Paul Mason really needs to learn some economic history

Many chroniclers of the 1930s say the decade only really took on its doomed, chaotic character when major countries left the gold standard (Britain first in 1931, Italy last five years later).


Britain leaving the gold standard was the best thing we ever did. It allowed us to have a suitable monetary policy and we recovered all the lost GDP within two years. And the importance of this is:

Italy is back in recession and approaching deflation; Germany’s economy has shrunk and France stagnates. In Britain, we have a record number of jobs but plummeting real wages. Only the US – which borrowed massively, restructured its banks and printed money on a historic scale – enjoys anything like a sustainable recovery, and even that’s being sustained only by the promise that quantitative easing will go on ad infinitum.

The importance is that monetary policy matters. Milton Friedman was in fact correct. And Ben Bernanke and the BoE have been correct in following the Friedmanite prescription: and the ECB has been incorrect in not.

And yes, this is important: and it’s also nothing to do with anything else about Friedman’s views. But no one commenting upon these current affairs should be blathering on about them without grasping these basic points. The Fed caused the Depression (no, not the 1929 Crash, no, not the recession, but the Depression) through monetary policy and it didn’t happen this time around because the Fed got it right.

The importance being of course that someone needs to bang heads together at the ECB (and Bundesbank where, hilariously, they think there is actually loose monetary policy in the eurozone) and get them up to date, into the 21st Century, on money.

21 thoughts on “Paul Mason really needs to learn some economic history”

  1. UK productivity is falling though, and real wages haven’t caught up with pre-crisis levels. I’m no fan of the Euro or the gold standard, but loose monetary policy is just papering over the cracks in the economy.

    Look back at pre-EMU days. Germany had tight monetary policy, but it also had a strong economy (at least until the shock of reunification). At the other end we had the likes of Italy with banknotes of millions of Lira. It’s easy to mistake the direction of causation: tight monetary policy clearly doesn’t turn every country into Germany. But it does unmask the underlying faults, whether it’s poor employment regulations, inefficient bureaucracies, or monetary union itself.

    Printing more euros just skirts the real issues, while creating a new order of winners and losers. It’s time to bite the bullet and break up the single currency.

    For the UK, QE masks our declining productivity, middling education, poor housing, and open-door immigration. With the possible exception of education, this government hasn’t made any meaningful effort to change things. But hey it’s ok, we all feel a bit richer thanks to QE.

  2. Err, yes, this is rather the point. We’d prefer to have QE than mass unemployment, wouldn’t we? That’s why it’s the appropriate policy.

    That we also need supply side reform is true, but why make it more painful than it needs to be?

  3. Are you quite so sure that the money printing thats going on in the US is actually achieving anything other than staunching the flow of blood loss, so to speak, rather than treating the underlying problem? If the US stops QE it is highly likely that its economy will nosedive drastically, so it doesn’t look like QE is solving the problem at all. Has QE solved Japan’s problems? Has printing money historically ever solved any nation’s economic woes, long term? It seems to me that QE is a band aid, to be used as a short term last resort, but one that won’t make things better in the long run. That takes more drastic (and painful in the short term) surgery, which is something no nation seems prepared to undergo voluntarily. One suspects that at some point we will have to, involuntarily.

  4. It’s not supposed to be a long term solution. It’s supposed to be a short term one avoiding the economic pain of 25% declines in GDP. Like, you know, happened to Greece recently and the US in the 30s?

  5. Paul Mason is also incorrect in his assertion that the US had massive borrowing (as he’d clearly like to show that a Keynesian stimulus in the US worked).

    Yes there was massive borrowing at the federal level but only to largely offset a massive decrease in public spending at the state level.

  6. Yes, rather temporary QE and slow adjustment than painful rapid adjustment. But it was sold to us as a short-term measure, as you say yourself. We’re now several years in and there’s precious little sign of either monetary tightening (in the UK/US) or reform of underlying problems. Shouldn’t we be worried by that?

  7. They are only putting off the day of reckoning. As Andrew M says QE was a temporary measure like all the state’s temporary measures it is here to stay. Meanwhile the debt climbs and more and more depend on a state that is an economic balloon.

  8. And QE worriers, why do we care about size of CB balance sheet? Why should we tighten if no signs of inflation?

  9. QE doesn’t work in this environment.

    Because the transmission mechanisms are broken.

    The Western consumer is tapped out and the banks are trying to repair their balance sheets (to say nothing of Basel III)

    So the QE runs off into equities, and bonds, and real estate, and land, and art, and diamonds.

    It’s just blowing bubbles, innit?

    P.S – It’s why we see little price inflation. FOR NOW.

  10. QE is a wealth transfer from savers to borrowers. The consequences of not having QE would be defaults on debts.

  11. As Luis says, which chroniclers supposedly constitute this “many”? I think writing “many people agree with me that…” is at best lazy writing and usually means “I am sure people agree with me but can’t name any offhand”!

    My not entirely wild guess is that he is citing (widespread and genuine) disapproval of “beggar my neighbour” policies in support of his thesis. The Gold Standard was, it is generally agreed, a bit naff.

  12. Tim Worstall said: “Err, yes, this is rather the point. We’d prefer to have QE than mass unemployment, wouldn’t we? That’s why it’s the appropriate policy.”

    The law of diminishing returns must play a part somewhere. Inflating your way out of trouble at a time when advances in technology, rising consumerism and building a better future were reshaping economies means the money is drawn towards new factories, roads, building a national grid, council houses, etc.

    We have those things now. Where are the gains to be made that would similarly transform our way of life?

    In the 1930s manual labour would have built much of that new infrastructure and kept employment up. These days we have a significant service economy. The economic landscape has changed so much is QE still the right answer? We’ve gone from supporting car factories to supporting credit factories. The money is going on treading water not on striding into the future.

  13. “The Fed caused the Depression”

    I thought it was caused by onerous taxes, the extreme contraction of international trade (Smoot-Hawley), and a general fear of government (as we have today with the Obama administration).

  14. From Wikipedia:
    “Mason was educated at St Joseph’s RC Primary School in Leigh and Thornleigh Salesian College in Bolton. He graduated from the University of Sheffield[4] with a degree in music and politics in 1981 and trained to be a music teacher at London University Institute of Education, after which he undertook postgraduate research into the music of the Second Viennese School at Sheffield University until 1984.
    Mason lived in Leicester from 1982 to 1988, working as a music teacher, and lecturer in music at Loughborough University.”

  15. Ivor>

    “It’s why we see little price inflation. FOR NOW.”

    Shame you haven’t followed the practice round here of calling yourself ‘Bloke in XYZ’ so I’d know where to come and do my shopping.

  16. “It’s not supposed to be a long term solution”

    Well the definition of medium term in government debt terms is taken to be 5-10 years. Thus the US is well out of short term use of QE, is into the medium term, and will be hitting the long term in about 4 years time. If QE has continued into the medium term and there is no prospect of it ending without financial collapse, are we sure that its the right policy at all? In the absence of something else also being done to solve the underlying issues, how long can it continue before it blows up horrendously again?

    Its like applying a tourniquet to a leg thats severely mangled – yes the patient doesn’t die there and then from blood loss, but unless the leg is rapidly operated on, maybe even amputated, the patient dies anyway from blood poisoning, gangrene etc. The tourniquet doesn’t prevent death, it just postpones it enough to allow other treatments to be tried. We just don’t seem to be trying any other treatments other QE.

  17. Dave>

    Everything is relative innit.

    £375bn should have given us maybe 20%.

    Instead we’ve got 10%, as the rest goes into asset bubbles.

    2% is reported.

  18. I accept the argument that we needed QE when the crash happened but it strikes me that since then its become nothing but corporate welfare. Just watch the little piggies squeal every time the Fed even says its thinking about QE at some future point.

    Its become the right’s equivalent of Keynesianism, they all want the QE in bad times but nobody has the balls to stop when the good times are starting to arrive.

    Not that I’m saying they’ve arrived just that the reactions to date don’t bode well for when they do.

  19. Well done, Worstall! As you are also a land taxer, you’ve got the problem of new money inflating property bubbles covered too.The latter problem is the one our very educated elite cannot get their fuzzy heads around (although land taxes were proposed for economic regulation hundreds of years ago.)

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