I had the good fortune to attend the INET 2014 conference this past weekend, to hear speak a variety of luminaries whose work I have been reading for years, and to meet bloggers with whom I have debated arcane points that none of my non-internet-based friends care about. I had a conversation there that I think sheds light on the causes of the Great Depression.
The thesis of Golden Fetters, Barry Eichengreen’s magnum opus, is this:
The gold standard is conventionally portrayed as synonymous with financial stability. … A central message of this book is that precisely the opposite was true. Far from being synonymous with stability, the gold standard itself was the principal threat to financial stability and economic prosperity between the wars.
More recently Eichengreen and Peter Temin conclude that a gold standard ideology played an important role in worsening the Depression. They quote in their conclusion an author who wrote in 1932:
What is astonishing is the extraordinary hold which what is called the gold mentality has obtained, especially among the high authorities of the world’s Central Banks. The gold standard has become a religion …
Certainly in retrospect it seems likely, that had Britain gone off gold in 1924 — before the accrual of seven years of credit imbalances built on a disequilibrium exchange rate — the world economy’s adjustment to that event would have been less traumatic than the events that took place after 1931. The question then is why there was such a strong commitment on the part of the world’s central bankers to supporting Britain in the maintenance of the gold standard.
I had a conversation at INET in which the following question was discussed: Why are the central bankers committed to coordinating with the ECB on protecting the Eurozone when there is a significant possibility that the politicians will fail to make the necessary adjustments, that the Eurozone will break apart, and that in retrospect their actions will appear ill-advised? The conclusion was this: from the point of view of the central bankers the immediate costs of failing to support the Eurozone are so high, that the central bankers have no choice but to have faith that the politicians will play the role they need to play.
If the same dynamic was at play historically, perhaps the golden fetters that chained central bankers in the 1920s and 30s were not ideological at all. But simply the fact that given a choice between causing an immediate crisis and leaving open the possibility, even if small, that the crisis can be avoided by political action, they could not bring themselves to take the pessimistic-realistic view. Maybe the central bankers in the 1920s and 30s felt that they had no choice but to place their faith in politicians, who were not worthy of that faith.