Stylised ‘facts’

Probably for anyone with an expertise not shared widely, there are frustrations about what people seem to “know” about your field. I’ll be less oblique:

People seem to “know” that one of the causes of the Great Depression (globally) was competitive devaluation (a.k.a.  “beggar-thy-neighbour” policy). 

It wasn’t. But let me back up and re-tell the story that people have been told. I guess this stuff is in the secondary school textbooks; I really should check. The story goes: In order to divert spending toward home-country output, the government devalues the currency. This then robs the neighbour of spending, and pushes up unemployment. In order to fight this rise in unemployment, the neighbour government also devalues. If this is the chain of causation (devaluation–>depression), then it stands that countries shouldn’t devalue. At least, for the system as a whole, devaluation is not Pareto-efficient

This viewpoint fundamentally confuses causation in the Great Depression. Academically, it was dismissed by the work of Eichengreen, Sachs, Temin and others about twenty years ago. This work established that countries were driven by depression to seek devaluation. The depression itself happened because of their reluctance to devalue in the first place.  

People seem to “know” that trade barriers caused the Great Depression. 

They didn’t. Trade barriers were a consequence of the depression. See above. The infamous trade barriers of the 1930s would have been much less in evidence had the devaluations come earlier in the story.

‘Keynesianism’ didn’t work — just look at the New Deal

Expansionary fiscal policy wasn’t tried, except in Germany where it suited the re-militarization. Roosevelt’s New Deal was financed through cuts elsewhere — the US Treasury was trying to balance the budget throughout the 1930s (it failed, but due to cyclical conditions). The real test (proof) of Keynesianism was the outbreak of war in 1939. As countries moved to a wartime footing, thoughts of balancing the budget went out the window. The ensuing fiscal expansions did wonders for the economy. The shame of it is that some exogenous, and deadly, event like war has to justify a genuine fiscal boost (amidst a de-leveraging recession). What we really need is an attack from outer space

and for those true anoraks, there’s this:

Sweden ran the world’s first inflation-targeting regime 

It didn’t. Rathke, Straumann and Woitek have put this issue to rest, in the wonderfully titled “Overvalued: Swedish monetary policy in the 1930s.”
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