Pat,

I fear we are in danger of running in circles here, but...

So, you say it is a "myth" that the financial collapses that 
led to the depths of the Great Depression did not reduce AD, 
or if they did, it is of little interest, since what is of 
interest is what caused the financial collapses.  You then 
cite Mundell.  

Well, I went back and looked at Mundell.  He likes fixed 
exchange rates, tight monetary policy, and supply-side tax 
cuts.  He says the world economy worked fine before WW I.  
His main argument about how the GD came about was the 
botched attempt to reinstall the gold standard at misaligned 
exchange rates in the 1920s.

I think there is a lot of truth to that, especially when one 
throws in that when the Fed ran a tight monetary policy to 
slow down the stock market bubble in the late 1920s, and 
then the market crashed, which damaged investor confidence 
and hurt AD through wealth effects, the Fed continued to run 
a tight monetary policy partly because of the gold 
standard.  The inflows of gold into the US then pushed other 
countries into tightening their monetary policies, which 
reduced global AD.  Of course, in 1931 all of this came 
crashing down in the greatest financial collapse of all 
time, with a concomitant collapse of the money supply with 
banks failing all over the world, and AD falling through the 
floor.  Of course, I know you would just as soon keep AD 
falling out of it, but it certainly makes it easier (and I 
would argue not incorrect, certainly not a "myth") to keep 
it in the story.

The other "myth" you cite is that legislatures created 
central banks based on the advice of economists to prevent 
such financial crashes and recessions/depressions.  Well, I 
would say that most central banks had little to do with 
economists.  The early ones in Sweden and the Netherlands 
and England, and even the later one in the US, were all 
creatures of the banking sectors in all those countries who 
wanted a lender of last resort.  Certainly central banks 
have sometimes messed up, either hyperinflating or, as in 
1929, engaging in overly contractionary policy that pushed 
AD down, leading to, well, we already know what...

BTW, this is a sideshow, but while Mundell praises the 
effect of supply side tax cuts in the 1980s, it should be 
kept in mind that if one compares the growth of the US 
economy between 1940 and 1964 and since 1981, the latter had 
a lower rate, even though the top marginal income tax rate 
has not exceeded 50% since 1981, whereas it exceeded 90% for 
all of 1940-64.  Of course Mundell might fall back on his 
main interest and argue that this outcome was due to the 
earlier period having mostly fixed exchange rates while the 
more recent one has had flexible rates, which he does not 
like.

Barkley Rosser