The lessons of history

Scott Sumner makes a very good point here:

"This leads to another cautionary observation about the 'lessons of history.' Either of the two policy counterfactuals [of tighter or looser monetary policy] for 1928-1929 might have led to a smaller 'Great Depression,' but in retrospect the undervaluation of gold made some sort of downturn almost inevitable. Had either alternative strategy been followed, and a modest depression resulted, that alternative would have almost certainly received historical censure." -- The Midas Paradox, p. 397

Sumner offers as an analogy the allied policy towards Germany after World War I. He argues, plausibly I think, that Allied policy was just about perfectly bad. If Allied peace terms had been more forgiving, Germany would have recovered better, and the appeal of the Nazis would have been blunted. But if the policy had been even harsher than it was, then, Nazis or no Nazis, Germany would have been to weak to remilitarize the Rhineland, threaten Czechoslovakia, and so on.

(I would argue that our Iraq policy has been similarly "perfectly bad": I was against the invasion, and I am sure that Iraq would be better off today if we have not invaded. But if we were going to invade, we ought to have done so with twice the force, and while being prepared to run Iraq as an American colony for 25 or 30 years.)

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