money volatility -- beggar-thy-neighbor

People should really read Mr. Bernanke's book on the Depression, Essays on the Great Depression. It clearly lays out Mr. Bernanke's thinking, more accurately his misconceptions on the era, and just as importantly, his failed strategies on how to meet the similar, but by no means identical situation we find ourselves in today. I pointed out a year ago in Ben's Bet, Mr. Bernanke's view of the 1930s is monetarist's revisionism first propagated by Milton Friedman. This revisionism's great advantage for Mr. Friedman, in the best tradition of economics, was it could not be proved right or wrong until the next crisis. However in the interim, it would helpfully provide cover for powerful interests, profiting greatly from the doctrine's growth and eventual dominance.

In short, the monetarists' view was the Depression was caused predominantly by the Fed, particularly their failure to drop rates and loose money in response to the popped financial bubble of the 1920s. As this monetarist's view came to dominate the 1980s, one of the accompanying great revisions was the monetary volatility of the late 1920s and early 1930s, which pretty much all who experienced considered a scourge, instead was revised to be a blessing. As Mr. Bernanke writes in his book,

Eichengreen and Sachs argued that depreciation, in this context, should not necessarily be thought of as a "beggar-thy-neighbor" policy; because deprecations reduce constraints on the growth of world money supplies, they may have conferred benefits abroad as well as home..

Thus, the competitive monetary deprecations of the 30s, also known as "beggar-thy-neighbor", were viewed triumphant by the monetarists, with Mr. Bernanke concluding, "A coordinated depreciation presumably would have been better than the uncoordinated sequence of deprecations that in fact took place." It's really no secret to understand the hoped ends of Mr. Bernanke's policies. So, its interesting to see a piece in today's WSJ bringing back the idea of "beggar-thy-neighbor" as scourge, while global currency markets become ever more volatile. The article states,

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?

This is in direct contradiction to both our ruling monetarists' doctrine and more importantly Mr. Bernanke's actions. The queer fact is money, as either fiat currency or connected to some non-utilitarian metal such as gold or silver, has no real connection to the real physical economy. History is quite clear that when you begin to simply manipulate the value of money as the main mean to balance great imbalances in the physical economy, you end up compromising the value of the established monetary system, in turn creating further problems for the physical economy. We need fundamental reform of our monetary system, a rethinking of money's creation, control, and relation to the physical economy, not a continuous tinkering or radical revaluing of established currencies.

Half the world didn't meet at Bretton Woods in 1944 to devise a system of global currency stability because they thought the beggar-thy-neighbor currency volatility of the late 1920s and early 1930s was a good thing. However, if you read Mr. Bernanke's book, this is a lesson lost to him and our ruling monetarist priesthood. So, we will learn it again.