Keynes, credit and a paranoid comparison

The parallels between the Great Depression and our 'Second Great Contraction' are building quickly.

One interesting comparison is between Ireland's need to cut costs due to its inability to tamper with the Euro and England's need to cut its costs when it returned to the gold standard in 1925- England's desire to return to the gold standard at what many saw as an inflated rate meant that it would be unable to compete with America in trade without reducing its costs of production (mainly the cost of labour).

Keynes believed that this reduction in labour costs (wages) would be brought about by a restriction in credit as wages were too 'sticky' to respond automatically to any change in the exchange rate.

He wrote in The Economic Consequences of Mr. Churchill that “The object of credit restriction... is to withdraw from employers the financial means to employ labour at the existing level of prices and wages. The policy can only attain its end by intensifying unemployment without limit, until the workers are ready to accept the necessary reduction of money wages under the pressure of hard fact... Deflation does not reduce wages 'automatically'. It reduces them by causing unemployment. The proper object of dear money is to check an incipient boom. Woe to those whose faith leads them to use it to aggravate a depression.”

It's obviously not a perfect parallel as Ireland doesn't have that many choices credit-wise (even though Britain was, essentially, being funded by the Fed in the '20s).

However, the idea that Ireland's on-going credit crunch might not make the government all that unhappy (and that they might be even a little unwilling to let credit flow freely just yet) is an interesting, and paranoid, one.