Un-learning the lessons of Great Depression (ad-infinitum)

This blog is full of lessons-unlearned since the Great Depression. Why so? Because, fortunately or not, I’ve spent a portion of the last several years working on the Great Depression from a monetary and policy perspective. 

One of the interesting things about that period is the soul-searching it occasioned. This soul-searching is a good place to look for the policy lessons that were drawn from the experience (rightly or wrongly). Three of the key texts to me are Nurkse’s International Currency Experience (League of Nations, 1943), Lary’s The United States in the World Economy (US Commerce Department, 1943) and Haberler’s Prosperity and Depression (League of Nations, 1943). 

Nurkse’s book in particular can be seen as a blueprint for what came at Bretton Woods, which laid down the international monetary order after the war. (Nurkse himself is an under-appreciated architect of that system.) One lesson hammered home in that book — and codified in the Bretton Woods arrangements — is the primacy of sovereign policymaking, specifically counter-cyclical policymaking. Nurkse wrote that it would no longer be possible for democratically elected governments to be expected to be indifferent to the employment and prosperity side-effects of their policies, in pursuit of some ‘grander’ aim — namely, exchange-rate stability. For this reason, the Bretton Woods system condoned controls on short-term capital. 

What we are seeing today is the repudiation of that lesson. Eurozone policymakers are being asked to set aside the real-economy impact of austerity, in the name of monetary order. Isn’t this exactly what we (ie Western civilization) said we’d never do again?
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