In the early days after Obama’s inauguration, there were many who saw the president as the new FDR. But is the Hoover reference an easier sell in the current climate? It is if you look through the prism of monetary affairs, according to one dismal scientist.
“Hoover wasn’t able to print gold, but can be blamed for supporting the Fed’s tight money policies,” writes Scott Sumner. “Obama can’t print dollars, but can be blamed for not moving aggressively to put people at the Fed who understand the need for more dollars.”
Alas, the clock is ticking. Bruce Bartlett reminds that the velocity of money supply (the ratio of quarterly nominal G.D.P. to the quarterly average of M2 money stock) is moving in the wrong direction again. The implications?
This suggests that the Federal Reserve could have offset the decline in spending and velocity resulting from the fall in home prices with a sufficient increase in the money supply. And it tried. Since 2006, money supply has increased by about $2 trillion. But velocity fell faster than the money supply increased as households reduced spending and increased saving — the saving rate is now over 5 percent — and banks and businesses hoarded cash.
And then Christina Romer, the former chairwoman of President Obama’s Council of Economic Advisers, gives us this bit of history:
As I showed in an academic paper years ago, [World War Two] first affected the economy through monetary developments. Starting in the mid-1930s, Hitler’s aggression caused capital flight from Europe. People wanted to invest somewhere safer — particularly in the United States. Under the gold standard of that time, the flight to safety caused large gold flows to America. The Treasury Department under President Franklin D. Roosevelt used that inflow to increase the money supply.
The result was an aggressive monetary expansion that effectively ended deflation. Real borrowing costs decreased and interest-sensitive spending rose rapidly. The economy responded strongly. From 1933 to 1937, real gross domestic product grew at an annual rate of almost 10 percent, and unemployment fell from 25 percent to 14. To put that in perspective, G.D.P. growth has averaged just 2.5 percent in the current recovery, and unemployment has barely budged.
There is clearly a lesson for modern policy makers. Monetary expansion was very effective in the mid-1930s, even though nominal interest rates were near zero, as they are today. The Federal Reserve’s policy statement last week provided tantalizing hints that it may be taking this lesson to heart and using its available tools more aggressively in coming months.
History doesn’t repeat, but does it rhyme? If so, which history? Romer continues:
One reason the Depression dragged on so long was that the rapid recovery of the mid-1930s was interrupted by a second severe recession in late 1937. Though many factors had a role in the “recession within a recession,” monetary and fiscal policy retrenchment were central. In monetary policy, the Fed doubled bank reserve requirements and the Treasury stopped monetizing the gold inflow. In fiscal policy, the federal budget swung sharply, from a stimulative deficit of 3.8 percent of G.D.P. in 1936 to a small surplus in 1937.