You may recall from your Samuelson textbook* that the Great Depression was propagated by “beggar-thy-neighbor” competitive devaluations that somehow disrupted world trade, and that the brilliant solution was fixed exchange rates under Bretton Woods.
Today most leading economic historians (Eichengreen, McKinnon, Krugman, Bernanke, Temin, Sumner, etc.) would agree that the reverse was true: that dogged adherence to fixed exchange rates under the gold standard was the principal cause of the depression, and that domestic recovery only occurred as countries went off gold and inflated their currencies.
Sadly, the Wall Street Journal is still mired in the economic thought of the 1950s: hard currency good, inflation bad, deflation an illusory threat. They really ought to read Bernanke’s Japan speeches, or anything by Eichengreen. Or anything written on the subject in the past 15 years that wasn’t written by a regional Fed president (or by Ron Paul, a doctor who plays an economist on Capitol Hill).
Here the Journal goes again (from today’s Heard on the Street):Beggar-thy-neighbor currency devaluations proved ruinous for the global economy in the 1930s. Is the world setting off down the same slippery slope again? ...The risk is that the lure of beggar-thy-neighbor competitive devaluations, which one country institutes to gain at the expense of its trading partners, may increase if the U.S. and U.K. embark on further quantitative easing.
Great, so it is better to have 15 million people out of work and on the dole than it is to have your currency depreciate? Unfortunately, this heartless Andrew Mellon philosophy (“liquidate labor”) has real world consequences for real families. And it leads to left-wing nostrums like “jobs bills”, open-ended unemployment benefits, and higher taxes.
Bad monetary policy (see: Japan) results in a reduction of the long-tern growth potential of the economy. If nominal GDP were today where it should be, the deficit would be smaller, the national debt would be lower, and our debt ratios would be lower.
There are real-world consequences to irresponsible monetary policies, and we are living through them right now. The Journal and the regional Fed chiefs aren’t helping.
*This is the same textbook that forecast that Soviet GDP would exceed US GDP by 1980.