While revising my manuscript I came across this tidbit:
The impact of floating the dollar went far beyond simply providing more flexibility to the Fed. When the war debts issue resurfaced in mid-June , the NYT observed that:
“Wall Street notes a remarkable contrast between the attitude toward the war debt question last December and that at the present time. Last year, financial circles began to become apprehensive about the war debt question long before Dec. 15. . . . At the present time, although the war debt payments are due by next Thursday, there has been almost no discussion of the subject in financial circles, and the possibilities of wholesale default have left the markets unperturbed.” (6/11/33, p. N5)
This is important because it shows that it was not the fiscal, but rather the monetary aspects of the war debts problem which was of greatest concern to the markets. Now that the dollar was being devalued, the markets no longer had to worry about the possible deflationary impact of a war debts dispute.
If Greece were not part of the euro, then Greek debt problems would probably not be impacting Wall Street. I’m not certain exactly why they have recently affected Wall Street, but I would guess that there is worry that the debt problems in Europe may impact the stance of world monetary policy. Perhaps there is fear that a eurozone crisis would make the dollar stronger, and that this would slow the US recovery. In the early 1930s the war debt problems made gold stronger, and delayed recovery for any currency still tied to gold.
BTW, nominal rates were still near zero in 1933, but markets recognized that the adminstration was committed to reflation. The fact that interest rates are near zero is not a reason to assume monetary policy is ineffective. It is effective if the policymakers have the courage to make it effective.