, 2012: The Federal Reserve in the 1920s
July 22, 2012: The Composition of U.S. Currency 1941-1970
July 15, 2012: The Composition of U.S. Currency 1880-1941
May 13, 2012: The “Gold Exchange Standard”
April 4, 2012: The Gold Standard and “Balanced Trade”
April 1, 2012: Did the Gold Standard Cause the Great Depression?

Here are the items from this year:

September 25, 2016: The “Giant Rise in the Value of Gold” Theory of the 1930s 3: Supply and Demand
September 18, 2016: The “Giant Rise in the Value of Gold” Theory of the 1930s 2: Never Happened Before
September 11, 2016: The “Giant Rise in the Value of Gold” Theory of the 1930s
September 4, 2016: What Is “Sterilization”? 2: The Complexity of Central Bank Activity
August 28, 2016: What Is “Sterilization”?
August 11, 2016: The Gigantic Importance of “Supply Side Economics”
August 7, 2016: Blame France 3: Dump A Pile Of Argle-Bargle On Their Heads
July 31, 2016: Blame France 2: Balance Sheet Peeping
July 24, 2016: Blame France
July 18, 2016: The “Price-Specie Flow Mechanism” 2: Let’s Kill It For Good
July 10, 2016: The Tyranny of Prices, Interest, and Money
June 26, 2016: Foreign Exchange Transactions and the “Gold Exchange Standard”
June 12, 2016: Milton Friedman Blames the Federal Reserve
June 5, 2016: Irving Fisher and “Debt Deflation”
May 22, 2016: The Devaluation of the British Pound, September 21, 1931
May 14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2: Paying Off Debt
April 3, 2016: Credit Expansion and Contraction in the 1920s and 1930s
March 19, 2016: The “Price-Specie Flow Mechanism”
February 14, 2016: The Balance of Payments
February 7, 2016: Blame Benjamin Strong 2: So Obvious It’s Hard To Believe
January 31, 2016: Blame Benjamin Strong
January 24, 2016: The Gold Mining Boom of the 1850s
January 17, 2016: David Hume, “On the Balance of Trade,” 1752

I’ve identified five main proposals — all from “libertarian free market” thinkers — that posit some kind of monetary problem during the 1920s and 1930s. They are:

The “Austrian” Narrative: The “Austrian” claim that there was some kind of giant credit boom or “malinvestment” engineered purposefully by the Federal Reserve in the U.S. during the 1920s. The bust of this “malinvestment boom” supposedly was the main factor behind the 1929-1933 breakdown.

The “Monetarist” Narrative: The “Monetarist” claim that the Federal Reserve was making some kind of mistake by “allowing” M2 (basically, bank deposits) to decline.

The “Gold Exchange Standard” Narrative: A claim popularized by Jacques Rueff that the “gold exchange standard” had something to do with the problems of the 1930s.

The “Blame France” Narrative: Something to do with France.

The “Giant Rise in the Value of Gold” Narrative: The claim that there was some kind of giant rise in the value of gold, which caused all gold-linked currencies to rise alongside, with substantial consequences. The cause of this rise is typically identified as central bank demand.

The first four items share something in common: they are basically contrary to the monetary theory that I hold, and have described in great detail (especially in Gold: the Once and Future Money and Gold: the Monetary Polaris) which includes certain postulates:

1) That there is no monetary “inflation” (causing “malinvestment” or “artificial boom” in the “Austrian” narrative) unless there is a decline in currency value, for example a decline in currency value vs. gold or other currencies. Similarly, there is no monetary “deflation” (causing problems in the “Monetarist” and “Blame France” narratives) without a rise in currency value, for example vs. gold or other currencies.

We can see this is true in examples such as the Bank of England during the 19th century, where there were many contractions of base money supply, sometimes in excess of 15% in a year. However, this did not cause any “monetary deflation” because the value of the currency didn’t change — it remained at its gold parity. The reduction in supply was simply the accomodation of a reduction in demand, via the automatic currency-board-like mechanisms of a gold standard system. Similarly, the 163-times increase in base money in the U.S. between 1775 and 1900 did not cause any “monetary inflation,” because again the value of the currency didn’t change. It was an increase in supply to accomodate an increase in demand, reflective of the economic growth during that time period.

Or, to quote Ludwig von Mises on the topic:

In theoretical investigation there is only one meaning that can rationally be attached to the expression inflation: an increase in the quantity of money … that is not offset by a corresponding increase in the need for money … so that a fall in the objective exchange value of money must occur. Again, deflation (or restriction, or contraction) signifies a diminution of the quantity of money … which is not offset by a corresponding diminution of the demand for money … so that an increase in the objective exchange value of money occurs.

This description leaves out some options where a fall in the value of a currency can take place with no increase in base money supply; or even with a decline in base money supply. Von Mises later said:

Changes in the money relation [balance of supply and demand for money] are not only caused by governments issuing additional paper money. … Prices also rise the same way if, without a corresponding reduction in the quantity of money available, the demand for money falls because of a general tendency toward the diminution of cash holdings.

2) That base money is basically a residual of the gold parity link; in other words, the outcome of the process which maintains the value of the currency at its gold parity value, using techniques similar to a currency board. Thus, whatever it is, is what it had to be to maintain the gold parity. In other words, the supply that matches demand at the parity value.

The fifth item, the “Giant Rise in the Value of Gold” theory, is consistent with the theory I hold. A rise in gold’s value would create “deflationary” monetary implications for currencies linked to gold in value.

I will summarize some of our findings for each of these five claims:

The “Austrian” Narrative

The “Austrian” narrative, popularized by Murray Rothbard, fails to answer the question of: how did this supposedly world-economy-destroying disaster take place while currencies, especially the U.S. dollar, were on a gold standard? This would seem to be a rather big hurdle, especially for gold standard advocates like Rothbard and the other Austrians. The answer, of course, is that it couldn’t — the “Austrian” narrative is basically a criticism of floating-fiat-currency Keynesian monetary fiddling. Although it is certainly descriptive of our own times, and even the Bretton Woods era when Keynesian fiddling was coming into constant conflict with gold parity policies, this was not the case at all in the 1920s. But beyond such things, we have the demonstrable fact that all of Benjamin Strong’s ambitions did not seem to lead to any change in base money at all. It was all cancelled out by the natural workings of the gold standard operations procedures of the time, particularly gold conversion. And if there was no change to base money, and no change to currency value, exactly how did these world-economy-destroying disasters come about?

January 31, 2016: Blame Benjamin Strong
February 7, 2016: Blame Benjamin Strong 2: So Obvious It’s Hard To Believe
May 14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2: Paying Off Debt
April 3, 2016: Credit Expansion and Contraction in the 1920s and 1930s

The “Monetarist” Narrative

The “Monetarist” narrative, popularized by Milton Friedman, basically hints that there was a “monetary deflation” caused by Federal Reserve negligence. To support this assertion, the Monetarists ignore base money — the only kind of money created by the Federal Reserve — and instead look at “M2”, which is basically bank deposits. Bank deposits are banks’ primary liabilities. Their assets are loans. Both contracted. So, the decline in bank deposits was basically a credit contraction, not a “monetary contraction.” It is really not much different than Irving Fischer’s “debt-deflation” observations, but looked at from the perspective of bank liabilities rather than bank assets. The difference is that Fischer recognized this phenomenon — which was real and problematic — as a credit phenomenon, which didn’t have anything to do with the money, which was soundly linked to gold.

Just like the Austrians, the Monetarists also had to torture their basic monetary theory to invent a disaster where none existed. There was no rise in the value of the dollar vs. gold, and thus no “monetary deflation.” U.S. base money actually expanded modestly in the early 1930s. As if to prove Friedman wrong, the Federal Reserve, under political pressure, actually undertook a major expansion in open-market purchases of government bonds in 1932. This was completely cancelled out by gold conversion and reductions in other forms of credit, thus showing definitively that the Federal Reserve was in no way undersupplying base money. Increases in base money, via open-market operations, simply caused a sagging dollar value vs. the gold parity, and consequent gold conversion outflows.

The real purpose of Friedman’s mishmash was to lay blame on Irving Fischer’s “debt-deflation” on the Federal Reserve. It was basically a means of claiming that the Federal Reserve should have somehow prevented the credit contraction by increasing base money. Such an increase in base money would have caused a substantial devalution and floating of the dollar. So, Friedman’s arguments amount to a series of justifications for devaluation and floating fiat currencies, the same recommendation made by Keynesians such as Barry Eichengreen.

It is a little like Greece today, which has also had a decline in M2 by about 40% since 2010, along with a decline in nominal GDP by 25%. Many economists have argued that Greece should devalue and embrace a floating fiat currency, as a means to somehow address this economic collapse. (These devaluers, for the most part, don’t have any other ideas; they are one-tool economists.) In these arguments, they are no different than the Barry Eichengreens who suggest the same things would have been good for central banks of the 1930s. Today, it is fairly easy to see that the euro itself is not the cause of Greece’s problems. Other countries using the same currency have been reasonably healthy. Much the same thing was going on in the 1930s. The gold standard was not causing the disaster. Today, we could imagine that Friedman could point to the 40% decline in Greece’s M2 and claim “deflation.” It would serve as a justification for devaluation and floating fiat currencies.

There really isn’t too much more to the “Monetarist” narrative than that.

June 12, 2016: Milton Friedman Blames the Federal Reserve
June 5, 2016: Irving Fisher and “Debt Deflation”
May 14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2: Paying Off Debt
April 3, 2016: Credit Expansion and Contraction in the 1920s and 1930s

The “Gold Exchange Standard” Narrative

This is the idea that there was some kind of dramatic flaw in the supposed “gold-exchange standard” arrangements of the 1920s and 1930s that led to some kind of disaster. What this flaw was, and what the disaster was that it caused, tend to be rather hazy. Variations on a “gold-exchange standard” were actually quite common before 1914 too — indeed, nearly every central bank besides the United States (the National Bank system), Britain and France held substantial foreign reserves, which they acquired through the process of managing their currency values with transactions with other currencies, rather than with gold directly or via domestic credit assets. The general pattern of the pre-1914 period was also one of “gold-exchange standards” among peripheral countries. During the 1920s there were a lot more monopoly central banks, due to the spread of central banks in Latin America during that decade, and also the emergence of several new countries (especially in Eastern Europe) after the war.

A “gold exchange standard” is much the same as a currency board. We have currency boards today, linked to the euro or dollar, and they work quite well without issues. So, what was the problem then? This is never explained — because, basically, it can’t be explained. The countries that had “gold exchange standards” didn’t really have any problem keeping their currency values linked to their reserve/target currencies and thus to gold. Those that did (in Latin America, arguably) were simply sloppy, or had other agendas.

The arguments about the supposedly disastrous “gold exchange standards”, though confused, tend to have two components. One is the idea that these systems were somehow “inflationary,” due to some kind of “mismatch” in the “balance of payments.” This is related to the idea of a “price-specie flow mechanism,” which of course did not exist. This notion of “inflation” seems to be related to the decline of currencies during WWI and their return to gold standard systems at devalued rates, notably by France in 1926 although several other countries also experienced permanent declines in currency value. This decline in currency value would have caused an upward adjustment of nominal prices in France during the 1920s. Also, France had a booming economy, fueled by some big reductions in tax rates. The combination of a booming economy, and nominal price adjustments related to the wartime devaluation, could lead people to search for mistaken causes. Once countries returned to a gold standard, in the mid-1920s, there was no further decline in currency value and thus no new “monetary inflation” — the rising prices were the result of the previous devaluation. Devaluations were rare before 1914, so people didn’t understand them very well.

July 18, 2016: The “Price-Specie Flow Mechanism” 2: Let’s Kill It For Good
March 19, 2016: The “Price-Specie Flow Mechanism”
February 14, 2016: The Balance of Payments

France, Britain and the U.S. were the only major countries that did not have foreign reserve assets before 1914. France, in particular, focused on large reserve holdings of bullion. The return to a gold standard in 1926 was accomplished by linking the French franc to the British pound, a “gold exchange standard.” In 1928, direct gold convertibility was restored in France, and the process began by which the Bank of France returned to its prewar policy of holding no foreign reserves. Thus, there was a longstanding tradition in France of rejecting any foreign reserve holdings, and also holding large amounts of bullion.

June 26, 2016: Foreign Exchange Transactions and the “Gold Exchange Standard”

The second component to the “blame the gold exchange standard” arguments is that the “gold exchange standard” — including the practice of other central banks holding substantial reserve assets of British government bonds or other pound-denominated credit instruments — forced Britain off the gold standard in 1931, and also led to the chain of follow-on devaluations that happened before the end of that year. British government bonds are not a liability of the Bank of England. Yes, they could be sold for British pound base money, and this base money converted to gold on demand by the BoE. You could say much the same thing for any pound-denominated debt instrument, including regular bank deposits. However, in this, central banks were no different than any other holder of pound-denominated debt instruments. If the British government bonds were not owned by central banks, they would be owned by someone else, and the outcome would be the same. The reason the British pound left gold in September 1931 was that the Bank of England refused to support the pound’s value with a contraction of the monetary base. This was supposed to happen automatically as a consequence of gold conversion outflows — and it appears that there were at least 100 million pounds of gold conversion leading up to the devaluation (including at least 50 million of bullion borrowed from the Federal Reserve and Bank of France), which would have resulted in a reduction of the Bank of England’s monetary base by about 20%. That’s a lot. No such reduction happened, however.

May 22, 2016: The Devaluation of the British Pound, September 21, 1931

In other words, the gold outflow was “sterilized.”

August 28, 2016: What Is “Sterilization”?
September 4, 2016: What Is “Sterilization”? 2: The Complexity of Central Bank Activity

Although I don’t have the numbers here at hand — I’d like to look them up later — I believe that the Bank of France actually held about two-thirds of all British pound foreign reserves held by all central banks in 1931. During the crisis, the Bank of France was not selling its reserves and converting them into bullion at the Bank of England (less debt/more gold). Rather, it was doing the exact opposite — lending bullion to the BoE! (More debt/less gold) I don’t think other central banks were converting very much either. Maybe nothing. They did so mostly following the devaluation, much as the Bank of France did.

The fact that many currencies were linked to the British pound via the “gold exchange standard” did indeed contribute to the wave of follow-on devaluations later in 1931. For one thing, the decline in value of the pound-denominated bonds on the assets side of their balance sheets would have rendered them technically with negative book value, if their liabilities (base money) remained linked to gold. But, the connections were broader and more general than that. Several countries that devalued in 1931 were British commonwealth countries. The fact that Egypt and India, both parts of the British Empire, devalued along with Britain should surprise no-one, no matter what the specifics of their central bank operations happened to be. Japan also devalued, in December 1931, due mostly to trade competitiveness issues.

The “Blame France” Narrative

After it restored gold convertibility in 1928, the Bank of France began to swap some of its large holdings of foreign exchange reserves for gold bullion — thus returning to its pre-1914 norm. This continued after the devaluation of the pound in 1931, which certainly emphasized again the risks of holding the debt of governments that devalue. Also, the Bank of France experienced large bullion inflows in 1928-1931, basically as a result of increasing demand for francs. The combination of both factors resulted in a large accumulation of bullion at the Bank of France.

So what? The value of the franc didn’t change. It remained linked to gold. If the value of gold didn’t change (arguably), then there were no consequences for other central banks either, whose currencies also remained linked to gold, and whose base money supplies reflected that link, no matter what the Bank of France did or didn’t do.

This large increase in bullion holdings at the Bank of France has proved irresistable to the legions of economists still looking for some kind of monetary disaster that took place. Their arguments here tend to be particularly fuzzy, which is no surprise since you can’t really make a rational argument of it. Who cares if some gold was in the vault of the Bank of France, instead of someone else’s vault. What it boils down to is: without either some kind of rise or decline in the value of other currencies (vs. gold), you really can’t get any kind of Great Depression-causing monetary catastrophes.

As part of the hodgepodge of notions that tend to be piled up by the France-Blamers, there is the idea that the accumulation of gold bullion by France could have resulted in a rising value of gold. More demand. But, this notion doesn’t survive even the briefest scrutiny. We’ll batch it into the “Giant Rise of the Value of Gold” theories below.

July 24, 2016: Blame France
July 31, 2016: Blame France 2: Balance Sheet Peeping
August 7, 2016: Blame France 3: Dump A Pile Of Argle-Bargle On Their Heads

The “Giant Rise in the Value of Gold” Narrative

This theory is commonly ascribed to Gustav Cassell, who really developed it in reaction to the commodity price declines of the 1880s and 1890s. The basic idea was that central bank demand for gold reserves was driving up the value of gold, creating “monetary deflation” for all currencies linked to gold. Central banks indeed accumulated gold bullion continuously from 1850 to about 1960. None of this caused any appreciable rise in the value of gold. In 1928 — after nearly eighty years of central bank bullion accumulation — commodity prices were actually rather high vs. gold, compared to their long-term history, and economies were generally healthy. (A rising value of gold would imply low nominal commodity prices and a moribund economy.) In 1950, after a century of this gold accumulation, and when central bank bullion reserves, as a percentage of aboveground gold, hit their all-time high, commodity prices were again high vs. gold.

There was no change in central bank behaviour in the 1929-1933 period that would cause any different outcome than what had been the case for the 110 years 1850-1960 — which is to say, no meaningful effect.

September 11, 2016: The “Giant Rise in the Value of Gold” Theory of the 1930s
September 18, 2016: The “Giant Rise in the Value of Gold” Theory of the 1930s 2: Never Happened Before
September 25, 2016: The “Giant Rise in the Value of Gold” Theory of the 1930s 3: Supply and Demand

Conclusions

I said once that “the gold standard guys are their own worst enemies.” The Keynesians were basically giving them a free pass — saying that there was no particular problem with the gold standard of the 1920s, except that it prevented them from applying their funny-money devaluation solutions. The idea that the gold standard didn’t work — that it actually allowed, or even caused, one of the biggest monetary disasters ever — has been invented, more or less from nothing, by the gold standard advocates themselves.

March 20, 2014: The Gold Standard Guys Are Their Own Worst Enemies

I tossed out some ideas to explain this “Freaky Friday” role-switching.

June 19, 2014: Explaining “Freaky Friday” — How the Gold Guys Became Their Own Worst Enemies

A lot of it had to do with the incredible blindness that characterized economists at the time — across the board, whether “Keynesian” or “Classical.” They really didn’t have any framework to understand any kind of nonmonetary disaster at all, so it naturally followed that if you had a disaster, it was a monetary disaster.

July 10, 2016: The Tyranny of Prices, Interest, and Money

In their efforts to invent a monetary cause where one did not exist, the Classical economists engaged in all sorts of contortions, which basically rendered them incapable of making sense not only of nonmonetary cause and effect, but monetary cause and effect as well. This is dangerously close to being “good for nothing.” For the Monetarist branch, this meant abandoning all Stable Money principles and embracing Funny Money along with the Keynesians, although with a little different framework that emphasized quantity measures of credit instead of interest rates. For the Austrians, they continued to be “gold standard advocates,” but their proposals contorted into bizarre new forms. If your conclusion was that the gold standard systems of the 1920s somehow caused or allowed a gigantic money/credit catastrophe caused by the Federal Reserve, then you would naturally be drawn toward systems that did not resemble those of the 1920s at all. The Austrians (notably Rothbard) tended to become hard-money extremists, focused on gold coinage, “100% reserve” systems, and the elimination of “fractional reserve banking,” willfully ignoring that gold standard systems had existed in the U.S. and Britain with banknotes, reserves of 20% or less, and “fractional reserve banking,” throughout the entirety of the 19th century without incident. In the 1960s, they actually became devaluationists: Rothbard notes that a clique around Ludwig von Mises actually advocated a devaluation of the U.S. dollar to $70/oz. from $35/oz. Jacques Rueff shared similar views. When even the gold standard guys are recommending a devaluation, it should be no surprise that a devaluation/floating of the dollar indeed took place in 1971.

September 1, 2016: Are the Gold Guys Ready For Prime Time?

These problems extend elsewhere: people who are not able to make sense of the 1920s and 1930s — and I think I have shown that the mistakes of the Monetarists, Austrians and others are not really very subtle, but rather amount to willful ignorance of the most basic principles, and the crudest and most obvious economic facts of the time — are really not going to be capable of making sense of anything today and in the future either. Certainly they will not be able to either establish nor manage a new gold standard system. They probably wouldn’t even be given the chance, as people will sense that giving them the car keys would most likely result in a crash.

Part of the path forward will have to be the recognition that nonmonetary elements can be important. This should not be a big leap. Seriously — the entirety of everything outside of the central bank office is irrelevant? Maybe it is relevant. Maybe it is often the most important thing. This is basically the “supply side revolution” that began in the 1970s, but which is still not very well appreciated among the Keynesian academics, or the “Austrians” or other Classical-themed groups.

August 11, 2016: The Gigantic Importance of “Supply Side Economics”

Once we are able to embrace the idea that things other than money can cause big problems, then we will no longer be left with a choice between “finding” (inventing) some kind of monetary explanation, or accepting the distasteful idea that economies can just blow up “autonomously;” that is, for no reason at all. I think that once people no longer feel the need to blame some kind of monetary cause — once that agenda is off the table, and they actually look at what was really going on, to their own satisfaction — it will become fairly obvious to them, as it is to me, that there was no world-economy-destroying monetary problem in the late 1920s or early 1930s, at least before the British devaluation of 1931 made a mess of things.

I think that, in the near future, I will try to devote a little more time to the idea that the Keynesians basically did not find any monetary problem of the time; that this was conventional wisdom until the 1960s; and remained the preferred stance of many to the present day. Here is a little taster:

“For at least a quarter-century after the Depression’s nadir, the prevailing interpretation concluded that monetary factors, specifically the actions of the Federal Reserve, were quite simply unable to stem the decline,” concluded Frank Steindl, in Monetary Interpretations of the Great Depression (1995) . Anna Schwartz, Friedman’s collaborator, explained: “In the ’30s, ‘40s, and ‘50s, the prevailing explanation of 1929-1933 was essentially modeled on Keynesian income-expenditure lines. A collapse in investment as a result of earlier overinvestment, the stock market crash, and the subsequent revision of expectations induced through the multiplier process a steep decline in output and employment. … Try as the Federal Reserve System might, its easy money policies … did not stabilize the economy.” Montagu Norman, head of the Bank of England, when asked by the Macmillan Committee in 1931 what the Bank of England could have done to address the soaring unemployment, Norman answered: “We have done nothing. There is nothing we could do.”

In the future I will also address a few more variants on the “blame money” theme, again from supposed gold standard advocates.

Perhaps there are only a dozen or so people who have followed this discussion this far, in all of its details. Who actually click on the links. But, they may be the most important dozen people.