devalue or deflate and downward nominal wage rigidity

BRAD DELONG (1996): REVIEW OF JOHN MAYNARD KEYNES, "A TRACT ON MONETARY REFORM": TUESDAY BOOK REVIEW WEBLOGGING by DeLong

DeLong quotes Keynes on the options government have when enacting policies to return to full employment and close the output gap.

Chapter four--"Alternative Aims in Monetary Policy"--sees Keynes shift from analyst to advocate: he comes down, in the context of Western Europe in the 1920s, on the side of devaluation to bring official currency values in line with relative national price levels rather than of deflation to force national price levels into consistency with pre-WWI exchange rate parities. He argues that when you are forced to choose between maintaining a stable exchange rate and maintaining a stable internal price level, choose the second. For avoiding fluctuations in your internal price level avoids a host of evils:

We see, therefore, that rising prices and falling prices each have their characteristic disadvantage.... Inflation is unjust and Deflation is inexpedient.... [I]t is not necessary that we should weigh one evil against the other. It is easier to agree that both are evisl to be shunned. The Individualistic Capitalism of today, precisely because it entrusts saving to the individual investor and production to the individual employer, presumes a stable measuring-rod of value, and cannot be efficient--perhaps cannot survive--without one...

He argues against return to the gold standard, on the grounds that modern central banks can do a better job of maintaining price stability if they are not tied to gold. Keynes's arguments in chapter four look very good: current opinion among economic historians, exemplified by Barry Eichengreen's Golden Fetters: The Gold Standard and the Great Depression, is that attachment to gold did a large part of the work in preventing central banks from stemming the Great Depression of the 1930s.

Over the past 5 years, the economy has been growing but not enough to make up for lost ground and close the output gap. Demand management  (fiscal, monetary and trade policy) has been such that the economy has achieved slow growth and a sort of deflation in hysterisis - an increase in long term unemployment and a degradation of the economy's productive capacity. Downward nominal wage rigidity has prevent outright deflation and a return to full employment by that painful route.