Paul Krugman writes:
What’s our gold standard?: I’ve just reread Eichengreen and Temin, The Gold Standard and the Great Depression, which does a great job of showing how the “gold mentality” — what they call mentalite, with an accent — paralyzed policymakers. (The longer-form version, with more personal color, is Liaquat Ahamad’s Lords of Finance.) What E&T show is that circa 1930 key decision-makers had spent so many years equating adherence to gold not just with prosperity, but with morality, decency, civilization itself, that they couldn’t even contemplate breaking with that orthodoxy — even in the face of total catastrophe. I think we’re more flexible now. But my sense is that the mystique of finance is playing a somewhat similar role.
More on this when I’m not waiting for a delayed plan at O’Hare.
My view is that we are not now bound by golden fetters--that by and large we know what to do and how to do it to keep the world economy out of a depression. But, I would say, there are three groups of people who are trying to handcuff us with today's equivalents of the golden fetters that constrained economic policy and made the Great Depression so great. Each group is doing so for its own reasons:
Out of ignorance: the modern-day Chicago School of economists, which is arguing against effective use of policies to manage aggregate demand because they have never read Metzler or Friedman (or Keynes), and never thought at all seriously about the transmission mechanisms by which changes in monetary policy (and fiscal policy) affect the price level in the long run and affect output, employment and demand in the short run.
Out of malevolence: the Republican members of congress and all their intelletual enablers who would have fallen in line behind what are now the policies of the Obama administration had McCain won the election and had they been the policies of the McCain administration instead--but who are right now opposed because they think making Obama's presidency a failure is the road to electoral success in 2010 and 2012.
Out of justice: avoiding depression requires supporting asset prices--which means that for many financiers the wages of overspeculation will be not bankruptcy but fortunes. People rebel against the fact that in a financial crisis the banking sector has got the rest of us by the plums, and that there is no effective way to make sure they get their justice without creating prolonged mass unemployment for the rest of us.