Ryan Avent at The Economist links to a new research paper citing “a remarkable lecture by economist Gustav Cassel, who is quoted as saying that the world’s central banks should ‘come together and make an end of the depression simply by declaring that they intend, from this moment on, to supply the world so abundantly with means of payment that no further fall in prices will be possible.'”
Cassel was ahead of his time, as the 1931 quote above reveals. Looking for a monetary policy response to severe economic contraction just wasn’t in the cards in the thirties. But now we know better. In the 21st century, one could argue that the self-destructive decisions with monetary policy in the 1930s are now recognized for what they were: colossal errors. Countless research papers and books over the years provide the smoking guns (including the titles listed here and here, for instance). Case closed? Not quite. This is economics, after all. Consider Nobel prize-winning economist Joseph Stiglitz, who writes in the new issue of Vanity Fair:
The argument has been made that the Fed caused the Depression by tightening money, and if only the Fed back then had increased the money supply—in other words, had done what the Fed has done today—a full-blown Depression would likely have been averted. In economics, it’s difficult to test hypotheses with controlled experiments of the kind the hard sciences can conduct. But the inability of the monetary expansion to counteract this current recession should forever lay to rest the idea that monetary policy was the prime culprit in the 1930s.
There’s no such thing as consensus in macroeconomics, but it seemed as though a majority of dismal scientists were of the persuasion that the Fed screwed up in the early 1930s. In fact, there’s plenty of collective blame to go around among the world’s major central banks in the years leading up to and during the Great Depression. But what appears as settled terrain is only a temporary respite in matters of macro analysis. Perhaps that’s why progress in economics appears to be cyclical rather than cumulative. It’s hard to move forward when we keep fighting (and refighting) old battles. Then again, the clash of ideas and keeping the debate rolling is an ancient sport in the profession. The more things change…