Golden Fetters: The Gold Standard and the Great Depression 1919-1939

Paul Krugman: Now, it probably annoys you as much as it annoys me to have people talk about your great work, stuff that's so far in the past you can barely remember having done it, but you wrote a really great book, Golden Fetters, about the gold standard and the Great Depression. Do you want to talk about that a little bit? Because I think it is relevant to where we are.

Barry Eichengreen: Well, I think the point of that book was, in part, that simple rigid rules are not a reliable guide for the conduct of monetary policy, and leaving it to the good judgment of an individual, be he in the boardroom of the Fed or the White House, is not a good arrangement either. We have been moving toward constrained discretion over time, where an independent central bank has discretion over monetary policy. But it faces constraints from its mandate, where the powers that be have kind of laid down what objectives it should pursue. And I do think that if you go back to the gold standard, it also functioned best when politicians didn't get in the way.

Before 1913, when political pressures were relatively limited, the extent of the franchise who could vote was limited in most countries, men of property in most places, white male adults in the United States. Trade unions were relatively unimportant, so people clamoring for lower interest rates to bring down unemployment wasn't a factor. All that changed after World War I with extensions of the franchise, the rise of labor unions and parliamentary labor parties. So with those pressures, the gold standard became more fragile and ultimately came crashing down in the Great Depression. So I think that tells you that no monetary ruler or regime is immune from political pressure, but you need an adequate setup, you need adequate institutions to contain that pressure.

Paul Krugman: Yeah. Supposedly when FDR took the U.S. off the gold standard, his budget director said "This is the end of Western civilization." So there was a view that it was really critical. You stole the phrase "golden fetters" from Keynes, but it was basically these kinds of chains that prevented countries from responding effectively to the Great Depression. Finding a way to have flexibility without opening the door to abuse of that flexibility was a long process, and we ended up with this modern regime of the independent central bank, ultimately answerable to the political process, but not quickly. But now technocrats and all of that is suddenly on the line again.

Barry Eichengreen: Yeah, the idea that the central bank is independent but accountable to the politicians, that idea rests on the notion that the politicians will punish the central bank when it acts recklessly, but it will reward the central bank if it behaves responsibly. We're about to find out whether the United States is still operating in that kind of world.