Will this crisis be as bad as the Great Depression of the 1930's? One important difference is that we don't have the Gold Standard now. That's one good reason for optimism.
Stephanie Flanders, the BBC economics editor, argues that the Gold Standard was more important than protectionism in worsening the problems of the 1930's. James Hamilton provides some background, and useful links. I am not an economic historian, so I can't say how important the Gold Standard was in causing or worsening the problems of the 1930's. I just want to point out some perverse incentives on government policy that are now, thankfully, absent or weakened.
1. Monetary policy. Any country that loosens monetary policy, and lowers interest rates, will tend to create a larger deficit on the capital account of the balance of payments. Now, under flexible exchange rates, this will cause a depreciation of the exchange rate. The lower interest rate increases demand, and so does the lower exchange rate. These encourage countries to loosen monetary policy in a recession. But in the 1930's, under the Gold Standard, the increased capital account deficit would cause a loss of gold reserves, and the danger of running out of reserves completely.
In a global recession, you want a global loosening of monetary policy. It is individually rational today to loosen monetary policy. It was not always individually rational to loosen monetary policy in the 1930's.
2. Fiscal Policy. Holding interest rates constant, and holding exchange rates constant, a country which loosens fiscal policy in a recession will see increased output, income, and imports. This increase in imports will tend to create a larger current account deficit. Now, under flexible exchange rates, this will cause a depreciation of the exchange rate, which partially or fully offsets the drop in net exports. But in the 1930's, under the Gold Standard, the larger current account deficit would cause a loss in gold reserves, and the danger of running out of reserves completely.
In a global recession, you want a global loosening of fiscal policy. It is individually rational today to loosen fiscal policy. It was not always individually rational to loosen fiscal policy in the 1930's.
3. Deflation. Under the Gold Standard, there is an incentive for an individual country to lower its levels of prices and wages. This would depreciate its real exchange rate, increase net exports, and increase demand for its goods. But these gains in one country's net exports came at the expense of other countries' net exports. At the global level, world deflation had one good effect, in that it increased the real value of the global stock of reserve currency, namely gold. But it had adverse effects as well, probably larger. The first adverse effect is to increase the real value of debts, as in Irving Fisher's debt-deflation theory. The second adverse effect is to create expected deflation, which increases real interest rates and reduces demand for goods. Now, under flexible exchange rates, there is less incentive for countries to encourage deflation to increase net exports. The exchange rate would adjust to offset an increase in net exports.
In a global recession, you do not want deflation. It is individually rational today to avoid deflation. It was not always individually rational to avoid deflation in the 1930's.
4. Protectionism. Some argue today that it is individually rational for a country today to adopt protectionism, to try to divert demand away from other countries and increase net exports. Others, like me, argue that it is not individually rational, mainly because exchange rates will adjust to offset the effects. Regardless of who is right today, the incentives for an individual country to adopt protectionism were stronger under the Gold Standard, for two reasons. First, because exchange rates could not adjust to offset the effects of protectionism. Second, because a country which did succeed in using protectionism to increase net exports would not only gain by diverting demand for goods away from other countries, it would also gain gold reserves.
In a global recession, you do not want protectionism. The incentives for countries to adopt protectionism today are weaker than in the 1930's.
Worthwhile Canadian Initiative 
Once again, why place the future of your economy to a metal, that is mined? Why let an accidental gold disovery in another nation determine your position in the world be determined by a randow discovery of massive amounts of gold in Coubtry XYZ(now suddenly the richest country in the world)? I know only X amount has ever been mined, inflation tax, government controls money supply controls my life arguments. But why let another country control your supply of money? Sounds like a reason why ancient wars were started, to plunder for economic gain ie another contry/empires gold, and other resources. I prfer knowing that inflation will be 2-3%, while speculating in other currencies to hedge that.
And yes, deflation does defer investing. If idle resources returned 3% a year, under my mattress, in my floorboards, in a hole in my backyard, why would I ever invest? The risk premium would be enormous, because the risk free approach, do nothing, is so rewarding…..
Also, private monies do compete. Companies routinely extend credit to clients, always have and always will.
Nick Rowe,
your argument makes perfect sense. Except I have not seen evidence that currency prices adjust rationally. The failure of exchange rate adjustment to prevent large and persistant US trade deficits is one primary source of this mess.
Sigh
As a reply to Caplan, it is precisely BECAUSE an individual vote does not swing the outcome that people should use in responsibly for the public good. It should be seen (as in Australia) as a responsibility not just a right.
As for this:
Yes exactly, for instance a responsible and appropriately targeted central bank.
And the answer to “what is to stop…”
Is OBVIOUSLY democratic accountability!
Why do you people hate democracy so much? What is your alternative, exactly?
Reason: “Nick Rowe,
your argument makes perfect sense. Except I have not seen evidence that currency prices adjust rationally. The failure of exchange rate adjustment to prevent large and persistant US trade deficits is one primary source of this mess.”
I’m not sure whether exchange rates adjust rationally. But I would not take the existence of persistent trade deficits (or surpluses) as evidence against rationality.
There are many reasons (demographics, investment opportunities, etc.) why it would be rational for one country to have spending greater than income (national investment greater than national savings) for many years, or decades. And that would result in a persistent balance of trade deficit, lasting many years or decades.
Nick,
but that undermines the rest of your argument.
reason: I don’t think so. When interest rates are stuck at zero the exchange rate get’s determined in a very different manner than in normal times.
Example:
Normal times: Increased government, investment, or consumption spending increases demand for Canadian goods. Bank of Canada raises interest rates to keep inflation on target, exchange rate appreciates in response to higher interest rate, output stays the same, net exports decline.
Now: Increased government, investment, or consumption spending increases demand for Canadian goods. Bank of Canada does nothing. Exchange rate depreciates due to higher imports. Net exports stays the same. Output rises.
Nick Rowe
I don’t think the exchange rate is so mechanically determined, after all it is a relative price and the alternatives are affected by the same sort of forces. I would love for your story to be true, but I don’t think empirically it actually is. Can you prove it?
Central bank bad gold standard good its black and white for me I don’t see how anyone who isn’t some rich international banker making a killing off the central banking system would support it. One more thing the central bank isn’t owned by the government its not even regulated by the government it is completely independent.
Wakeup…
http://www.aapel.org/bdp/BLsplittingUS.html
Maybe you want to change how you express yourself.