Monetary debates have always produced strange bedfellows

Matt Yglesias notes that the financial community was strongly opposed to dollar devaluation in 1933, despite the fact that most businesses benefited from the policy. 

Economic recovery would be good for business, but businessmen who may be good at running businesses are extremely bad judges of macroeconomic policy. Consider, for example, the Great Depression, and the monetary stimulus that economists from Milton Friedman on the right to Christina Romer on the left now agree ended it.

The Depression was not good for big business. Nor was it good for banks and large financial institutions. Ending the Depression required stepping on some toes, but fundamentally the Depression was a negative-sum experience and everyone was better off when growth returned. But here’s a couple New York Times articles from June of 1933 “” “Plea” from June 2, “Return to Gold” from June 4 “” showing the business community’s intense hostility to the expansionary monetary policy that eventually saved all their skins:

I agree with the implication Matt draws from this example; businessmen can’t be trusted to know what’s in their own best interest.  But it was actually a bit more complicated—and in an interesting way.  The dollar devaluation policy was strongly supported by stock investors, and also some manufacturers.  It was opposed by the American Federation of Labor.  Keynes initially supported the policy, but later turned against it went he felt FDR had gone too far.  Irving Fisher, who’s now often seen as being to the right of Keynes, supported it throughout 1933.  Right wing populist Father Coughlin was a strong supporter of FDR’s policy, whereas a number of FDR’s advisers resigned in protest. 

I’m sure one can come up with reasons for all these splits.  The policy helped stockholders but hurt holders of Treasury bonds.  It helped unemployed workers but raised the cost of living for those with steady jobs.  But I also think many people simply misjudged the effects of the policy.  Unfortunately, we’ll never know for sure how effective it could have been, as an explosive recovery was aborted in July 1933 by the NIRA.  But until that time, industrial production had risen 57% in 4 months, an annual rate of nearly 300%.

How about today?  One difference is that in 1933 there really wasn’t much doubt that dollar devaluation would have some effect, at least on prices.  Today many on the left discount the possibility of monetary stimulus.  Those that don’t generally support it.  However I recall Joe Stiglitz and Robert Reich complaining about the effect of QE2 on the value of the dollar.   And where are the unions demanding easier money?  I don’t recall a single utterance from them on the subject.  Might they have the same concerns as the AFL had in 1933?

On the right you have splits all over the place.  Quasi-monetarists vs. old monetarists.  Stock investors vs. bond investors.  Perry criticizes monetary stimulus while Romney refuses to criticize monetary stimulus.  There’s even a split within the National Review.  Undoubtedly the right is much more hostile than the left, but it’s hardly monolithic.  And in Britain there are press reports that the Cameron government favors monetary stimulus.

There are good reasons for this.  Monetary stimulus has (greatly overrated) implications for the distribution of income.  But it also has non-zero sum effects that reasonable people can interpret differently.  In my view the non-zero-sum effects of monetary stimulus right now are so large and positive that even savers would benefit as a class (albeit not in every single case.)


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34 Responses to “Monetary debates have always produced strange bedfellows”

  1. Gravatar of Silas Barta Silas Barta
    19. August 2011 at 14:38

    At the time, going off the gold standard = seizing the gold that people were entitled to as currency holders.

    Can you think of some reasons why people might be fundamentally opposed to it and so require a higher standard of proof that you’re doing them a favor when you steal their gold?

    Think about it.

  2. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 14:51

    “Today many on the left discount the possibility of monetary stimulus.”

    This actually may be the biggest problem (not to the Republicans of course). I spent considerable time, in your absence Scott, arguing with Democrats that monetary policy could still be effective at the zero lower bound. I cited numerous research articles and reviewed the history of the Great Depression from an international perspective.

    But they dug in their heels and I was astounded by their irrationality. (If one has lost the art of debasing a currency, and that this probably would have real effects, what is the world coming to?)

    Mostly I blame DeKrugman. The dynamic duo know better but have managed to confound the left through sophisticated omission of important facts. If there is a Second Great Depression the blame will lie squarely with them.

  3. Gravatar of Martin Martin
    19. August 2011 at 14:57

    “In my view the non-zero-sum effects of monetary stimulus right now are so large and positive that even savers would benefit as a class (albeit not in every single case.)”

    Scott, doesn’t this statement depend on your baseline? Your baseline – I assume – is where NGDP is on trend. From that baseline, I find it difficult to see how any saver could lose. If savers would lose – it seems – it is merely because they benefited from NGDP going off trend.

  4. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 14:57

    So when we do Monetary the Fed go SPECIFICALLY overpay for the assets of the hard asset holders.

    Problem solved.

    To make it more normative, just have them offer to buy bonds of any individual who is worth less than $5M – and wants to sell for 50% over their value.

    If the bankers still like that – great.

    It isn’t hard to make QE, acceptable just initiate the money with the people whose cash may be being devalued.

    America won’t like it, but they will like it more than Goldman Sachs getting to sell.

  5. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 14:58

    DeKrugman!

  6. Gravatar of foosion foosion
    19. August 2011 at 15:01

    >>In my view the non-zero-sum effects of monetary stimulus right now are so large and positive that even savers would benefit as a class>>

    I agree, but we seem to be in the minority.

    Savers with a reasonable time frame benefit from a better economy. Stocks shouldn’t be hurt much from inflation, as businesses can raise prices, and in any event faster real growth should make up for it over time. Bonds would be hurt initially, but over time faster real growth means higher real rates which means higher returns, making up for the initial inflation hit over time.

  7. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 15:02

    Want to talk about strange bedfellows?

    “Bank of America. We’ll help you out.”

    http://www.zerohedge.com/news/bank-americas-dead-drop-rick-perry-we-will-help-you-out

    God, Rick Perry sends a chill up my leg.

  8. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 15:21

    Not so strange. Rick Perry jogs in a T-Shirt with “Crony-Capitalist” emblazoned on his chest. (Just kidding.)

    I just had a gander at Rick Perry’s college transcript. He earned a D in Principles of Economics. So he truly does sound like a shoe-in for the Republican nomination.

    http://www.scribd.com/doc/61684192/Rick-Perry-s-Texas-A-M-Transcript

    His overall GPA was 2.22. That gives whole new meaning to a “gentleman’s C”.

    P.S. Morgan, you should patent “DeKrugman”. So far as I know you coined it, and, honestly, it’s very creative.

  9. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 15:49

    Silas, Promises sometimes need to be to be broken. People should be pragmatic, and also have sympathy form the suffering of the poor and unemployed. I am sure some dollar holders got less gold than they expected, but still their dollar appreciated in real terms due to deflation. No need to shed any tears for them.

    Mark, Yes, imagine how amusing the ancients would have found our predicament. We supposedly forgot how to debase a currency. Might as well legalize counterfeiting.

    martin, Most savers didn’t benefit from NGDP going off trend. I am a saver, and I certainly didn’t.

    Morgan, No, don’t overpay.

    foosion, Stocks would be greatly helped, the market responded very strongly to rumors of QE2.

    Mark, Maybe he’s not evil, just dumb. (How do we know the transcript is real?)

  10. Gravatar of Jason Jason
    19. August 2011 at 16:20

    Scott,

    Long time reader, first time commenter. You need to do something about the fact that Glenn Beck ads (for gold!) are appearing on your site. I think you are excellent and smart, and I really appreciate all of your writing and am a huge fan. I check your blog daily, even when you were on prolonged absence.

    But Glenn Beck is a total doucehbag and needs to be disappeared from your site if at all possible.

    Thanks,
    Jason

  11. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 16:30

    Scott, are you saying Goldman doesn’t have a sweet deal?

    Please be careful here, if they have ANY advantage, it’s better to overpay the Tea Party.

  12. Gravatar of Will Will
    19. August 2011 at 16:58

    “Mostly I blame DeKrugman. The dynamic duo know better but have managed to confound the left through sophisticated omission of important facts. If there is a Second Great Depression the blame will lie squarely with them.”

    That’s a bit unfair. Krugman has supported monetary easing whenever it has come up; his criticism has been that they won’t be large enough to turn things around, and his preferred policy has been raising the inflation target. DeLong calls for more QE quite frequently.

    “Might as well legalize counterfeiting.”

    That’s too much to ask of our lawmakers. But it’s not too much to ask of other people! The most feasible path to monetary stimulus would involve large-scale counterfeiting of quality dollars. It would need to be done by a foreign government to be large enough to have an effect.

  13. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 17:12

    Scott wrote:
    “Mark, Maybe he’s not evil, just dumb. (How do we know the transcript is real?)”

    I never claimed he was evil.

    His transcript is too real to have been faked. Just listen to him when he opens his mouth.

  14. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 17:26

    Will,
    I recommend that you read DeKrugman more frequently.

    Krugman has at least 10 columns promoting fiscal stimulus to the one promoting monetary. He doesn’t say monetary stimulus is impossible but only claims that without a target QE would require at least on the order of $10 trillion. Roughly once a year he points out that this could be accomplished more painlessly with an actual price level target.

    DeLong so often hammers blogposts claiming that currency and short term bonds are perfect substututes under current circumstances that it makes me nauseatingly sick.

    Am I making unfair claims?

  15. Gravatar of Lorenzo from Oz Lorenzo from Oz
    19. August 2011 at 18:02

    President Obama seems to producing a baby NIRA (Federal regulatory agency expenditure up 16%, employment up 13% since 2008), without the serious monetary stimulus. Let’s do our bit to constrain supply but not do much actually useful about demand: only the bad bits of FDR without the good bits because the Administration does not understand what the good bits were.

    I blame Larry DeKrugman.

  16. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 19:41

    You mean SummersDeKrugman?

    That would require a different patent number.

    Fill another form and return to the start of the line.

  17. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 19:43

    NEXT!

  18. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 21:01

    “I agree with the implication Matt draws from this example; businessmen can’t be trusted to know what’s in their own best interest.”

    You two let me know when you get done with the circle jerk. Please don’t get anything bio-hazardous on the rest of us.

    Just for that, NEITHER of you get to have a real opinion.

    As penance, you will follow along behind businessmen making notes and asking if they need somewhere to rest their feet.

    The point being – what’s the corollary for economists and tardish youngns?

    What can’t we trust about you two second class citizens to know whats in your best interest?

    When you lay that out, you’ll at least get to sit at the grown ups table.

    This isn’t India, we don’t raise up the brahmans, here in America, we let them babysit our kids.

    —–

    I invite you folks to spend some time reading Matty’s presentation to CATO:

    http://thinkprogress.org/yglesias/2011/08/19/299843/debt-and-the-millenials/

    He gets maybe 50% right. And the only interesting stuff leads to the question to Matty:

    Since you admit we are going to be cutting more than we tax, and since the cuts will go deeper than touching the rich….

    Before we go any further, since you are in the weaker position, you NAME the cuts to the poor and middle class, and once you are unclean politically, who cannot recover from the cuts you advocate, once you are exposed… we’ll talk about kinds of tax reform that generates revenue.

    Progressives (and eggheads) are only interesting when they get bendy.

  19. Gravatar of Mark A. Sadowski Mark A. Sadowski
    19. August 2011 at 21:31

    Morgan,
    Matt may think we have to cut but I do not.

    All we have to so is precisely nothing.

    That’s right: NOTHING!

    If we do nothing, if we just let:
    1) PPACA go into effect
    2) EGTRRA and JGTRRA expire and
    3) the Doc Fix expire

    The federal budget more or less goes into primary surplus by FY 2015 and remains so at least through FY 2085. As a consequence the Federal Debt stays below 100% of GDP.

    See the Extended Baseline Scenario as calculated by the CBO.

    Thus I pray every night before I sleep that congress just goes the !@#$ home.

  20. Gravatar of Mike Sandifer Mike Sandifer
    19. August 2011 at 22:52

    Mark,

    I’m glad to see some other non-MMT people saying it. Of course there’s no US solvency problem nor is there on the visible horizon. Healthcare reform could solve the entitlement problems, but I think we could go on with 9% deficits for considerably longer than many seem to think, for a whole host of reasons.

    I wish all liberals at least would start to echo this message. We can not only afford all the benefits we currently promise people, but can afford more, and we should give people more.

  21. Gravatar of Martin Martin
    19. August 2011 at 23:33

    “martin, Most savers didn’t benefit from NGDP going off trend. I am a saver, and I certainly didn’t.”

    Scott, that’s why I said if you benefited as a saver. If you were holding TIPS, you’ve probably benefited or if you had some fixed income that was pre-indexed for inflation, or if you were a creditor and were charging a fixed interest rate to your very solvent debtors, you’ve probably benefited.

    However, I have difficulty seeing how as a saver you could lose seen from a baseline where NGDP was on trend.

  22. Gravatar of Steve Steve
    20. August 2011 at 01:35

    Speaking of DeKrugman, his latest blog post was interesting mostly for the WSJ link.

    http://online.wsj.com/article/NA_WSJ_PUB:SB124347148949660783.html

    The date is May 29, 2009 and the title is “The Bond Vigilantes: The disciplinarians of U.S. policy makers return.”

    This is an opinion piece arguing that *both* fiscal *and* monetary stimulus are a travesty. But the final sentence of the piece is “When in doubt, bet on the markets.” If only the WSJ would take it’s own advice.

  23. Gravatar of John Thacker John Thacker
    20. August 2011 at 02:38

    I dispute the claim that Father Coughlin was right-wing. His political views are described as follows:
    “In 1934 he announced a new political organization called the “Nation’s Union of Social Justice.” He wrote a platform calling for monetary reforms, the nationalization of major industries and railroads, and protection of the rights of labor.”

    He was antiSemitic and thought that fascism (in the Mussolini sense) provided an alternative to both Communism and Wall Street, but that was hardly unusual among progressives of the era, before WWII. Mussolini had many liberal admirers. Coughlin only broke with the New Deal because he thought it didn’t go far enough against the bankers.

    He was a left-wing populist more than a right wing populist, but perhaps it is best not to categorize him.

  24. Gravatar of Rob Rob
    20. August 2011 at 05:43

    Interesting and timely post. It seems to me that monetary policy is quite a mystery to the business community, and it looks like it always has been.

    Why shouldn’t it be? Arguably, that’s how things work best. The arguments over programmatic anything (e.g. “QEn” or “stimulus” of any kind) have just become so shrill and even self-defeating. As a layman it makes me want to see the Fed adopt a more systematic stance – call it a finely tuned level targeting – and go back behind the curtain to the largest extent possible.

  25. Gravatar of Morgan Warstler Morgan Warstler
    20. August 2011 at 05:45

    If we do nothing, if we just let:
    1) PPACA go into effect
    2) EGTRRA and JGTRRA expire and
    3) the Doc Fix expire

    —–

    Mark,

    We’re going to gut Obamacare. If you want to create something like it, here’s how… the issue with Obamacare is that is does not sufficiently treat those who can currently pay better than those who cannot currently pay. In practice this means CLASSES of care, just as in any other thing on earth.

    In all forms of buying, you get 80% of top line functionality for the first 20% of cost. The next 80% of cost only gets you 20% of marginal increase.

    $14K KIA vs. $70K BMW
    $4 per lb. cheese vs. $28 per pound cheese
    $100 phone vs. $500 phone

    If you want to give people free healthcare, you have to limit what they get to the the healthcare equivalent of the left hand side.

    You sell it with a tough love label like Soup Kitchen Care, and you make clear to EVERYBODY how much more it sucks compared to the good stuff.

    At $4K per man per year, no one will begrudge the helping the uninsured. At $4K per man, you wan to use student doctors, you want to treat everyone like number, cost is always issue – it is a cheaper version of the VA.

    You means test, and take charges for SKC out of paycheck, to catch the free riders – and they already KNOW they won’t get the good stuff. Good incentives.

    And you make it a public option. People who WANT to buy into it to save money can.

    This is what Medicare becomes when we have first weakened the public employee unions.

    —–

    On Bush tax cuts, they are staying BUT we are going to redo the whole ball of wax as TAX REFORM. Deeper wider base. Lower rates.

    Basically a tax cut for the Tea Party with higher rates for the Fortune 1000.

    My blog post from yesterday’s Big Government here:

    http://biggovernment.com/mwarstler/2011/08/19/tea-party-economics-distributism/

  26. Gravatar of JTapp JTapp
    20. August 2011 at 06:34

    Here’s a nice graph showing phases of QE2 (from hinted at to today), return on S&P 500, long Treasuries, and gold.

  27. Gravatar of Patrick R. Sullivan Patrick R. Sullivan
    20. August 2011 at 08:39

    ‘…before WWII. Mussolini had many liberal admirers.’

    Apparently he still does. DeLong was recently pumping for Technocracy:

    http://delong.typepad.com/sdj/2011/08/you-know-i-arrived-in-washington-in-1993-to-work-for-lloyd-bentsens-treasury-as-part-of-the-sane-technocratic-bipartisan-ce.html

    ‘I Arrived in Washington in 1993 to Work for Lloyd Bentsen’s Treasury as Part of the Sane Technocratic Bipartisan Center…’

  28. Gravatar of TGGP TGGP
    20. August 2011 at 09:06

    I second Thacker on Coughlin. His reputation changed when he turned against FDR (a similar thing happened with Huey Long, though Long was arguably more racially progressive than FDR and can’t be tarred with quite the same brush as Coughlin), but back when he was an early supporter of him and the New Deal people would not have regarded him as right-wing.

  29. Gravatar of Scott Sumner Scott Sumner
    20. August 2011 at 13:52

    Jason, I’ll change ad companies soon.

    Morgan, Perhaps, but I don’t know of any sweet deals–except perhaps IOR.

    Will, I’d be ironic if the North Korea sprang our liquidity trap, and added a trillion in real GDP!

    Mark, You misread me, I was the one claiming he was evil.

    Lorenzo, Yes, that’s certainly true to some extent, although the NIRA really was much much worse. But you are right that he’s come up with the worst of both worlds.

    Morgan, Don’t forget that the hedge funds supported Obama.

    Mike, Yes, we could run 9% deficits, but why in the world would we want to?

    Martin, The drop in NGDP badly hurt my stocks.

    Steve, The WSJ follows the markets when it’s convenient for them to do so.

    John Thacker and TGGP, I can accept that.

    Rob, I agree.

    JTapp, Very nice graph.

    Patrick, I’m not really very knowledgeable about Mussolini, was his a technocratic administration?

  30. Gravatar of Martin Martin
    20. August 2011 at 14:23

    Scott,

    I think you misunderstood me/I phrased it badly.

    If at time t=1 NGDP goes below trend, savers who lose lose, savers that win win. If NGDP goes back to trend at t=2, savers who lost win and savers who won lose.

    Who does or does not ‘benefit’ depends on your baseline. Do you measure from t=1 or do you measure from t=2. The savers who ‘lose’, lose only, because they benefited first.

    This is directed at the last part of your post where you said:

    “In my view the non-zero-sum effects of monetary stimulus right now are so large and positive that even savers would benefit as a class (albeit not in every single case.)”

    You do not need to concede that some savers will lose from a monetary stimulus that pushes NGDP back to trend. It’s not redistribution from the perspective that NGDP should be on trend, as those that lose have temporarily benefited.

  31. Gravatar of Will Will
    20. August 2011 at 18:07

    Scott-

    It would be ironic indeed if North Korea gave us a more Friedmanite monetary policy, but why stop there? If Korea’s doing it, why can’t Iran get in on the action? And Belarus? If Putin thinks we’re “hooligans” for doing QE, why doesn’t he get into the dollar-printing business as well to retaliate?

    Ideally, we should have a competitive market in counterfeiting by statist regimes.

  32. Gravatar of Scott Sumner Scott Sumner
    21. August 2011 at 06:24

    Martin, I think I now follow your argument, which is essentially an ethical claim about fairness.

    Will, Great idea!

  33. Gravatar of Martin Martin
    21. August 2011 at 12:25

    Exactly.

    What other kind of argument could you be making when comparing policies in terms of winners and losers and who benefits and who does not?

    My point is simply that with your policy there are no losers when viewed from the perspective that NGDP should be on trend. And my subsidiary point is that this is the appropriate perspective.

  34. Gravatar of Scott Sumner Scott Sumner
    21. August 2011 at 13:28

    Martin, Yes, I’ve always thought NGDP targeting was highly ethical. Selgin has a good discussion of the fairness issue–he influenced my thinking on the issue.

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