I’ve been following up on this important David Beckworth post on QE and monetary policy done by FDR in the Great Depression. Beckworth argues that the first QE policy was during the Great Depression, and it benefitted from the fact that Roosevelt explicitly says they will do what it takes to get the pre-trend price-level target. He links to this Gauti Eggertsson paper that argues that when Franklin Roosevelt took office, Roosevelt signaled that they’d get the price-level back to pre-Depression trend by going off the gold standard, creating a Federal government created through deficit spending and explicitly stating target levels for prices, and this expectation change from Hoover did a lot of the work of recovery.
I wasn’t sure how serious to take this – a President talking about price levels to the public? Sure enough, here’s the second Fireside Chat, May 7th 1933 (Transcript, my bold):
Much has been said of late about Federal finances and inflation, the gold standard, etc. Let me make the facts very simple and my policy very clear. In the first place, Government credit and Government currency are really one and the same thing. Behind Government bonds there is only a promise to pay…in the past the Government has agreed to redeem nearly thirty billions of its debts and its currency in gold, and private corporations in this country have agreed to redeem another sixty or seventy billions of securities and mortgages in gold…knew full well that all of the gold in the United States amounted to only between three and four billions and that all of the gold in all of the world amounted to only about eleven billions.
If the holders of these promises to pay started in to demand gold the first comers would get gold for a few days and they would amount to about one-twenty-fifth of the holders of the securities and the currency…We have decided to treat all twenty-five in the same way in the interest of justice and the exercise of the constitutional powers of this Government. We have placed everyone on the same basis in order that the general good may be preserved.
The Administration has the definite objective of raising commodity prices to such an extent that those who have borrowed money will, on the average, be able to repay that money in the same kind of dollar which they borrowed. We do not seek to let them get such a cheap dollar that they will be able to pay back a great deal less than they borrowed. In other words, we seek to correct a wrong and not to create another wrong in the opposite direction. That is why powers are being given to the Administration to provide, if necessary, for an enlargement of credit, in order to correct the existing wrong. These powers will be used when, as, and if it may be necessary to accomplish the purpose.
We discussed most of that blockquote dealing with gold clauses here and here, where FDR told rentiers who had put suicide-pact clauses in their contracts, clauses that allowed them to collect more gold that existed in the world as a way to allow private parties to profit while the country suffered and was immiserated in a deflationary spiral, that he was going to come at them like a spider-monkey. Beyond establishing credibility and changing expectations, reading it makes me happy, to see a President so actively go after broken, destructive contractual schemes that prevent the management of bad debts and threaten the general good. But there’s the bold quote, stating where the final goal of monetary policy is at the beginning of his administration.
Economic and monetary policy commentators like Ryan Avent have noted that “The Fed chose a direction rather than a destination” when it has come to QE and monetary policy. If Avent wants to see a destination mentioned by a sitting President, he should check out FDR’s fourth fireside chat on October 22, 1933 (my bold):
Finally, I repeat what I have said on many occasions, that ever since last March the definite policy of the Government has been to restore commodity price levels. The object has been the attainment of such a level as will enable agriculture and industry once more to give work to the unemployed. It has been to make possible the payment of public and private debts more nearly at the price level at which they were incurred. It has been gradually to restore a balance in the price structure so that farmers may exchange their products for the products of industry on a fairer exchange basis. It has been and is also the purpose to prevent prices from rising beyond the point necessary to attain these ends. The permanent welfare and security of every class of our people ultimately depends on our attainment of these purposes…
Some people are putting the cart before the horse. They want a permanent revaluation of the dollar first. It is the Government’s policy to restore the price level first. I would not know, and no one else could tell, just what the permanent valuation of the dollar will be. To guess at a permanent gold valuation now would certainly require later changes caused by later facts.
When we have restored the price level, we shall seek to establish and maintain a dollar which will not change its purchasing and debt paying power during the succeeding generation. I said that in my message to the American delegation in London last July. And I say it now once more.
1. Wouldn’t it be funny if in this fireside chat, years into a sub-trend growth and massive waste from high unemployment and unused capacity, Roosevelt said something like “someday, 25 years from now, Russia might be able to get a space dog into orbit before us. In order to Win the Future against this space dog, we should immediately forget everything going on right now in order to pivot to preparing for research competition with potential adversaries decades from now. We must immediately start planning for this battle right now, lest we lose the future, so let’s give a bunch of tax holidays and easily captured credit benefits to various rocket manufacturers and other incumbents” as a response? That would be crazy. I’m glad he was really serious about using every pressure point and every lever to get monetary and fiscal policies going instead.
2. Obviously back then the Democratic coalition had a lot of farmers in it, people for whom “the price level” wasn’t a graph they pulled from the St. Louis Fed to put on their blog but a real thing that they dealt with daily. There is a chance that insomuch as hipsters are an influential Democratic coalition group, and hipsters begin to engage in urban farming, “the price level” might become more of a thing that Democrats are responsive of in order to meet the needs of urban hipster gardeners. Until then, it’s up to economic bloggers to carry this message.
Best. Post title. Ever. And the post itself makes me want to stand up and cheer.
The only thing I would add is that we might want to push back against the idea that policy for the long run is even a thing. I think Atrios is almost the only prominent blogger to point out that current Congresses cannot set tax and spending levels for future years. (This is one of the reasons it’s so intellectually corrosive that economics grad students are taught about fiscal policy in terms of an intertemporal budget constraint, where tax and spending levels once for all time, world without end, amen.)
It is certainly true that current policy can influence tax rates and expenditures in the future, but the main, arguably the only, channel by which this happens is by changing tax and spending levels today. This almost has to be true, as a matter of logic. So in terms of the policy tools we possess, the statement that “policy should be more expansionary right now” and “policy should be more expansionary” are indistinguishable. Or, more to the point, arguments for austerity in ten years or whatever don’t have any content except as arguments for austerity now.
I am sure Krugman would say the same, except he concentrates on a different part of things.
Astonishing that a U.S. President actually spoke of facts and explanations and decisions and reasons for them rather than trumpeting how patriotic and strong and masculine he is! Astonishing. Also astonishing that a U.S. President spoke to the citizens as though they/we wanted to understand rather than just to cheer or boo. Astonishing. If we saw and heard that now, we would think it was change we could believe in.
Completely, totally agree. The level of FDR’s intelligent engagement with his audience was just remarkable. In his case, it must have come from some patrician confidence in his own place in society — a social confidence, let it be said, that is rarely directed toward such humane goals. For someone as smart and eloquent as Obama it should be so natural, but evidently it’s not. Someone said that FDR had a second-rate intelligence and a first-rate temperament; the opposite could be said of Obama.
Though, I whole-heartedly agree that the role of price levels and real debt matter, I feel this quote only shows FDR would support our current muddling along with low inflation. His reflection of stable prices in commodities really means farm price stabalization, and his discussion of debts seem to only be appropriate in relation to the increased debts farmers faced due to an overhang from land price collapses in the 20s . For economic and political reasons FDR saw the depression as a mainly agricultural problem, thus raising farmers income from higher prices raised output. This also flows from his beliefs that the price collapse was the cause, and not the result, of the collapse in output. Price targeting in the 30s is not in the same genre as price targeting in 2010s.
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One small problem with that explanation: The price level didn’t return to 1929 levels until WW2. So while monetarists like to claim the recovery of the 1930s as resulting from price-level targeting, it doesn’t hold water. Perhaps agents believed that FDR could return the price level to 1929 (or before) levels, but given the rational expectations behind monetarist explanations, this seems contradictory. If agents understand the model, they would see that FDR couldn’t increase the price level back to 1929 levels simply by announcing a new price level target. Tinkerbell is just a story, not an economic theory, no matter how much you believe.
Sorry, forgot to leave a chart- courtesy of Mark Thoma http://tinyurl.com/6bfp8fh
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“In the first place, Government credit and Government currency are really one and the same thing.”
I TOTALLY disagree with that!!!
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