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Tuesday, July 10, 2012

'In Lost Opportunity of 1932, Are There Lessons for Today?'

Bruce Bartlett:

In Lost Opportunity of 1932, Are There Lessons for Today?, by Bruce Bartlett, Commentary, NY Times: By the summer of 1932, the Great Depression was three years old with no end in sight. The Hoover administration, like Republicans today, was adamant that economic stimulus was wrongheaded, that the big problem was business confidence, which would be restored by keeping the budget under control, and that under no circumstances should the Federal Reserve adopt policies that would ignite inflation.
However, it was painfully clear to farmers and business people that deflation – falling prices – was the root of the economy’s problem. ... By early 1932, a growing number of prominent economists were openly advocating “reflation” – just enough inflation to get the price level back to where it was in 1929...
In a May 1932 article in The Atlantic Monthly, John Maynard Keynes agreed that deflation was the core economic problem and that cheap money was the necessary cure. But he warned that the economy’s downward momentum may have gone too far for conventional monetary policies to work... Keynes warned that there might be “no means of escape from prolonged and perhaps interminable depression except by direct state intervention to promote and subsidize new investment.” ...
On May 5, President Hoover ... argued that the nation’s true problem was not monetary, but fiscal. Balancing the budget by drastically cutting spending and raising revenue was what the economy needed. “Nothing will put more heart into the country,” Hoover said.
In testimony before the Senate Banking Committee on May 13, Fisher strenuously disagreed. He noted that the economy was showing some signs of life because of an expansion of the money supply that the Fed had adopted in the spring. But businesses had no assurance that it would continue, which was their prime source of uncertainty. ... He was prescient. In July, the Fed halted its policy of quantitative easing and the recovery was quickly aborted. ...
 Meaningful action to end the Great Depression would have to wait until after the election and the inauguration of Franklin D. Roosevelt in 1933.

We need both monetary and fiscal policymakers to attack the unemployment problem aggressively. The Fed has done better than Congress, but neither has gone far enough (e.g. on the Fed, see here).

    Posted by on Tuesday, July 10, 2012 at 08:46 AM in Economics, Fiscal Policy, Monetary Policy, Politics | Permalink  Comments (14)


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