Archive for the ‘Economics – macro, micro etc’ Category

Gradually, we are admitting that banks create money by giving loans and not accepting deposits…

September 21, 2018

After the storm created by Bank of England questioning the inter-mediation role played by banks, other central banks are also waking up. We are usually taught that banks first accept deposits and then lend this money and via the multiplier money is created. But this is wrong. Banks actually first give loans and then this money comes back to the banking system as deposit.

Chris Kent, Assistant Governor of Reserve Bank of Australia also says banks create money via credit and not deposits:



Does It Pay to Study Economics in Australia?

September 21, 2018

James Bishop and Rochelle Guttmann of Reserve Bank of Australia in this Bulletin article:

The Bank has increased its efforts to encourage more students to study economics at school and university. This could improve the quality of public discourse and have benefits for society as a whole. Our analysis suggests that an economics degree also confers substantial private benefit to graduates in terms of their earnings, relative to many other degrees. This arises from the development of analytical and maths skills, which command a wage premium in the labour market. However, our analysis also reveals that the probability of finding work as an economist is low, given the small number of jobs relative to qualified graduates. Nonetheless, the wide range of disciplines in which economics graduates work suggests it is a degree that is useful beyond the narrow discipline. As Heath (2017) explained, doing an economics degree appears to give one a set of skills that are currently rewarded quite well and looks set to continue in importance in the future.


What Keynes should have said: Central banks/government should target stock markets

September 20, 2018

Prof Roger Farmer of UCLA has this proposal:

Iceland’s crisis, its successful stabilization program, and the role of the IMF

September 19, 2018

Nice lecture (must read) by Poul M. Thomsen of IMF summing the aftermath of the Iceland crisis.

The lecture is titled as: Ragnarök: Iceland’s Crisis, its Successful Stabilization Program, and the Role of the IMF.  In Norse mythology, Ragnarök is a series of future events, including a great battle, foretold to ultimately result in the death of a number of major figures, the occurrence of various natural disasters, and the subsequent submersion of the world in water.

Upfront, some humility is needed:

To me, it seems entirely appropriate that I should mark the tenth anniversary of Lehman’s collapse with you here in Iceland, in a country that was one of the first in the path of the financial tsunami that followed.

I will not get into why Iceland had become so vulnerable—why the banking system had been allowed to explode in size relative to the Icelandic economy during a very short period, relying on a funding model of aggressive foreign borrowing. Much has already been said about this, and it is clear that there is ample blame to go around—in Iceland and abroad.

Indeed, if I was to get into this, I would have to admit that we at the IMF also have to be humble. Among several things that we in retrospect might want to have done differently, we had for a while moved Iceland from the standard 12‑month cycle for our surveillance missions to a 24‑month cycle, reflecting a benign view on vulnerabilities. The same was the case for Cyprus, another small country that would soon be engulfed in a deep crisis.

Instead, he focuses on the policies to ease the crisis:


How Keynes got idea about his General Theory book from Malthus…

September 18, 2018

Fascinating paper by Steven Kates.

He draws evidence showing how Keynes book General Theory drew inspiration from Malthus. More specifically Keynes drew insights about aggregate demand from the letter exchange between Malthus and Ricardo. Malthus wrote to Ricardo showing how excessive savings could lead to fall in demand to a fall in profits and to a fall in output.

It was because Keynes read Malthus’s letters to Ricardo in late 1932 that he eventually focused on effective demand in the General Theory. Because of his reading of Malthus, Keynes attacked Say’s Law and wrote the General Theory to establish variations in effective demand as the major cause of fluctuations in economic activity. If these conclusions are right, the story of how the General Theory came to be written cannot be understood in isolation from Malthus’s role nor is it possible to understand the General Theory itself without seeing it in relation to Keynes’s interpretation of Malthus. The continuing focus on aggregate demand by macro and business cycle theorists is due to the insights gained by Keynes from his reading of the Malthus side of the Malthus-Ricardo correspondence during the months of October and November, 1932.

How ideas evolve…

The rise of Inequality Industry: But is it interested in making us more equal?

September 17, 2018

Superb piece by Atossa Araxia Abrahamian in Nation.

It says:

Since 2008, wonks, politicians, poets, and bankers have all started talking about inequality. But are they interested in making us more equal?

Lots to think about in this piece…


Post-crash economics: Why economics curriculum remains stuck and we do nothing about it….

September 13, 2018

There is little doubt that much of economics teaching has barely anything to do with real world stuff. Infact, one always wondered how come whatever economics topic is of interest, is never there in the curriculum?

Maeve Cohen, Director of Rethinking Economics (devoted to improving economics education) reviews economics teaching after 10 years of Lehman. She says some economists have figured limitations of the field but still one does not see much changes:


Revisiting Marx and Smith

September 12, 2018

Nice post by Gulzar whose blog I should read more often.

He posts about how we need to move away from the usual description of Marx and Smith’s works.

Exploring the agora and learning some economic history from Greeks…

September 11, 2018

Nothing better than seeing a German visiting Greece and reviewing latter’s economy. Also drawing econ history lessons from Greece which have obviously been forgotten.

Jens Weidmann of Bundesbank does both these tasks in this speech. He first mentions Agora:

Greece is often said to be the cradle of Western civilisation, and rightly so. One could say that the Greeks invented the way we think. Or, in the words of the English poet Percy Shelley: “We are all Greeks. Our laws, our literature, our religion, our arts have their root in Greece.”1 The lasting impact becomes obvious when one considers the many words of Greek origin in our modern-day languages: words like “policy”, “democracy”, “economy”, but also “idea”, “theory” and “dialogue”.

Austrian thinker Karl Popper observed once – and I quote: “The war of ideas is a Greek invention. It is one of the most important inventions ever made. Indeed, the possibility of fighting with words and ideas instead of fighting with swords is the very basis of our civilization, and especially of all its legal and parliamentary institutions.”2

How could this kind of discourse have been invented? A key step may have been that ancient Greeks created a public meeting place in the very heart of the city-state: the “agora”. Here, citizens exchanged views, discussed politics and celebrated cultural events. The best-known example of an ancient agora is situated not far from here.

Just a few years ago, Joachim Gauck, then Federal President of Germany, said in a speech that Europe would need an agora in order to develop a common European civic spirit.3 So this idea of a forum for public discourse is still with us today. And, indeed, a culture of open debate and a lively democracy are hallmarks of present-day Greece.

Yet the ancient agora not only allowed an exchange of views, but, more tangibly, also defined the marketplace of a city (as it still does in modern Greece). Here, merchants and craftsmen sold their products. In this respect, it set an essential foundation for prosperity.

The link between the economic and political spheres also provides the blueprint for my speech this evening. In particular, I am looking forward to sharing some thoughts on the Greek economy and my view on European integration with this distinguished audience.


He then reviews Greek situation which despite some progress has a long way to go. He brings agora back in discussion:

As a matter of fact, European policymakers learned from past mistakes and did things better. However, the achievements seen so far are not enough. There is consensus among experts that additional reforms are needed to further reduce the euro area’s vulnerability to crises. Yet it is not clear which path to choose going forward. For some time now, an intensive debate has been taking place on the future structure of the monetary union. A number of concepts and proposals are on the table. They differ over the weight they each accord to risk sharing and joint liability on the one hand, and to individual responsibility, a rules-based regime and the avoidance of false incentives on the other.

Either way, however, it is crucial for the stability of monetary union that the liability principle is complied with. In a nutshell, it stipulates that whoever decides on an action must also bear the consequences of that decision – by reaping the benefits or suffering any disadvantage or loss. It would be neither fair nor sustainable if decisions could be made at the expense of others. Wrong incentives would be created.

For example, insurance can encourage the policyholder to take on more risks. This is the essence of moral hazard. And again, the ancient Greeks provide us with an illustrative example since they may have been the first to come up with a commercial insurance scheme.

Back then, unpredictable weather conditions and piracy rendered maritime trade a highly dangerous venture. But the ingenious Greeks invented rather complex contracts for a loan which could be used for equipping or repairing a ship and which would not have to be repaid if the ship was lost on its journey. If the ship made a successful return, the creditor received its principal plus massive interest on top, reflecting the risks involved and the insurance premium. However, if the loan exceeded the value of the ship, there was an incentive for the ship-owner to simply keep the loan and make off with it.

Thanks to a speech ascribed to the Athenian orator Demosthenes, we know of a certain Hegestratos.6 He is said to have planned to sink his own ship during the journey – with all passengers and cargo on board. Unfortunately for him, he was caught in the act, jumped overboard and was not seen again. Nevertheless, the incident, which may have been the first case of insurance scam in history, led to a complicated legal dispute between an alleged co-conspirator and a creditor.

Fast-forward more than 2,300 years, the Maastricht framework was based on a clear understanding of the liability principle. Member states would remain autonomous in terms of their economic and fiscal policies. The flip-side then was the “no bail-out” clause. Both actions and liability were located at the national level and, thus, aligned.

Today, many Europeans call for greater risk sharing. If such a joint liability were established, corresponding sovereignty rights would need to be transferred to the European level, too. Otherwise, the set-up could contribute to a possible resurgence of unsound developments. However, my impression is that the willingness to cede sovereignty rights to Brussels is rather limited in most of the euro area member states. For the time being, therefore, reforms must fit within the existing Maastricht framework.

But that does not wholly rule out elements of joint liability. I concede, for example, that a common deposit insurance could contribute to a more stable financial system, as it would reduce the risk of bank runs.

However, the balance between actions and liability requires that risks that arose under national responsibility cannot be mutualised. They would have to be reduced before the scheme is established. If not, a common deposit insurance would lead to a redistribution of inherited risks.

Hmmm.. Nice way to link history with current developments.

Lehman’s 10th anniversary: How global financial crisis altered the course of economic thinking?

September 10, 2018

My new piece in moneycontrol.

Unike the Great Depression, the 2008 recession might not have led to a new economic thinking; but the resurrection of older ideas, especially that of inequality, is quite a movement by itself.


The ECB should choose an Italian to supervise banks?

September 10, 2018

How European policymaking is so much about nationality as well. The member nations compete to have their own representation on European organisations. We know some bit about all this in European Central Bank, but is beginning to show in other organisations too.

After the European banking crisis, they created several institutions and are moving towards creation of banking union. One of these instis is European Banking Supervision which is a single Supervision authority housed in ECB.

Its Board is comprised of 6 executive members + all National Banking Supervisory Heads, just as ECB. Of the 6 members, there is Chair, Vice Chair who is chosen from ECB’s Executive Board and 4 members who are appointed by ECB. Currently, 2 of these 6 Board positions are vacant. The nationality of the 4 members is:

  • Danièle Nouy, Chair of the Supervisory Board of the ECB: French

  • Sabine Lautenschläger Member of the Executive Board of the ECB and Vice-Chair of the Supervisory Board of the ECB: German

  • Ignazio Angeloni Member of the Supervisory Board of the ECB: Italian

  • Pentti Hakkarainen, Member of the Supervisory Board of the ECB : Finnish

Apparently, the Chair has a non-renewable term of five years. Nouy was appointed in 2014 and her term expires in 2019. The politics of who will fill the position has started.

Prof Melvyn Krauss (emeritus professor of economics at New York University) in this piece says:

It seemed like good news for Europe when Sharon Donnery, deputy governor of the Irish central bank, made an application to be the top banking supervisor at the European Central Bank.  She is widely regarded as extremely competent, has experience in important areas like nonperforming loans, and is a woman in an institution that badly needs women in leadership positions.

But the case for Donnery is not as clear-cut as it might appear.

Her appointment probably would prevent her boss at the Central Bank of Ireland, Philip Lane, from becoming the next ECB chief economist, as has been widely predicted. That’s because of an unwritten rule that no European Union member country can hold two big EU jobs at the same time.

This would be a pity since Lane is widely considered to be the best economist in the ECB governing council. He is a moderate who would carry on the work and policies of the current ECB president, Mario Draghi, who will leave office in October 2019.

That’s extremely important at a time when populists, who are trying to pry Italy loose from the EU, could use hawkish ECB policies to convince Italians that the EU is biased against them.

Likely Germans would support Donnery for a cleanup job of Italian banks. But this is not a great choice. Let an Italian be appointed:

Realizing that Lane could have a similar powerful effect on policy in the coming years, though from the dovish side and without a German in the top chair in Frankfurt, Berlin is now reported to be supporting Donnery for the bank supervisor’s post, claiming she would be the best choice for cleaning up the huge bad loan problem in Italy.

This argument not only is disingenuous but wrong. The best choice to clean up Italy’s bad loan problem would be an Italian, not an Irishman or Irishwoman.

The most telling argument for Italian banks to be supervised by one of their own, especially if bitter medicine is to be administered as it probably will, is that it would help counter populist pressure to pull Italy out of the euro and EU. Having a competent Italian like the well-regarded Andrea Enria, current chair of the European Banking Authority, as chair of ECB bank supervision would make it tougher to portray legitimate bank oversight as foreign meddling in Italian banks.

Europe can ill afford to give the Italian populists a boost for the sake of blocking Lane’s appointment as chief economist.

Donnery should withdraw her ECB application and be promoted to Lane’s current job when he leaves for Frankfurt.

Phew. Much more complicated than anyone can imagine.
Best choice would be to break from this Nationality image and appoint best qualified, no matter the nationality. So if Lane and Connery both fit in, they should be in….

10 years of Lehman: How the crisis enfolded?

September 10, 2018

BIS’s Quarterly Bulletin released in Dec-2008 provides a nice timeline and real time account of the crisis.

See Page 3 of the bulletin for a chronology of events and Fed interventions and policies. But then this is just till Dec-08. Lot more happened after that too!

The rise of populism and the collapse of the left-right paradigm: Lessons from the 2017 French presidential election

September 10, 2018

Yann Algan, Elizabeth Beasley, Daniel Cohen  and Martial Foucault decipher the French elections:

From Brexit to the election of Donald Trump, populist parties have gained momentum in many western and European countries (Dustmann et al. 2017), including Poland, Hungary, Switzerland, Denmark, Austria, Finland, France, Italy, and Germany. This progression culminated with Marine Le Pen reaching the second round of the French presidential election in 2017 and the populist governmental coalition in Italy in 2018.1

The French presidential election of 2017, in particular, illustrates the collapse of the traditional left-right political axis, which had been alive and well since the end of WWII. In every presidential election up until 2012, with the exception of 2002, French voters eventually had the choice, in the second round, between a left-wing candidate and a right-wing candidate. In 2017, however, François Fillon, came third in the first round, while the leader of the left, with more radical clothes, Jean-luc Mélenchon, came fourth.The second round was a contest between Emmanuel Macron (whose motto was “neither right or left”) and Marine Le Pen (leader of the extreme right party, Front National). Macron won by a comfortable margin (with 66% of the votes), but the French political landscape had radically changed.

In order to analyse this new political space, in a recent paper we use a unique dataset collected by Cevipof at Sciences Po. Monthly questionnaires were given to around 17,000 panellists from November 2015 up to the 2017 election (Algan et al. 2018). The size and scope of this dataset allows us to examine vote choice in a way that has previously not been possible. It includes socioeconomic variables, geographic localisation, life history, and a wide range of subjective information such as life satisfaction, interpersonal trust, trust towards institutions, and various dimensions of ideology.


Votes on the traditional left-right axis are correlated with views on redistribution and predicted by socioeconomic variables such as income and social status. Votes in the 2017 election in France, however, appear to have been driven by individual and subjective variables, with low well-being associated with ‘anti-system’ opinions (on the left or the right) and low interpersonal trust associated with right-wing populism.

Lots of permutations and combinations at work…

Saving Capitalism from Economics 101

September 10, 2018

It could be titled even as Saving Economics 101 from Capitalism! Such are times.

Prof Simon Johnson writes about how economics 101 does not talk much about market imperfections and abuses:

All across the United States, students are settling into college – and coming to grips with “Econ 101.” This introductory course is typically taught with a broadly reassuring message: if markets are allowed to work, good outcomes – such as productivity growth, increasing wages, and generally shared prosperity – will surely follow.

Unfortunately, as my co-author James Kwak points out in his recent book, Economism: Bad Economics and the Rise of Inequality, Econ 101 is so far from being the whole story that it could actually be considered misleading – at least as a guide to sensible policymaking. Markets can be good, but they are also profoundly susceptible to abusive practices, including by prominent private-sector people. This is not a theoretical concern; it is central to our current policy debates, including important new US legislation that has just been put forward.

One core problem is that market incentives reward self-interested private behavior, without accounting for social benefits or costs. We generally overlook our actions’ spillover effects on others, or “externalities.” To be fair, Econ 101 textbooks do discuss this issue in some contexts, such as pollution, and it is widely accepted that environmental damage needs to be regulated if we are to have clean air, clean water, and limits on other pollutants.

Unfortunately, “widely accepted” does not include by President Donald Trump’s administration, which is busy rolling back environmental protections across a broad range of activities. The New York Times counts 76 rollbacks in progress. The thinking behind this policy is straight out of the first few weeks of Econ 101: get out of the way of the market. As a result, there is a lot more pollution – including more emission of greenhouse gases – in America’s future.

There is also an even deeper problem. There is a general presumption in Econ 101 that firms should maximize profits, and that this is best for their shareholders and for society. But this notion of “firms” is just a shorthand for people organized in a particular form. People, not firms, make decisions. To understand the nature and impact of these decisions, we need to look closely at the incentives of firms’ senior managers and board members.

He mentions Elizabeth Warren’s proposal to usher accountability in capitalism:

This is the context in which Senator Elizabeth Warren of Massachusetts is proposing a new Accountable Capitalism Act. Very large companies would need to acquire a federal charter (as opposed to the current state charter arrangements), which would come with specific obligations – in particular, the need to consider the interests of all corporate stakeholders, including workers. To make this more meaningful and generally improve transparency, ordinary (non-management) employees should get some representation on the board of directors. This type of arrangement works well in Germany, a country where workers continue to be treated with respect.5

Warren also supports a proposal that originated from John Bogle, founder of Vanguard (a mutual fund company), that would require super-majority support from shareholders and directors before a large company could engage in political expenditures.

The underlying legal theory behind these proposals is sound, and it is well articulated in a letter signed by Robert Hockett of Cornell Law School and other distinguished figures. Large corporations are granted significant rights, including limited liability for individual executives, and facilitate the pooling of large amounts of capital from people who do not necessarily know one another (or the promoters of the company). Originally, the purpose was to enable the private sector to carry out large-scale risky investments that had broader potential impact, such as building canals and railroads.

He ends it like a typical Professor:

The legitimacy of capitalism – private ownership and reliance on market mechanisms – would be greatly strengthened under the Accountable Capitalism Act. So, yes, like it or not, this will be on the final exam.


Witch hunts in the Western world, past and present

September 6, 2018

Fascinating research by Peter Leeson of George Mason Univ.


Role of Hajj in the introduction of Saudi banknotes

September 5, 2018

Religion goes a long way to explain money and banking.

It was interesting to read this piece (HT: JP Koning) which points how Haj pilgrimage led to introduction of Saudi banknotes (a piece on Haj and globalisation as well):

The riyal became the currency of Saudi Arabia since it was founded in 1932. Before that the currency was being used only in the Hijaz region. The first Saudi currency bearing the name of the country, which was smaller and lighter than its predecessor, was minted in silver in 1935.

The Saudi Arabian Monetary Authority (SAMA), the second-oldest central bank in the Arab world, was created in 1952 to develop and unite the Saudi monetary system. Given the fast-paced growth of the economy and increasing revenues, King Abdul Aziz was aware that it was not realistic to continue using metal coins and there was a need for a more practical form of currency. In particular, piles of silver Saudi riyals were a heavy burden for pilgrims to carry with them during Hajj seasons.

In 1953, the king took a courageous decision to issue the first Saudi banknotes. They were known as “pilgrims’ receipts,” each worth 10 silver riyals.
The first batch of 5 million were printed in Arabic, Persian, English, Urdu, Turkish and Malayan. Pilgrims welcomed the new paper currency and it quickly became widely accepted throughout the Kingdom.

Its success encouraged confidence among Saudi traders and citizens. However, pilgrims started to collect the receipts as souvenirs and gifts to take back to their home countries, which prompted the Ministry of Finance and Economy to ban commercial use of them overseas. The acceptance and popularity of the receipts persuaded SAMA to re-issue them in 1954, with the addition of a new 5 riyal denomination, which was followed by 1 riyal pilgrims’ receipt in 1956.
SAMA realized that citizens and pilgrims were happy for the old metal coins to be replaced with the paper notes, so they decided to keep using it after Hajj, rather than returning to the old currency.

In June 1961, Saudi banknotes were issued for the first time, in denominations of 1, 5, 10, 50 and 100 riyals. As a result, the pilgrims’ receipt was phased out in 1965.


RBI too issued both notes for circulation in Gulf region and special notes for Haj pilgrims.

Should Federal Reserve provide accounts to all?

August 30, 2018

JP Koning in his new piece points to a new research which suggests to open a FedAccount, a bank account for the excluded:

What if you and I could bank at the Federal Reserve? This is the premise behind a new paper by Morgan Ricks, John Crawford, and Lev Menand titled “A Public Option for Bank Accounts (or Central Banking for All).” Under the authors’ plan, the Fed would provide the public with FedAccounts, interest-paying no-fee accounts that could use the Fed’s underlying payments platform to effect free transfers to other accounts and enable point-of-sale purchases via a Fed-provided debit card. The Fed would not provide account holders with loans. 

While the authors provide a number of motivations for providing FedAccounts, a key one is financial inclusion. Around 7 percent of American households, or 9 million households, are currently unbanked, which means no individual in the household has bank-account access. Not only would the welfare of each individual who gains financial access improve, according to the authors, but society would enjoy significant positive externalities as those on the other side of the equation, say employers or businesses, could use a more efficient payments option.

The authors present central banking for all as a plan targeted at the United States rather than a universal one, and for good reason. Bank penetration is at 99 percent in the United States’ northern neighbor Canada, illustrating that banking is quite capable of filtering into most of society’s nooks and crannies.

Canada provides a natural foil for the United States because it shares many characteristics including geography, culture, and history. Why would bank penetration rates suddenly rise dramatically just a few meters north of the 49th parallel? If we can answer this question, the United States might simply copy whatever Canada is doing rather than experimenting. 

It is amazing how Canada almost has everything better compared to US in monetary matters. But its achievements are barely discussed…



The historical meaning of the Reserve Bank of New Zealand’s Armistice Day coin

August 30, 2018

Brilliant article by Matthew Wright of RBNZ. You seldom see researchers in a central bank write history of World War-I.

This year the Reserve Bank is releasing a coloured circulating fifty cent coin to mark Armistice Day, the effective end of the First World War. This follows a similar coin issued in 2015 to mark the Gallipoli campaign. Both coins feature new-technology minting processes, and both were especially commissioned to mark these events as the Reserve Bank of New Zealand’s contribution to the government First World War centenary celebrations.2

This article outlines the historical meaning of the armistice and gives a particular context for the Armistice Day coin. It also describes the special design of the coin, which is one of only two coloured circulating coins issued in New Zealand.


Lessons learned from 10 years of quantitative easing

August 29, 2018

American Enterprise Institute conducted this interesting panel discussion on the 10 years of QE.

On Thursday, AEI’s Desmond Lachman and Brookings Institution’s Ben Bernanke discussed whether quantitative easing (QE) programs have successfully stimulated the US economy in the 10 years since the Federal Reserve launched its first program. Mr. Bernanke argued that QE has blurred the distinction between monetary and fiscal policy tools. Mr. Bernanke and Mr. Lachman evaluated the merits of tools the Federal Reserve and other central banks can use to stimulate growth and examined the possibilities and risks of innovative economic policy tools.

Following their conversation, a panel of economic policy experts discussed the success of economic policy reforms in recent years. The Hoover Institution’s Kevin Warsh argued that the first round of QE was successful and the second round may have positively affected employment and output to a minor extent. Yale University’s Stephen Roach pointed out that, though the first round of QE was successful, successive rounds were less successful, which suggests their marginal diminishing returns for economic recovery. Joseph E. Gagnon of the Peterson Institute for International Economics argued that QE effects mirror conventional monetary policy effects and that the program has benefited the economy so far. 

There is both transcript and videos.

Lots of different views. The one by Alex Pollock at the end is quite interesting..

World War I, Gold, and the Great Depression

August 28, 2018

Nice post by Hu Mcculloch. He revisits the Great Depression and says it was Gold Standard which was primarily responsible for the deep crisis we had back then.

My own view, after pondering the problem for many decades, is that indeed the Depression was monetary in origin, but that the ultimate blame lies not with U.S. domestic monetary and financial policy during the 1920s and 30s. Rather, the massive deflation was an inevitable consequence of Europe’s departure from the gold standard during World War I —  and its bungled and abrupt attempt to return to gold in the late 1920s.

In brief, the departure of the European belligerents from gold in 1914 massively reduced the global demand for gold, leading to the inflation of prices in terms of gold — and, therefore, in terms of currencies like the U.S. dollar which were convertible to gold at a fixed parity. After the war, Europe initially postponed its return to gold, leading to a plateau of high prices during the 1920s that came to be perceived as the new normal. In the late 1920s, there was a scramble to return to the pre-war gold standard, with the inevitable consequence that commodity prices — in terms of gold, and therefore in terms of the dollar — had to return to something approaching their 1914 level.

The deflation was thus inevitable, but was made much more harmful by its postponement and then abruptness. In retrospect, the UK could have returned to its pre-war parity with far less pain by emulating the U.S. post-Civil War policy of freezing the monetary base until the price level gradually fell to its pre-war level. France should not have over-devalued the franc, and then should have monetized its gold influx rather than acting as a global gold sink. Gold reserve ratios were unnecessarily high, especially in France.

And as there was no Gold Standard during 2008 crisis, the policies should not have reacted asif we are about to face another Great Depression:


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