Bear with me for a second – I obviously do not mean that literally. But at the same time, it wasn’t really strictly literally back then either. As Christina Romer puts it, what we needed back then and what we need now is a regime shift – while the precise nature of that regime shift is considerably less important. What the gold standard did was essentially limit the ability of central banks – which in many cases back then hadn’t even existed for all that long – to ease monetary policy when times most required it. In other words, it was a monetary regime that might work fairly well as long as everything else works fairly well. Put differently, it works at times when we might be just fine having no central bank at all to begin with. In that sense, the current strict inflation target by the ECB in particular (but also inflation targeting in general, as many other central banks around the world face similar issues) is actually remarkably similar, even if it does represent a vast improvement. The Fed’s fairly sluggish action in late 2007 and the beginning of 2008 was in large part due to fears of rising headline inflation. The ECB’s failure to act now is largely due to overall inflation in Europe remaining fairly stable – even while unemployment keeps rising and rising. Back in the 30s, central banks were held back by the supply of a metal the worth of which, for most intents and purposes, has baffled economist for centuries. Today’s central banks are held back by a basically randomly chosen number linked to a just as arbitrary basket of goods and services that is supposed to stabilize the overall economy – and yet has proven not to do so when needed the most.
As such, today, just as in the 1930s, what we need is for central banks to get rid of the chains that prevent them from doing their job when we need them the most. Let’s get off the gold standard. Not literally, of course – but it’s time, once again, to face the fact that our current way of doing things means, just as it did back then, strongly restrictive monetary policy when monetary policy should be loose. As pointed out by Katharina in the comments to one of my previous posts, having countries leave the Euro would of course be an option. I don’t think we have to go with the nuclear one though. Giving the ECB at least a dual mandate like that of the FED would be a start, if only a timid one. Nominal GDP targeting would certainly help as well.