18 Jul 2009

They Tried Easy Money Back in the 1930s

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Bill R. sent me a link to this amazing site where they excerpt the news from WSJ from the corresponding day in 1930. For July 18, 1930:

Editorial: Constantly increasing taxation is a burden on “every form of enterprise”. It diverts money from productive uses to government functions which “though mostly indispensable, do not always require the scale of expenditure to which our public servants have become accustomed.” Total taxation (including local) has risen from under $3B in 1913 to about $9B now; recently rising about $500M/year. This aggravates the current depression.

Federal Reserve faces tough problem in how long to continue easy money policy, since in time “this has always stimulated speculation to dangerous proportions.”

Credit likely to remain easy for some time, but extremely low current rates seen unlikely to last (call money at 1.5%-2.5%). Rates for credit in the 3-6-month range have already begun to move up. This month seen as a low point for industrial activity; demand for credit anticipated to increase seasonally in August.

Now in fairness, someone like Scott Sumner would say, “Yes, those fools thought the Fed was engaging in ‘easy’ money, but it wasn’t!”

But let me point it out again: During the 1920-21 depression, the New York Fed jacked up its discount rate to a (then) record high, while in the aftermath of the 1929 crash, the NY Fed cut its discount rate to a (then) record low. Price deflation was more severe during the 1920-21 depression than during any comparable time period in the early 1930s. And I think it’s safe to say that the 1920s were a better economic experience than the 1930s.

We are truly repeating the mistakes of the 1930s. Scott Sumner’s has drawn the wrong lesson, and thinks that if only we did what they did times a hundred, then things will be rosy. Just as the Keynesians think Hoover and FDR didn’t run high enough deficits, the Friedmanites think that the Fed didn’t print enough green pieces of paper. Even though the deficits and money printing (as far as monetary base) were much more aggressive than in previous U.S. depressions, still for some reason a moderate dose of the “right medicine” (from Krugman and Sumner’s different viewpoints) led to the worst economic calamity in U.S. history.

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