As Keynes suggested, most practical men are indeed in thrall to the ideas of some long dead economist and current events are proving him nearly correct. For the economist all are currently looking to is Milton Friedman. The scramble is to stop the financial system imploding and the reason why we want to do that is laid out in this republished chapter of one of his academic works. It wasn’t the collapse of Wall Street in 1929 that led to the Great Depression, it was the collapse of the banking system in 1931 and 2 that did. That collapsing financial system led to a credit crunch in the real economy, a fall in the money supply and so the deflation that followed.
If you look around at a hard core monetarist like Tim Congdon, or a more Keynsian Democrat like Brad DeLong, or perhaps here, or half the Guardian (that half not calling for the end of capitalism) all are saying very much the same thing. Either we get the banks back on their feet and lending to each other again or we cut interest rates strongly or we start to suffer from deflation. The reasoning being that all are working from Friedman’s script: that just as inflation is always and everywhere a monetary phenomenon, so is deflation.
It has to be said that there’s something amusing about those Guardianistas and the cries for immediate sweeping cuts in interest rates. They’re all calling this the end of neoliberalism and yet they’re following the advice that would have been given by the economist they anathematise as the High Priest of that very creed. Following indeed perhaps his most contentious point, that the Depression wasn’t caused by a lack of demand and thus wasn’t solved by Keynes and his measures.
In fact, what the proposed solutions all seem to be saying is that we are all monetarists now.