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The 1930s are not talked about much anymore, except by a few specialists who generally riff variations on the blame-the-Fed nostrums of the past. The era has been submerged like a childhood trauma. Yet the consequences of the 1930s are everywhere with us, especially regarding central banks and their currency manipulations. The floating currency regime of today causes incessant crises and economic disasters around the world, but it is justified, consciously or unconsciously, by arguments that the world needs the Fed and floating currencies to prevent another 1930s-like contraction.

It's time to take another look at the 1930s, because the intellectual errors of today will never be solved until this era is properly understood. As this paper attempts to demonstrate, the Fed and the gold standard were innocent of the almost universal charges leveled against them in the last several decades. Stripped of their justification, today's floating currencies are revealed for what they are -- grotesque aberrations. The gold standard has always been the monetary system of Capitalism. In centuries of use it has never failed, although governments have often failed to stick to the gold standard.

The world made an enormous intellectual shift in the 1930s. The Classical perspective of Adam Smith, which had been ascendant since the mid-18th century, was discarded for what can be described as a sort of Neo-Mercantilism, which now permeates all discussion of economic policy. All of today's intellectual fascinations -- public works spending, big government, floating currencies and monetary manipulation, trade "imbalances," a focus on "consumer demand," a tendency toward economic nationalism -- are shared with the Mercantilists of the 17th century. It was a century of big government, high taxes, trade wars and constant warfare, not so different from the 20th century.

The Classical perspective was abandoned because it could not satisfactorily explain or deal with the events of the Great Depression. Indeed, the conventional wisdom of the time was very much responsible for causing the Great Depression in the first place. Governments tried to solve their economic problems by raising taxes in an attempt to balance the budget. This caused the Great Recession to become something much worse. The Classicalists of the time had a blind spot regarding the potentially destructive effects of taxation or tariffs.

The intellectual vacuum was filled by a new sort of Mercantilism, with new explanations for the events of the 1930s. The Neo-Mercantilists also had a blind spot regarding taxes, and thus tended to fixate on monetary factors. The Federal Reserve, created in 1913, became a focus of attention. The Keynesians did not blame the Fed for causing the Depression, but insisted that the Fed should have devalued the currency to help counter the contractionary economic forces. The Monetarists later made similar arguments. Even the Austrians, who were the primary inheritors of the Classical wisdoms of the 19th century, eventually blamed the Fed for the Depression.

Blaming the Fed essentially meant blaming the gold standard, because that was the monetary system used by the Fed and other monetary authorities around the world. The fact of the matter is that the Fed could not do what the Keynesians and Monetarists wanted it to do, unless it abandoned the gold standard. Such ideas swept around the world in the early 1930s, and resulted in a wave of devaluations worldwide beginning in Britain in 1931. The same arguments led to the abandonment of the gold standard by the U.S. in 1971, which touched off a worldwide stagflation that was genuinely caused by the Fed. Since then, the world has suffered three decades of ceaseless monetary turmoil, all of which was totally unnecessary.

Floating currencies will never work. The only lasting solution is to return to a system of fixed currencies such as the gold standard that prevailed from the 1690s to 1971. But first, the Fed (and the gold standard) needs to be absolved of guilt for the 1930s. The Great Depression was caused by rising tariffs and taxes worldwide, and was soon made worse by a series of devaluations around the world. Despite their blind spot regarding taxes, the Classical economists of the 1920s were very sophisticated regarding monetary affairs - more sophisticated, in fact, than the economists of today. They understood that the economic contraction after 1929 was not caused by a monetary problem, which is why they were left incapable of explaining the events that followed. Re-establishing the innocence of the Fed and the gold standard is the first step toward reconstructing a properly functioning world monetary system.

http://www.polyconomics.com/1930s.pdf

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