Great Depression and present recession: causes and cures

Both economic upheavals with the enormous social costs to societies the world over have an underlying cause that is often not recognized.

While in both cases the immediate causes are clear—credit expansion leading to crashes—the underlying cause of both calamities is the relinquishment of the discipline of adhering to a monetary standard. During World War 1 the belligerent nations abandoned the gold standard, so that they could buy more arms on credit once their gold reserves were used up (and transported to the US). This led to huge trade balances which produced an expansion of international liquidity. This liquidity, in turn, caused credit expansion which, in turn, led to over-investment, overcapacity, asset price inflation or bubbles and, finally, in deflation. This same pattern can be seen presently with so much more credit created by all the fancy instruments made possible by removing of regulatory control. However, all that is, in last instance, made possible by the abandonment or collapse of the Bretton Woods institutions when the Nixon Administration went of the gold standard and replaced it by the dollar standard. The enormous trade deficits are part and parcel of the unsustainability of this standard because it allows and pushes one country to become a deficit nation in order for other nations to export their goods and services.

Part of the cure for the present recession is not only to adopt the many measures that the Bush Administration and President-elect Obama are advocating is the need to go off the Dollar standard for “global greenback” that is not tied to one country but which reflects a basket of currencies of major economies. Once the Obama Administration comes in it not only should adopt Stiglitz’s global greenback, but go a step further to take the Terra as the accounting unit of an international monetary system that integrates economic and ecological, i.e. carbon credits and debits, as proposed by the TIMU Initiative on this blog and elsewhere.

While “crony capitalism”, “infectious greed” or the income widening gap can still be considered part of the causation of the Great Depression, Richard Duncan in his 2005 The Dollar Crisis conclusively shows, in my opinion, that the enormous trade imbalances balances between 1914 and 1920 are the underlying cause, a fact that is often overlooked by those analysts who do not take this longer time frame.