In 1933 Roosevelt decided that the key to ending the depression was to create inflation. To that extent he took the US off the gold standard. Actually he just arbitrarily revalued gold from $20.00 to about $35.00.
The value of the dollar quickly dropped about 40%. By this time Europe was already off the gold standard and competitive currency devaluation was already well underway on the continent. In order to compete the US followed suit.
So what was the result of Roosevelt's inflation scheme?
Initially the economy saw a small uptick. Employment picked up slightly although it still remained high all the way into WWII.
But there are always unintended consequences when the government meddles in the market and this time was no different.
Commodity prices immediately shot up. Much of the agricultural markets soared up to 25% in a matter of days. The stock market took off.
The incessantly high unemployment acted to keep wages depressed. The end result was that now the average American couldn't afford to buy food and still couldn't get a job. The people that did have jobs soon discovered their paychecks couldn't keep up with the rise in commodity prices.
This gave rise to the formation of unions, strikes and ultimately civil unrest, not just in the US but throughout the world culminating in WWII.
Last year the Fed and governments throughout the world again resorted to the printing press to combat the specter of deflation. What has been the end result so far. Well it does seem that economic activity has picked up slightly which I guess is to be expected if the government spends a trillion or so dollars on stimulus.
Stock markets around the world have soared with the influx of an ocean of liquidity.
We haven't seen much effect on employment and wage growth yet, but I guess if history is any indication we probably won't. Commodity prices have surged higher pretty much the same as they did in the severe deflationary climate of the 30's.
The only part of the equation left to play out is whether surging commodity prices combined with high unemployment and stagnant wages eventually lead to civil unrest and another major global conflict.
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