One way or another (a tale of two presidents)
Here’s what FDR told the country in October 1933, when the recovery was faltering under the higher business costs imposed by the National Industrial Recovery Act (perhaps the most misnamed act in US history.)
“although the prices of many products of the farm have gone up . . . I am not satisfied . . . If we cannot do this [reflation] one way we will do it another. Do it, we will. . . . Therefore the United States must firmly take in its own hands the control of the gold value of the dollar . . . I am authorizing the Reconstruction Finance Corporation [RFC] to buy gold newly mined in the United States at prices to be determined from time to time after consultation with the Secretary of the Treasury and the President.” (NYT, Oct. 23, 1933, p. 3.)
FDR doesn’t blame foreigners; he realized we needed to put our own house in order, make our own monetary policy much more expansionary with an explicit price level target, and reduce the value of our own dollar.
And here is President Obama:
UNITED NATIONS “” President Obama increased pressure on China to immediately revalue its currency on Thursday, devoting most of a two-hour meeting with China’s prime minister to the issue and sending the message, according to one of his top aides, that if “the Chinese don’t take actions, we have other means of protecting U.S. interests.”
No call on the Fed to adopt a higher price level target. Instead, we are blaming foreigners for our weak aggregate demand. Of course the “other means” refers to protectionism, which FDR understood was not the answer. And what does he mean by “protecting US interests?” Not yours or mine, but rather car parts makers in the rust belt threatened with Chinese competition. I suspect it’s too late; five weeks from now the rust belt will vote Republican, repudiating a modern technocratic Democratic party that has lost touch with its working class constituents.
Where’s our modern William Jennings Bryan?
My friends, we declare that this nation is able to legislate for its own people on every question, without waiting for the aid or consent of any other nation on earth; and upon that issue we expect to carry every state in the Union. I shall not slander the inhabitants of the fair state of Massachusetts nor the inhabitants of the state of New York by saying that, when they are confronted with the proposition, they will declare that this nation is not able to attend to its own business. It is the issue of 1776 over again. Our ancestors, when but three millions in number, had the courage to declare their political independence of every other nation; shall we, their descendants, when we have grown to seventy millions, declare that we are less independent than our forefathers?
No, my friends, that will never be the verdict of our people. Therefore, we care not upon what lines the battle is fought. If they say bi-metalism is good, but that we cannot have it until other nations help us, we reply that, instead of having a gold standard because England has, we will restore bi-metalism, and then let England have bi-metalism because the United States has it. If they dare to come out in the open field and defend the gold standard as a good thing, we will fight them to the uttermost. Having behind us the producing masses of this nation and the world, supported by the commercial interests, the laboring interests and the toilers everywhere, we will answer their demand for a gold standard by saying to them: “You shall not press down upon the brow of labor this crown of thorns! You shall not crucify mankind upon a cross of gold!” (italics added)
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25. September 2010 at 11:27
We are running huge trade deficits, much of it with China. A lot of the stimulus from our budget deficits does not get spent on domestic output, but on more imports. Economists seem almost universally to ignore this issue. As the nth currency, the dollar can’t be devalued, as it clearly needs to be. So we can begin to take down the free trading system with tariffs and quotas which would be a tragedy. Or we can press the Chinese and its Asian neighbors, Korea, Taiwan, and Japan, to appreciate.
25. September 2010 at 12:01
And this forgetting of Democrats about where they come from – its the work of Chuck Schumer.
http://www.amazon.com/Positively-American-Winning-Middle-Class-Majority/dp/1594865728
The middle class – thats the Obama mantra. Poor people had Roosevelt and the old Democratic party. Now poor people have no-one at all to represent them. And thats why Obama went for health care reform rather than fixing unemployment – because health care reform is for the middle class while only the poor worry about unemployment – and who cares about them?
25. September 2010 at 12:56
Notice that FDR seemed to be very much in *active political control* of the monetary situation, and not essentially hostage to the stubborn recalcitrance of a board of conservative experts. By threatening to pack the bench he eventually even got the Supreme Court as well to supinely defer to his frenetic legislative ad hoc improvisations and aggressive economic agenda. These were widely recognized at the time as major political battles with important shifts of power and authority in the office of the Presidency due to the extended national emergency.
Obama, for both Historical and personal reasons, sits in a very much reduced Presidency, one deferential to the independent committees structure, and which sees itself as having permanently and completely delegated authority for monetary matters to the Fed, as if it were indisputably proper that such always be the case.
When one perceives oneself as inescapably restrained in such a manner – then one lashes out where one has some remaining room for maneuver, and the nefarious machinations of our foreign “enemies” always provide more than ample rhetorical space for some an effort. How absolutely sad.
25. September 2010 at 13:23
John, We can depreciate the dollar in the only way that really matters–against goods and services. Foreign exchange rates are not the problem.
BTW, if we don’t buy those goods from China, we’ll simply buy them from other Asian nations. And Obama (to his credit) is not even pressing those other Asian nations. Japan needs to sharply devalue its currency to bring the 15 year deflation to an end. Further currency appreciation in Japan would be a complete disaster.
JimP, I agree.
Indy, Yes, and even worse it is mostly self-inflicted. If he hadn’t wasted a year on fiscal stimulus, he could have by now had a majority of the Federal Reserve Board.
25. September 2010 at 14:22
One criticism of FDR is that he increased policy uncertainty. Obama is criticised on the same grounds. So one could argue that Obama is like FDR, but only in a bad way.
25. September 2010 at 15:33
Scott,
a question regarding beggar-thy-neighbour: if ALL (!) countries try to depreciate their currency by buying other countries’ currency, then there is no expansionary monetary policy in any country. You wrote some time ago that if every country tried to “beggar their neighbour”, that this would be a good thing as it would be expansionary in every country. Or did you mean something else? S
25. September 2010 at 16:41
I do not understand how anyone thinks economies can remain strong if poor people are ignored indefinitely. Before Obama was elected his campaign kept sending letters begging for money, and I kept sending letters back asking, what is this change you are talking about? I told them, the people around here have very little money, and yet these old timers will keep right on working until they fall down and can not get up anymore. It seems all that incentive to remain responsible has just been wasted because they are not valuable enough for their vote to count.
25. September 2010 at 18:00
@Steve
There’s a difference between managing currency through purchase of foreign reserves, and managing currency through open market operations to purchase government debt (QE).
In the latter case, the home currency depreciates in value vs. goods and services, and against other currencies. Other currencies may respond by trying to stabilize values without conducting their own QE (e.g. by pumping up the US dollar by purchasing dollars, to keep demand for dollars artificially high – this leaves them holding large dollar reserves that are likely to devalue at some future point). In this case, the US gets some free consumption now, at the cost of international debt (which will probably be repaid in less valuable dollars). So long as the US maintains its consumption, the world can grow.
The alternative is that other countries engage in their own QE, in which case global currencies all devalue vs. goods and services and we get global inflation.
Right now, there’s a mix of both going on. Japan is using QE. Swiss are buying dollars. Brazil is intervening. And of course China.
Note that there’s a limit to how much other countries will buy up US dollars – they may hate the choice between buying dollars and letting their domestic currencies appreciate (and their exports lose competitiveness), but there’s always an out – print more of their own currencies.
A lot of folks still underrate the US dollar’s durability, because they forget the importance of the US as a consumption market. It’s the old line – if you owe the bank a million, you have problems. If you owe the bank a billion, the bank has problems.
25. September 2010 at 18:05
@ssumner
“Foreign exchange rates are not the problem.”
This is simplifying a bit too much. They are still a problem. If a significant foreign trade partner accumulates dollars to keep their currency low in value, they are accumulating dollars now which will be less valuable in the future when those dollars are spent. This is a subsidy (to exporters, and likely to currency speculators too).
The US can keep printing money to force the other country to buy more and more dollars to keep exchange rates stable. But this isn’t costless to the US – it impacts OTHER trade relationships, and it impacts INTERNAL debt relationships. Eventually, there’s some equillibrium where it isn’t worth it to the US to print more money just to have a monetary argument with China – printing money is the bluntest of all instruments.
I’m not saying we are there now – surely we’re not! But to say that Foreign Exchange Rates are not the problem is somewhat sketchy. They aren’t the ONLY problem, but they’re a problem.
25. September 2010 at 18:52
Williams Jennnings Bryant:
“without waiting for the aid or consent of any other nation on earth”
How was that for a speech? Loved it (I’m delerious) and I will always love it. Great stuff Scott.
Still with you and as always pushing the agenda.
25. September 2010 at 19:12
Gentlemen and ladies may I present you with the greatest president we never had: WJB.
25. September 2010 at 19:45
Glad to see a mention of William Jennings Bryan! Populism has been generally getting a bad name in the last two years, but the original Populists were simply calling for some monetary easing! (And if I remember correctly a lessening of the tariffs that the industrialists of the time supported).
Notice WJB’s references to MA and NY, more evidence perhaps that the US was not an OCA back then? I am sure someone has done a paper or two on that.
26. September 2010 at 02:14
Populism has been generally getting a bad name in the last two years, but the original Populists were simply calling for some monetary easing!
Lots of monetary easing, very abruptly implemented. The demonetization of silver by several important countries had brought its market price down to about 1/30 that of gold. Bryan and company wanted to remonetize it at 16/1.
In the opinion of Milton Friedman ‘the transition would have been anything but gradual for the United States. . . . the immediate result would have been a sharp depreciation in the exchange rate between the dollar and the currencies of the gold standard countries, a depreciation that would have created great transitional difficulties for the international trade and financial activities of the United States.’ (Money Mischief, Chapter 5)
Notice WJB’s references to MA and NY, more evidence perhaps that the US was not an OCA back then?
I’m guessing New York (the city) and Boston were the country’s number one and number two financial centers. Bryan was predicting that the propaganda of the financiers would fail even on their home turf.
For the northeast to join Britain on the gold standard while the rest of the of country returned to bimetallism would have been a very bad idea, economically and politically. I think that’s one proposal that would have joined Bryan with his opponents in emphatic rejection.
I’m assuming you meant Optimal Currency Area, rather than, say, Organic Consumers Association or Overflow Channel Allocation.
26. September 2010 at 02:21
JimP:
Poor people had Roosevelt and the old Democratic party. Now poor people have no-one at all to represent them.
In FDR’s day the poor, as they would later be officially defined, were probably about a third of country. Today they are less than one sixth. It’s not surprising their political clout has declined.
26. September 2010 at 05:30
Lorenzo, Yes, but in fairness to Obama, FDR’s interventions were far more drastic. FDR’s big advantage was in the monetary arena.
Steve, You asked;
“a question regarding beggar-thy-neighbour: if ALL (!) countries try to depreciate their currency by buying other countries’ currency, then there is no expansionary monetary policy in any country. You wrote some time ago that if every country tried to “beggar their neighbour”, that this would be a good thing as it would be expansionary in every country.”
Unfortunately the terminology used by the press is very misleading. Countries don’t actually buy each others “currencies” they buy each others bonds. So it would be a worldwide QE.
Rebecca, That’s right.
Statsguy, Those are good points. Is there data showing Japan is doing a lot of QE? Or is it sterilized?
You said;
“If a significant foreign trade partner accumulates dollars to keep their currency low in value, they are accumulating dollars now which will be less valuable in the future when those dollars are spent. This is a subsidy (to exporters, and likely to currency speculators too).”
The EMH says any expected depreciation in a currency will be reflected in higher nominal yields.
You said;
“I’m not saying we are there now – surely we’re not! But to say that Foreign Exchange Rates are not the problem is somewhat sketchy. They aren’t the ONLY problem, but they’re a problem.”
If we printed enough dollars so that NGDP grew along a stable 5% growth path, then we would not need to worry about exchange rates. If we don’t, then rather than worry about exchange rates which should fix NGDP.
If we have a problem with chronic CA deficits it might be an indication we save too little–a problem that would need to be addressed through fiscal policy, not fiddling with exchange rates.
Mark, Thanks.
OGT, Notice how things change over times. Back then those two states were conservative Republican states, and the western states were populist. You may be right about the OCA argument. But of course if the West had bi-metallism, and had to borrow from NY, then they’d have had to pay higher nominal rates.
David Tomlin, Good point, although I recall Friedman said bi-metallism probably would have been the better system. And of course if we went to bimetallism, the 30-1 ratio would have fallen somewhat.
26. September 2010 at 07:09
David Tomlin
Exactly. And Schumer can count. So – for him and for Obama the poor just do not count at all.
But I clearly remember somewhere in Earl Thompson’s papers (I cant find it now but I am looking) a discussion of a (at that time) yet to come real estate and stock bust that would bust the American middle class and move all the money to the banksters. Or, as George Akerlof accurately put it, to the looters. Rather prescient on his part I would say.
When many of the middle class become poor, the politics of the middle class cannot be your only focus.
26. September 2010 at 07:29
And just in case anyone on this blog has missed past discussions of Thompson, here are two wonderful articles he wrote on the current crisis:
http://www.americanthinker.com/blog/2009/02/an_economists_advice_to_presid.html
http://www.americanthinker.com/2010/03/no_reason_for_economic_optimis.html
26. September 2010 at 07:55
And here is Thompson’s bubble prediction – along with a theory of social (class) warfare to explain it.
Politics is struggle – for who gets the gelt. Obama does not quite get this. Roosevelt sure did.
http://www.econ.ucla.edu/thompson/Predicting%20bubbles.pdf
see especially section 5.2. “A Suddenly Diminished Concern for the Middle Class”
Thompson was some sort of mad genius.
26. September 2010 at 19:53
I thought the conventional wisdom was that WJB was ignorant (Scopes monkey trial plays a role there) and the economy did fine under McKinley.
26. September 2010 at 22:42
Bryan wasn’t ignorant. In the Scopes trial, he agreed to be an expert witness on subjects on which he was no better informed than an average educated person, opening himself to cross-examination by competent lawyers aided by actual experts.
27. September 2010 at 04:12
Given the high propensity to import from Asia, one of the unacknowledged brakes on U S domestic output is the leakage of aggregate demand abroad. Major players in this are China, Japan, Korea, and Taiwan. All manipulate their exchange rates to keep exporting. Japan just drove its dollar rate down to 83. China, perhaps recognizing that somewhat more favorable dollar rate would be good for its economy, has now put penalty tariffs on imports of chickens from the US. Korea, our ally, has decided not to do anything, having realized that the current exhcange rate allows for a predicted $32 billion trade surplus this year.
Our Congress is up in arms. Why have stimulus, from the budget or the FED, if it just adds to our foreign and total debt. As I suggested in my previous comment, I don’t want to preside over the collapse of the relatively free trading system we have, but if it can’t adjust to the changing circumstances, it will fall apart. Keep your eye on Germany and the euro zone.
27. September 2010 at 07:28
JimP, Thanks, Thompson is dearly missed.
TGGP, The economy did do fine, as gold output fortuitously started rising after 1896. Bryan’s policies were needed in 1873, not 1896.
David, I don’t follow your comment. You seem to imply he was ignorant.
27. September 2010 at 09:39
A part of my comment got lost. China has started selling dollars for yen, driving the yen up. So Japan is selling yen to keep the rate down. China is still actively intervening in the dollar-yuan rate.
27. September 2010 at 17:51
John, You are confusing two completely unrelated issues, the US CA deficit, with is a fiscal policy issue–we need to encourage more saving, and the problem of inadequate AD, which is a monetary policy problem–the Fed need sto boost NGDP by an easier money policy.
No country ever solved its CA deficit problems by pressuring other countries to revalue. We tried that with the Japanese for decades, they raised the yen from 350 to the dollar to 90. That’s a 4-fold increase. And Japan still runs massive surpluses. It won’t work because it’s treating symptoms, not root causes (which is inadequate US saving.)
27. September 2010 at 19:44
Scott Sumner
You seem to imply he was ignorant..
‘Ignorant’ is a relative term. In the context, I assumed an average educated person as the standard. Maybe TGGP had something else in mind.
27. September 2010 at 22:37
Scott Sumner:
I recall Friedman said bi-metallism probably would have been the better system.
Yes. But the core of the Free Silver movement weren’t bimetallists. They were inflationists. They were the people who pushed for more greenbacks, and opposed restoring convertibility at all. After losing that argument they turned to bimetallism, getting more traction because bimetallism was the American tradition (before the Civil War) and the gold standard was associated with Britain. The silver miners also got on board.
Historically most bimetallists weren’t inflationists. On the contrary, they advocated bimetallism because they thought it would be more stable, at least in the long run, than either gold or silver monometallism. This was the view that Friedman shared.
In Bryan’s day, these bimetallists were mostly ‘international bimetallists’, who wanted the governments of the most economically important countries to agree to remonitize silver at a common ratio. Bryan spoke of them as those who ‘say bi-metalism is good, but that we cannot have it until other nations help us’.
28. September 2010 at 05:42
David, Thanks for that info on bi-metallism.