We’re all Austrians now . . . make that Keynesians.

I plan to discuss a very impressive (unpublished) paper from 1991 written by Ronald W. Batchelder and David Glasner.  Then I hope to use this paper as a springboard to re-think the evolution of 20th century macro.  With apologies to Mr. Batchelder, I will refer to “David’s ideas” for simplicity.  (I know David, and he provides some excellent comments to this blog.)  David and I also share similar views on monetary policy, and in many cases he published his views first.  Unfortunately, the paper I refer to is not available on the internet.

The paper focuses on the views of Ralph Hawtrey and Gustav Cassel, two unjustly neglected interwar economists.  Both economists favored an international gold standard, but both were also concerned that the post-WWI system was potentially unstable.  During WWI many countries sold off their gold stocks to help pay for the war.  This big drop in the demand for gold caused the value of gold to plummet, which meant that the price level more than doubled.  Some of that was reversed in the 1920-21 deflation, but Cassel and Hawtrey feared that as countries rebuilt their gold stocks the price level might fall, causing higher unemployment.  They favored policies that would economize on the use of gold, such as replacing gold coins with gold-backed paper money.  Another idea was to supplement gold reserves with some sort of international accepted currency, such as the dollar and/or the pound.  And some of these reforms were implemented.

At first it looked like their fears were overblown.  Throughout most of the 1920s, prices in terms of gold were fairly stable.  After 1929, however, their worst fears came to pass.  Both central bank and private hoarding of gold caused severe deflation throughout most of the world, leading to mass unemployment.  So why didn’t they get credit for their predictions?  Why aren’t they famous today?  It turns out that the answer is surprisingly complicated, and tells us a lot about how macroeconomics evolves over time.
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