Representative Ryan Requests

And Barry Eichengreen anticipates with an answer

From “Ryan leads opposition to Fed’s economic efforts,” Milwaukee Sentinel Journal:

…”Name me a nation in history that has prospered by devaluing its currency.”

From “Competitive devalution to the rescue,” published over a year ago in The Guardian:

Every day it seems more likely that we are destined – or should one say doomed? – to replay the disastrous economic history of the 1930s. We have had a stock market crash to rival 1929. We have had a banking crisis comparable to 1931. With the economic meltdown in eastern Europe we have the prospect of a financial crisis in Vienna, exactly as in 1931. We have squabbling among the major economies over the design of rescue loans, just as when the Bank for International Settlements was hamstrung in its efforts to contain the crisis in Austria. We have the prospect of a failed world economic conference in London to dash remaining hopes for a co-operative response, just as in 1933.

And if all this wasn’t enough, now we have the dreaded spectre of competitive devaluation. In the 1930s, one country after another pushed down its exchange rate in a desperate effort to export its way out of depression. But each country’s depreciation only aggravated the problems of its trading partners, who saw their own depressions deepen. Eventually even countries that valued currency stability were forced to respond in kind.

In the end competitive devaluation benefited no one, it is said, since all countries can’t devalue their exchange rates against each another. The only effects were to fan political tensions, heighten exchange rate uncertainty, and upend the global trading system. Financial protectionism if you will.

Now, we are warned, there are signs of the same. The Bank of England is not exactly discreetly encouraging the pound to fall. And just last week the Swiss National Bank intervened in the foreign exchange market to push down the franc. Will Japan, the United States and China be long to follow? Will we all yet again end up shooting ourselves in the foot?

In fact, this popular account is a misreading of both the 1930s and the current situation. In the 1930s, it is true, with one country after another depreciating its currency, no one ended up gaining competitiveness relative to anyone else. And no country succeeded in exporting its way out of the depression, since there was no one to sell additional exports to. But this was not what mattered. What mattered was that one country after another moved to loosen monetary policy because it no longer had to worry about defending the exchange rate. And this monetary stimulus, felt worldwide, was probably the single most important factor initiating and sustaining economic recovery.

It is true that the process was disorderly and disruptive. Better would have been for the countries concerned to co-ordinate their moves to a more stimulative monetary policy without sending exchange rates on a roller-coaster ride. But, not for the first time, they failed to agree. Those in the most precarious positions had no choice but to pursue the new policy unilaterally.

In any case, monetary easing achieved through a process of “competitive devaluation” was better than no monetary easing. Those countries that shifted in this direction first were also first to recover. But in the end – the end coming after an excruciating five years – they had all moved in the requisite direction, and they all began to recover.

This, in a nutshell, is our situation again today, …
..[emphasis added — mdc]

From a 1992 Economic History Review 45(2)article, an illustration that the countries that left gold earliest recovered earliest:


Figure 5 from Eichengreen, “The Great Slump Revisited,” Economic History Review 45(2) (1992).

I hope I have undetaken a public service by providing some historical perspective that might inform the debate. For those who wish to learn more, let me recommend Golden Fetters (only 400 pages or so). Additional, updated, views here and here.

The Milwaukee Sentinel Journal article continues:

“There is nothing more insidious that a government can do to its people than to debase its currency,” Ryan said.

Just as harmful, Ryan warns, is that the proliferation of newly printed dollars inevitably unleashes inflation and throws the economy out of kilter in other ways.

James Hamilton responds indirectly (directly to “the bunnies” on quantitative easing) thusly:

…Actually no money is going to be printed. The Fed will pay for these purchases by crediting accounts that banks have with the Fed. Although it is true that banks could ask to withdraw these funds in the form of green currency, they currently are showing no interest in doing so. And before banks did start to want to withdraw these funds as money, the Fed plans to sell the assets off to bring the reserves back in. There is no plan now or in the future to “print a ton of money”.

39 thoughts on “Representative Ryan Requests

  1. pete

    If banks don’t lend then QE2 is kind of a failure, eh? Exchanging zero maturity dead presidents for longer maturity debt, QE2, is interesting, but only if the zero maturity debt gets out there and goes to work. If so, then the inflation which ensues will cause a wealth redistribution from fixed priced contracts (say debt and union wages) to variable (commodities, retail sales), which may induce some growth. It works until the fixed priced contracts are up for renewal. Then all bets are off. Worst case scenario is when the fixed price contracts rationally contain the expectation…then to get any effect on growth the inflation must be even higher…QE3, QE4, etc.
    Essentially relying on activist monetary policy is the old definition of insanity.
    Krugman begged for inflation in 2002, even though “competent economists” (Dean Baker’s language describing inflation hawks like himself and Shiller) knew there already was a housing bubble. Are we set to repeat again?

  2. Ricardo

    Do not be deceived. Note this from Robert Murphy
    …all five of the countries under discussion were on a gold (exchange) standard as of January 1931. Then, if you ask in what order did they sever their currencies’ ties to gold, the actual ranking is: Germany, Britain, Japan, the United States, and France.
    Eichengreen’s analysis is a little weak and even he has softened his claim in a later paper (though I cannot now find the reference. Apparently I lost it changing computers.)
    But there is also another consideration that those with a gold standard phobia do not want you to consider. When the UK went off of the gold standard they essentially stole 1/3 of the value of foreign reserves from the countries in Europe that they convinced to follow the gold exchange standard and hold pounds rather than gold. Had these countries not trusted England to maintain the value of the pound they would not have experienced the huge hit to the value of their foreign exchange.
    Countries leaving the gold standard did not improve their economic conditions because of a flexible currency but because they unilaterally dissolved a significant amount of their foreign debt. Would your “economic” position be improved if you could simply refuse to pay 1/3 of your debts?
    The revival of the old mercantilist economics seems to be significantly based on theft and deceit.

  3. markg

    Reserves are just govt securities that pay interest with a 1 day maturity (the source of the interest – the Fed or Treasury – makes no difference in the publics eye). Whether the public has a trillion in reserves or the same trillion in longer term securities plays no role in inflation or currency value.

  4. Nemesis

    A “free-banking”, gold standard-like discipline on the profligacy of banksters and politicos could be applied by requiring a 100% reserve requirement and banksters being permitted to lend only their own money/capital and not via fractional reserving of reserves against depositors’ money (lenders to the banks at short terms) held on deposit at the central bank.
    If the banking system holds $3.5 trillion in cash and securities marked to market, they should not be allowed to lend more than that.
    The central bank’s holdings of securities should be an equivalent to outstanding loans as the monetary base. All loans would then be self-liquidating and likely to be at shorter terms or at adjustable terms and callable.
    One could impose a specie reserve exchange standard of some percentage against central bank reserves; but the 100% reserve requirement and banks lending only their own assets would impose a similar discipline as a gold exchange standard.
    Banks should not be allowed to intermingle trading, leverage, and depositors’ funds. We need Glass-Steagal II AND enforced.
    Banks should be permitted to charge whatever fees they like for transaction and custodial services.
    Depositors should expect to pay deposit insurance via the FDIC, not have the bank pay the premia and pass the charges to the depositor. If a depositor does not want to pay the deposit insurance against his loan to the bank, then he is consciously accepting the risk that he won’t get his money back were the back to go bust and somehow have pilfered the depositors’ funds.
    Rather than private lending for mortgages and securitizing mortgages and thus encouraging massive leverage, the gov’t should consolidate the agencies into one agency and be the primary mortgage lender for residential real estate at cost, requiring no more than 80% LTV and a mortgage of no more than 2 1/2 to 3 times incomes with sufficient assets. No more 0% or 3% down and financing the down payment and closing costs. If one cannot afford a mortgage, one should either rent indefinitely or save for the down payment.
    Private banks could still make real estate loans, but they would be competing with the gov’t at cost, thus there would be no incentive to issue loans banksters know won’t be paid back and then pawn them off to the gov’t to eat the losses in the amount of trillions of dollars.
    To transition to such a system, the federal gov’t today could buy all mortgages from willing mortgagee sellers at 75-80 cents on the dollar and write down all agency paper accordingly (or allow to run to term), forcing lenders to eat the losses. Then restart the mortgage system as primarily a gov’t system at cost with outstanding mortgages no more than today’s estimated replacement costs of structures.
    Until someone breaks the fatal grip by Wall St. and the bankster and realtor syndicate on the financial system and gov’t, there will be no resolution to the unreal estate bust apart from a slow grinding debt-deflationary regime lasting throughout the decade.
    Debts must be written down to the level that can be sustained by wages, production, and the domestic net energy per capita supplies, which ultimately means oil consumption and debt per capita 50-65% lower in the next 10-20 years and beyond. How we get there will determine whether we become a Third World society or somehow manage to transition to a sustainable socially acceptable level of material well-being for the majority of us; but few if any are even telling us about the risks we face and what must be done to mitigate the worst effects of Peak Oil and the Great Regression.

  5. T-Dub

    Jim Hamilton’s quote regarding the exit strategy does puzzle me a bit. Going with the assumption that the Fed can spot inflation coming, exactly how are they planning sell off their assets when they have effectively cornered the market on new auctions? If the economy gains traction and inflation expectations increase then rates will start moving higher. Are we then to say that the Fed will sell their bonds at losses and push interest rates even higher? With higher rates, how will we then fund the debt service? This problem will only be made worse if we are successful in fixing the trade deficit as there will be fewer foreign investors. How many central bankers who presided over the onset of hyperinflation thought that printing money would truly spin out of control? I am no historian in this respect, but I am guessing that most of these central bankers were caught by surprise with respect to how quickly things spun out of control.

  6. pete

    seems spot on T-dub…I raised the issue of time inconsistency on another site and was told that was so old fashioned….but this is exactly the issue. the exit strategy may end up being out of the frying pan into the fire. Continuing to rely on irrational bond markets seems like a poor long run strategy. One suspects that currently if Ben is buying the Chinese are selling, keeping rates from falling…but thats just a wild guess. They have $850B, he is only buying $600B.

  7. JERRY

    He can look to the 80s for the benefits of devaluing the currency. After Volker got inflation under control he cut interest rates. Then in 1985, the dollar was further devalued at the Plaza Accord. As Prof. Frankel’s paper pointed out ( , the Reagan administration was frustrated that Volker didn’t act to further weaken the dollar.
    Maybe Ryan can show us a nation that has prospered with his recommended monetary policy while facing huge inequality of wealth, income and enormous household debt overhang.

  8. Estragon


    It would be more accurate to say China has pegged, not devalued.

    It may also be helpful to keep in mind that in many important respects, China is to the US and EU today as the US was to Britain in the 20’s (trade financing and reserve accumulation). Whether the current imbalances can be unwound in a less catastrophic way remains to be seen.

    IMHO, debates around the gold standard, competitive devaluations, etc., are debates about transmission channels. It’s the underlying imbalances which create the conditions for a blowup. The channels are just how the blowup manifests.

    I think it’s also worth remembering that although devaluations and monetary expansions in the 30’s seem to have brought the big economies out of depressions, a significant part of the demand thereby stimulated went to an ultimately unsustainable buildup of arms. Hopefully, whatever unintended buildups occur with current post-blowup monetary expansion are of a more benign character.

  9. don

    Whether we will prosper from it or not, it seems clear that dollar depreciation is the main avenue for QE to have any effect. The main effect of Japan’s zero interest policy was to spur the yen carry trade, leading to yen depreciation and export gains. That is essentially what the Fed is doing now. I think it is short-sighted and irresponsible, and the foreign critics are right, although China, among some others, is a case of the pot calling the kettle black.
    I wonder how much of the Republican complaint can be traced to lobbyists upset at the effects on financial services income, as the yield curve flattens and margins on loans decline. I find it hard to believe that their primary motive is to increase domestic suffering in order to enhance their election prospects in 2012.

  10. Tom Grey

    @Nemesis: Debts must be written down to the level that can be sustained by wages, production, and the domestic net energy per capita supplies, which ultimately means oil consumption and debt per capita 50-65% lower in the next 10-20 years and beyond.
    Inflation writes down real debts most effectively.
    What is really needed is a targeted mini-bubble in house prices to get the number of mortgages underwater back down to “normal” levels. QE 2 will help this, but only a little.
    There are also still far too many finance people employed for the number of real new loans being made.

  11. W.C. Varones

    Does anyone have an example of a central bank actually shrinking its balance sheet significantly ever in history?
    ‘Cause Zimbabwe Ben has tripled his balance sheet and I don’t think he has an exit strategy. He’s cornered the market for Treasuries and mortgages like the Hunt brothers cornered silver. And how did their exit strategy work out?

  12. Bryce

    Except for countries with particularly profligate pasts, all countries can benefit in the short run from the illusions of abundant savings created by the printing press [via fractional reserve banking system]. Did Greenspan/Bernanke’s 1% Fed funds rate not create the illusion of great household wealth in 2004-7?
    But it is harmful in the long run to do so because of the disco-ordination it causes in prices. The US went back down in 1938 & finished the decade with double digit unemployment. 2007 was followed by 2008, the inevitable bust created by the loose money of 2001-6.
    This isn’t complicated.

  13. ppcm

    The work of K Rogoff,C Reinhart is supplying enough facts and data on the subject please see “This time is different”.
    Currencies depreciation,inflationary pressure are leading indicators of debts default.
    In Debt intolerance K Rogoff,C Reinhart,M Savastano (It is not an empirical study) wonder why repeatedly financial markets lend to debt intolerant countries up to the point of default of the country (ies).Whilst the focus is on emerging markets, the same economists are answering:
    “As for the extent to which borrowing countries are complicit in the problem,one can only conclude that throughout history,governments have always been too short sighed or (too corrupt ) to internalize the significant risks that overborrowing produces over the long term”
    This is an address to the emerging countries,since then the G7 became more democratically the G20.
    Lacking in the captioned study, is the influence of Central Banks monetary policies and oversupply of money.
    As regards the subject of the Federal reserve and QE one may read as well Econbrowser post and comments:
    The market moves ahead of the Fed (influence of QE on banks contingent liabilities)
    Why is the Fed doing this?
    Not much has been written on the Fed ability, to withdraw liquidities in the banking system through reverse repos.
    Overall, striking is the degree of amnesia of the governments,economists,financial markets,supervision bodies,central banks. Throughout my readings I found the best typifying writing of their attitude when looked through the prism of history “sea mammal animals willing to go on shore in spite of all warnings”

  14. Johannes

    figure 5 “industrial production increase 1929 to 1937”.
    Menzie, this production increse is not related to gold standard or not, but related to the Nazis and their rearmament economic boost.
    Eichengreen has no idea and he is comparing apples with bananas.

  15. W.C. Varones

    Now I’m just a country boy without any fancy letters after my name, but I reckon you might be confusing current account balances in the banking system with the central bank’s balance sheet.
    Your link does show a huge increase and then decrease in current account balances in the Japanese banking system, but the Bank of Japan’s actual balance sheet is not so extreme.
    The BOJ shows assets up from 105T yen in 2001 to 155T yen in early 2006.
    They did manage to take most of it back shorty thereafter, but as the ~50% increase in assets pales in comparison to the Fed’s tripling of the balance sheet, I’m not confident that Japan’s exit strategy serves as a roadmap (and look where that got Japan five years later anyway).

  16. markg

    Why do many of the commentors here think additional reserves will lead to (hyper) inflation? Banks do not need reserves to make loans. Some countries like Canada impose 0 reserve requirements. Banks there only hold enough reserves for clearing operations (making payments between banks) so they do not get hit with an overdraft charge. How do those banks make loans with only small amounts of reserves in the system? Banks DO NOT lend reserves or need reserves to lend. So again I ask, why do you think flooding the banks with reserves will lead to inflation?

  17. aaron

    Tom, inflation only decreases the cost of debt if disposable income after non-discretionary expenses increases. I don’t think that’s happening for many people.

  18. aaron

    Here how I think we could do some writing down in a smooth, safe way.
    We put policy in place to facilitate, and encourage banks to institute, a Moratorium on Bubble Mortage Interest. ie, interest should be applied to principal for bubble mortgages that are in good standing and the homeowner should be able to deduct that principal on their taxes for a while.
    It would be nearly costless. The effects of the Bubble Mortgage Interest Moratorium would be:
    Government, losses some tax revenue in the short run due to lower bank profits.
    Banks, Cash flows improve as people have greater incentive to make their payments. Balance sheets improve and less taxes are paid (lower profits during moratorium). Reduced foreclosures and short-sales. House values are less likely to fall.
    Banks, lose some profit if people are able to refinance at lower rates sooner. Banks also lose at the end of mortgage, as it is payed off earlier; these losses are very small and very far in the future. Banks can also lose at sale the amount above principal, up to the amount of scheduled interest during the moratorium, that the home sells for. Again this would occur in the future so the loss would be discounted.
    Homeowners balance sheets improve. Uncertainty diminishes.
    Homeowners who are ultimately insolvent may be given false hope and make payments they shouldn’t.
    Fed, value returns to some toxic assets, since many of the instruments were created under the assumption of prepayment of principal and non-payment of interest (the operating model was that people moved frequently and bought houses to invest in and sell). This will offset some of the lost tax revenue.
    I think we’d see economic benefit after about a year.

  19. David Pearson

    Thank you for noting a common misconception. ER’s are not inflationary for the reasons you cite. Further, banks can always borrow as much in reserves as they want at any given Fed Funds rate, so having the reserves “beforehand” is not a material difference.
    What is inflationary is the effect that Fed buying of assets has on real interest rates. Real interest rates are low or negative across the curve as a result of QE. Now, imagine a future in which commodity and tradeables inflation rises steeply in the presence of an output gap, resulting in moderately high inflation (4% as in 2008). Were the Fed to stop buying Treasuries — or god forbid sell them — as l.t. deficit projections rise, real interest rates would jump. That would cause a recession and an unacceptable level of unemployment — something like 12% or more. Markets would perceive that the Fed would be powerless to act to stem rising inflation. This perception would increase inflation expectations further, and lead to further commodities hoarding and dollar devaluation, and accelerating inflation.
    The above is basically the experience of Latin America in the 80’s and early to mid 90’s. The question is not whether the probability of this occurring is low, but whether the Fed has any contingency plans to stop it from happening once it starts. I believe the answer is no.

  20. Mark A. Sadowski

    With respect to Eichengreen’s graph it might be useful to consider the value of each currency relative to gold during this period.
    The yen declined more deeply than any other currency. During 1932-1935 it fell by nearly two thirds relative to gold. The pound was the earliest in depreciation (1931) and ultimately fell by about 40% by about 1934. The dollar of course declined by 40%, starting later (1933) than the yen or the pound but realizing its full depreciation by about the same date (1934).
    The franc only started to depreciate in 1936 and fell sharply (down nearly 40%) relative to gold only in 1937. The mark never budged so much as a phennig throughout 1929-1937 relative to gold.
    So the real outlier with respect to Eichengreen’s graph is Germany. It would be interesting to see the same graph done with GNP.

  21. Menzie Chinn

    W.C. Varones: By January 2007, the BoJ balance sheet 113 T yen. This means they shrank the balance sheet by 27% (32% in log terms). More importantly to me is the fact that reserves (what is “current account balances”) shrank from Y35 T to about Y10 T. In the US case, in order to reduce reserves back to pre-2008 levels, about $1 T needs to be drained. Given the mid-2006 exchange the rate was about 115 yen/dollar, well, that’s about equivalent magnitudes.

  22. markg

    David P.
    You asked me to imagine a future… and if the Fed can stop it. I want you to imagine another OPEC oil embargo and the price rise that would follow. What would the Fed plan be to deal with it? Are you sure the inflation you are talking about is caused by the Fed or a force outside the Fed control?

  23. The Rage

    Ryan is heavily subsidized by Asian creditors. This little fact will get out when big capital wants to kick the Republicans down again………oh, after they create another recession.

  24. W.C. Varones

    Now I’m just a country boy without any fancy letters after my name, but I reckon you might be confusing current account balances in the banking system with the central bank’s balance sheet.
    Your link does show a huge increase and then decrease in current account balances in the Japanese banking system, but the Bank of Japan’s actual balance sheet is not so extreme.
    The BOJ shows assets up from 105T yen in 2001 to 155T yen in early 2006.
    They did manage to take most of it back shorty thereafter, but as the ~50% increase in assets pales in comparison to the Fed’s tripling of the balance sheet, I’m not confident that Japan’s exit strategy serves as a roadmap (and look where that got Japan five years later anyway).

  25. Menzie Chinn

    W.C. Varones: I am pervaded by a sense of deja vu, when reading the first paragraph your last comment. Oh, well. I understand if it is difficult for you to think up new text. You are a moving target. First you say it’s hard to think of an example of a central bank reducing it’s balance sheet “significantly” (your word). Now, you redefine the hurdle as reducing to one-third. Then you redefine the issue as shrinking the balance sheet and having a positive outcome (as opposed to an outcome better relative to a baseline).

    I agree that the expansion of the Fed’s balance sheet is not riskless. However, to not act is to act. In my view, to not undertake QE2 is riskier than the Fed’s current course.

    By the way, if we want to play the “aw, shucks” card, I bet I grew up in a smaller town than you did.

  26. Mark A. Sadowski

    I would play the “aw, shucks” card except that my small town (Hockessin) is listed in Wikipedia as one of the highest income places with a population of at least 10,000.
    That and the fact that my name officially has two BAs, an MA and soon a PhD following it.
    But on the other hand, why shouldn’t us countryfolk be well educated? (Or even live in rural areas with high incomes?)
    Yee Haw!!!
    P.S. My old mailing address was “R.D. 1 Box 296”. R.D. means “rural delivery” to you citifolk.

  27. Hitchhiker

    I also find the analysis pretty weak. Sounds like a monetarist talking. If one believes that monetary policy drives everything, then the diagnosis is accurate and the prescription sound. If not, it all falls apart. Count me among the latter. Besides, isn’t the Fed out of bullets?
    While the blowback from QE2 may be overblown in the short run, no one can deny that the long term fiscal outlook, if not corrected, is bleak and inflationary. Until we see some fiscal sanity, expect continued blowback. The Fed is being scapegoated and the true culprits in the halls of Congress certainly won’t complain.
    It is not so much QE2 that has people up in arms but, an apparent teetering on the edge of remaining a free country or stumbling down the European socialist model that is being abandoned and condemned by same. The euro is forcing some sanity over there because those spendthrift countries cannot simply manipulate their currencies. They don’t have one anymore. Germany is the backstop. There is no such constraint on the dollar and Bernanke is not Wolfgang Schaeuble. I believe he characterized U.S. policy as clueless.
    I am of the opinion that economies cannot be jump started or forced to grow. Proper fiscal and monetary policies can allow an economy to grow or they can muck up the works. As any gardener knows, more and more nitrogen will cause plants to grow faster and bigger right up till the toxicity point is reached and the same nitrogen kills the plant very quickly.

  28. Mark A. Sadowski

    Hitchhiker wrote:
    “The euro is forcing some sanity over there because those spendthrift countries cannot simply manipulate their currencies. They don’t have one anymore. Germany is the backstop.”
    How did Germany acquire such a reputation? It was countries like Spain and Ireland that were running fiscal surpluses before the Great Recession and Germany that was running massive deficits. And yet they are facing sovereignty crises. Is no one capable of reading or researching?

  29. ReformerRay

    Whether by devalautation of currency or increase in tariffs, nations in the aftermath of the 1929 financial crisis attempted to recover by a policy of beggar my neighbor.
    How to avoid this? We need a simple agreement that all nations should trade with each other in terms of equality of exports and imports, in so far as that is possible, given the need for every nation for some imports that cannot be produced domestically (oil and rare earth minerals, in the case of the U.S.)
    I cannot envision a comperable simmple standard in terms of currency value.
    Focus on actual trade, not currency value. Because with trade we can establish a standard that is fair to all.

  30. Leroy

    “I am of the opinion that economies cannot be jump started or forced to grow.”
    China’s command and control economy has been forced to grow at 10% for 30 years. The economy slowed and they enacted a stimulus that was about 15% of GDP and recovered quickly.

  31. 2slugbaits

    Johannes “Menzie, this production increse is not related to gold standard or not, but related to the Nazis and their rearmament economic boost.”
    Your example of Nazi Germany rearmament spending proves Eichengreen’s point. Going off the gold standard is what liberated German finance minister Hjalmar Schacht (an academic economist) from constraints on government spending.
    Rep. Paul Ryan’s position is that QE2 leads to competitive devaluation, which he sees as a zero sum (actually negative sum) game that leaves everyone worse off. It’s a race to the bottom kind of argument. Eichengreen’s argument is that Ryan’s critique may or may not be true, but either way it is largely irrelevant. The main benefit from going off the gold standard was not increased exports due to currency depreciation. Eichengreen is willing to grant the possibility of competitive devaluation. The core of Eichengreen’s argument is that going off the gold standard frees up other expansionary policy levers:
    More significant was that currency depreciation provided additional scope for the unilateral pursuit of expansionary policies. Countries that allowed their currencies to depreciate could expand their money supplies without having to worry about the consequences for the balance of payments. Depreciation removed the pressure to cut government expenditure and raise taxes in order to defend the exchange rate. The adoption of more expansionary policies enabled countries with depreciated currencies to edge their way towards recovery. Moveover, countries continued to benefit from the more expansionary policies facilitated by currency depreciation even if other countries depreciated their currencies as well.
    On page 233 (page 22 of the pdf document), Eichengreen has a table showing a broad sample of growth rates for countries on the gold standard; those with exchange controls; those under sterling controls; and those with depreciated currencies. The correlation is striking. Those with looser currency restrictions did a lot better.
    Rep. Ryan claims that economics is his first love. It shows. Unfortunately, love is rarely a good foundation for rational and quantitative analysis, which is what you need to understand economics. Rep. Ryan typifies a lot of conservative political activists who studied just enough economics to develop a fascination with the idea of an invisible hand and the vision of undergraduate microeconomics textbooks. Rep. Ryan is infaturated with Walras’ Auctioneer. Sometimes a little education can be a bad thing. Ryan knows just enough economics to fall hard for the ideology of the markets, but not enough economics to actually work his way through serious papers. So instead of serious analysis we get laughable roadmaps.

  32. Mark A. Sadowski

    Earlier I mentioned that Germany was an outlier on Eichengreen’s graph with respect to currency devaluation and growth. Perhaps I should clarify how I think this was possible. Germany adopted strong currency controls, which meant the German government could inflate without worrying about a gold outflow. So in contrast to the other countries mentioned in the graph, the value of gold tells us little about the stance of German monetary policy during this period.

  33. Babinich

    Mark asks:

    How did Germany acquire such a reputation? In response to a question about how Germany became the “backstop” of the ECB.

    Here’s how: Certain EU members are in crisis due to the fact that their monetary policy tools are non-existent. Without individual monetary policy the German export sector remains highly competitive and the German cost of productivity remains lower than the rest of the Eurozone.

    What ever (no amount is too much) it takes…

  34. Mark A. Sadowski

    I’ll grant most of your points. However, why has the Irish export sector become so incompetitive in such a short period of time? That’s a problem that your simplistic views will never answer.

  35. Babinich

    In 2009, the Irish export volume went down to $107.3 billion, from $119.8 billion in 2008. The largest export component, machinery and transport equipment, has had the largest loss.

    Germany, on the other hand, exports: cars, pharma, scientific/medical/hospital equipment & industrial equipment.

    It is little wonder the Irish defend their corporate tax rate with such vigor.

    Really not too difficult to figure out with a little digging.

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