Beginning with the floating of the Thai baht on 2 July 1997, a regional crisis unfolded that saw the magic disappear from the economies of East Asia. What appeared initially to be merely the sharp devaluation of a single currency turned into an economic free-fall that rippled across neighbouring economies and eventually the entire region. By early September 1997, the Malaysian ringgit had fallen to its lowest level against the US dollar since 1971; in the space of six months the Thai stock-market had lost 38 per cent of its value; Malaysia’s lost 44 per cent, the Philippines’ lost 35 per cent; Indonesia’s lost 17 per cent; and Japan’s lost 4 per cent. By year’s end, the Indonesian and South Korean economies had been brought to their knees, and speculation had begun that East Asia would drag the global economy into a bout of chronic deflation.

Economic growth slowed down as the reforms after the crisis introduced a less aggressive system. Banks lent money to households rather than firms as household loans were liberalized. The current account turned into a surplus, but it failed to produce the equivalent increase in net foreign assets because of the large net capital losses. The country now held more international reserves, but it was for self-insurance purposes after throwing open the capital market. The country failed to avoid a currency crisis in 2008, which was resolved through currency swap agreements. The growth rate fell further with the ensuing Great Recession, and the country faced a deflation threat in 2013, but it was slow to use fiscal policy to cope with it. South Korea fought the pandemic in 2020 well but is currently having difficulties with its disinflation policy as it has to heed the risks in international as well as domestic financial markets.

The grand hoteliers of Berlin, who were also German financial, industrial, and commercial elites, cast their lot with Hitler in 1932. Several factors played into the decision, but the most important was an unshakable pessimism, born of the chaos of 1918–23, especially the hyperinflation of 1923, that never quite dispelled in the years of relative prosperity of 1924–28. After 1929, during the Great Depression, this pessimism hardened into fatalism: that is, certainty that business would fail under present conditions. Under the influence of a contagious fatalism endemic to their milieu by 1932, the Kaiserhof’s owners, in particular, would not have seen or understood the ramifications of their decision to let Hitler use the hotel as his headquarters. On the one hand, the decision at least kept open the possibility of a different future under the next regime. And on the other hand, the alternative, ejecting Hitler, might trigger immediate and violent retaliation by the Brownshirts. In the end, however, these same hoteliers, because they were Jewish, found themselves running for their lives as some of the earliest victims of the Nazi persecution.

This chapter studies short-term economic fluctuations or business cycles. We first introduce the Keynesian Cross model which, in contrast to classical models, allows the equilibrium output to deviate from the potential level of output. Next, we introduce the celebrated IS-LM model, which is the leading interpretation of the Keynesian theory. We also modified the IS-LM model to study interest rate policy, the small open economy with floating exchange rate, the small open economy with a fixed exchange rate, and the large open economy. Next, we derive aggregate demand (AD) from the IS-LM model and introduce the Keynesian AD-AS model. Then we introduce dynamic modeling and study two dynamic AD-AS models. Finally, we discuss two verbal theories, Keynes’ theory of employment and investment and Minsky’s financial cycles.

Chapter 3. The mechanisms that govern how a gold standard works, and the historical performance of gold standards in practice, have often been misunderstood or inaccurately described – both by critics and by supporters, including academic economists. We address the main misconceptions by critics, including “The Gold Standard caused the Great Depression,” “A gold standard is dangerously deflationary,” “The volatility of the price of gold in recent years shows that gold would be an unstable monetary standard.” We also address the main misconceptions by supporters, including “Gold has objective value,” “A gold standard provides a perfectly stable measure of value, like a yardstick provides a stable measure of length, because it fixes the definition of the monetary unit,” and “The quantity of money is self-regulating under a gold standard only if we outlaw fractional-reserve banking in favor of one hundred percent reserves.”

The centrality of the Bretton Woods international conference (1944) in the reshaping of international economic and financial institutions in the post-war world has always seemed obvious. In this story Keynes has been recognised as a key player, given his central role as a key advisor of the British government (despite his now precarious health). The mythology of Bretton Woods has often focussed on a supposed clash between a ‘Keynes Plan’ that sought to introduce the concept of ‘bancor’ as an international currency, and a ‘White Plan’ that was the brainchild of the leading US economist Harry White. But this way of telling the story misses the fact that ‘bancor’, for all its suggestive implications, was never put to the conference as an option. Instead we see Keynes – sadder and wiser than in Paris perhaps – accommodating all along to an American view that ‘a deal’ had to be struck. It was one that crucially involved Britain in paying for the benefit of Lend-Lease by adopting the mantra of ‘non-discrimination’. So here is a revealing example of the priority for expediency over truth in a real-world situation.

If wages and prices are flexible enough, money can be neutral in the long term and has little impact on business fluctuations. In the short term, however, money can affect national output and employment because wages and prices are rigid. This chapter looks at the effect of money on prices and on short-term economic fluctuations in Korea. Finally, the chapter examines the relationship (Phillips-curve relationship) between inflation and output in Korea.

The incoming Labour government immediately in 1997 set a new framework for the Bank’s operational independence, while removing debt management and transferring financial supervision to the new Financial Services Authority (FSA). The FSA would operate in a trilateral framework, in regular contact with the Bank, which established its own Financial Stability Committee in parallel to the newly created Monetary Policy Committee. But the Bank’s role was increasingly seen as primarily in setting monetary policy, with an overall inflation goal of 2.5 per cent, and the obligation to write an explanatory letter to the Chancellor of the Exchequer if the target were to be seriously missed. Chancellor Gordon Brown saw the Committee structure, with half the Committee appointed by the government, as a path to cutting down the powerful figure of the Bank Governor as an alternative economic policy-maker. The early years of the MPC were overshadowed by disputes over the resources allocated to the external (government-appointed) members of the Committee, and by increasing press attention to divisions within the MPC between ‘hawks’ and ‘doves’. By the time George stepped down as Governor in 2003, the MPC process looked highly credible.

The chapter examines the evolution of the Reichsbank, from its establishment in 1876 until the departure of key figures of the directorate in 1939. It devotes particular attention to the record of central bank independence during the inter-war era, and the careers of those Reichsbankers who went on to lead the post-war central bank. The chapter argues that the origins of monetary mythology can be traced back to the Nuremberg trials, where a form of it was first applied in defence of Schacht amid efforts to sanitise both his record and the conduct of the Reichsbank under his tenure.