Recessions and Depressions by Todd A Knoop
Knoop presents a literary introduction to business cycles in economies. While at points he loses his logic in his words, it's still a pretty good review of historical situations according to received wisdom: Japan in Recession, the 1998 Asian currency crises, and Argentina (don't cry for me, Argentina, cry for yourself ;).
It is astonishing what foolish things one can temporarily believe if one thinks too long alone, particularly in economics (along with the other moral sciences), where it is often impossible to bring one's ideas to a conclusive test either formal or experimental.
Another important implication of rational expectations is that without an understanding of how people adjust their expectations in response to changes in economic conditions, which in any given circumstance may be impossible to predict, any forecast of the future based upon data from the past will be unreliable.
This is known as the Lucas Critique, and it raises important questions about stabilization policy because forecasting is an integral part of policy formation...
The appropriate monetary policy under the gold standard was to sustain a trade surplus regardless of the worldwide economic situation. This policy of attempting to run trade surpluses at the expense of other countries is often referred to as a beggar-thy-neighbor policy. The problem with beggar-thy-neighbor policies is that every country in the world cannot run a trade surplus at the same time.
The attempt to do so can lead to exactly what happened in the Great Depression: a contraction of world money supplies, world trade, and world incomes.
Andrew Mellon, Hoover's Secretary of the Treasury, urged markets to
liquidate labor, liquidate stocks, liquidate the farmers, and liquidate real estate... It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.
This is akin to arguing that the SARS outbreak in Asia during 2003 was not such a bad thing because it only affected the infirm and elderly. Clearly, macroeconomic policy played a crucial role in creating the Great Depression -- so great, in fact, that Peter Temin has referred to the Fed's monetary policy between 1929 and 1931 as "one of the biggest examples of misguided policy in history".(Good Sir, what you need is a proper leeching...)
After a decade of very strong growth in the 1980s, beginning in 1991 the Japanese economy averaged roughly zero growth over the next 12 years, and unemployment more than doubled, to postwar highs. If the Japanese economy had instead grown at a reasonable 2 percent a year over these 12 years, Japan would be 25 percent richer today than it is. To put this in perspective, Japan has lost what is equivalent to the entire GDP of Italy.