The underlying deflation is well known, and was caused (in large part) by all the countries in WWI going off gold and printing money like crazy, then going back on gold in 1926 at the pre-war gold/pound exchange rate. The excess money supply had to be soaked up somehow. One of the unfortunate side effects of being terrible at math is that I know that there is a mathematical explanation but I can't give it. At any rate, the wrong exchange rate was adhered to for policy reasons of the British government. Churchill was Chancellor of the Exchequer then, and he was terrible at math, too.
Both Keynes and one of the Austrians, I think von Mises, warned of dire consequences, and so there were. Keynes wrote an essay, "The Economic Consequences of Mr. Churchill." Mundell-Fleming again, but nobody really understood that then.
The whole bit about using economic and fiscal policy to carry out social policy goals didn't become so important until after the ordinary people got the vote. As long as governments and central banks could make ordinary people suffer recessions and unemployment in order to maintain exchange rates, there really was no obvious problem to people on top of the food chain. So what if the navvys were out of work? Their lives were ordained by God to be solitary, poor, nasty, brutish, and short. |
