How could they have been so passive?

I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They new that monetary policy could reflate.  And yet . . .

Weeks went by, then months, then years.  Somehow they never connected the dots.

“Monetary policy is already highly stimulative.”

“There’s a danger we’d overshoot toward too much inflation.”

“Maybe the problems are structural.”

“There are green shoots, things are getting worse at a slower pace.  The economy needs to heal itself.”

“Consumer demand is saturated.  Even workingmen can now afford iceboxes and automobiles.  We produced too much stuff in the 1920s.”

And the worst part was the way political news kept slipping into the financial section.  Nazis make ominous gains in the 1932 German elections, Spanish Civil War, etc, etc.  In the 1930s the readers didn’t know what came next—but I did.

Thankfully we can learn from their mistakes.


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45 Responses to “How could they have been so passive?”

  1. Gravatar of Luis H Arroyo Luis H Arroyo
    18. August 2011 at 10:00

    Yes, I agree, that´s the way.

  2. Gravatar of Alex Godofsky Alex Godofsky
    18. August 2011 at 10:01

    Thankfully we can learn from their mistakes.

    Apparently not.

  3. Gravatar of Ron T Ron T
    18. August 2011 at 10:02

    They were passive because they didn’t understand that only fiscal policy can replace the assets gone in the collapsing stock bubble.

    government deficit = private sector surplus.

    Lending money will not help if your balance sheet is underwater.

  4. Gravatar of DW DW
    18. August 2011 at 10:04

    Scott, your writing is really getting good.

    Powerful post.

  5. Gravatar of In Which I Retweet A Scott Sumner Post « feed on my links In Which I Retweet A Scott Sumner Post « feed on my links
    18. August 2011 at 10:06

    […] Yikes: I once read all the New York Times from the 1930s (on microfilm.)  You can’t even imagine how frustrating it was.  They knew they had a big problem.  Then knew that deflation had badly hurt the economy (including the capitalists.)  They new that monetary policy could reflate.  And yet . . . […]

  6. Gravatar of Mike Russell Mike Russell
    18. August 2011 at 10:14

    Scott, while it was running did you ever visit http://newsfrom1930.blogspot.com/ ?

  7. Gravatar of Gabe Gabe
    18. August 2011 at 10:30

    That is an enlightening way to do research. he fed new what it was doing then and they know now. They intentionally create crisis in order to centralize power.

    Without the Great Depression they couldn’t have started dozens of new government blood sucking beuracracies and larger standing armies. It empowered the fascist crony-corporate-capitalist economic lessons of Mussolini’s favorite economist.

  8. Gravatar of Donald Pretari Donald Pretari
    18. August 2011 at 10:41

    It’s also the case that they had Great Economists, indeed, in my opinion, The Greatest US Economists produced ( Fisher, Knight, Simons, Viner, Director ), telling them what to do and why in the Chicago Plan of 1933. To the extent that their advice was followed, things got better.

  9. Gravatar of W. Peden W. Peden
    18. August 2011 at 11:34

    Ron T,

    What would happen if someone increased the value of the remaining assets in the economy?

  10. Gravatar of Cameron Cameron
    18. August 2011 at 11:44

    Mike,

    Great link. One of the first things I saw…

    “Editorial citing Josiah Stamp, “sound economist and active man of affairs.” Blames the worldwide downturn on insufficient gold supply (dollar was gold-backed), and consequent deflation. Estimates since mid-1920 purchasing power of gold is up more than 60%… Rise in value of gold has increased burden on debtor nations. Calls for cooperation for more effective use of gold stocks and price stabilization.”

    That’s from June 9, 1930… I can’t believe the solution was so well understood (he didn’t mention sticky wages, but close enough) so early on and still not fully used until a world war broke out.

  11. Gravatar of johnleemk johnleemk
    18. August 2011 at 12:13

    Scott,

    An article on Huntsman which I enjoyed: http://www.vogue.com/magazine/article/jon-huntsman-the-outsider/

    His pitch is essentially that he’s Romney, except better on every dimension Romney’s competing on. Everything I’ve heard about Huntsman at this point is positive, which is surprising for a politician — maybe because nobody takes his campaign seriously enough to dig into whatever closets he may have.

  12. Gravatar of JimP JimP
    18. August 2011 at 12:36

    http://blogs.telegraph.co.uk/finance/jeremywarner/100011568/bank-comes-close-to-admitting-its-targeting-nominal-gdp-growth/

  13. Gravatar of W. Peden W. Peden
    18. August 2011 at 12:46

    The funny thing is that, if we could get an explicit target, they’d have the leeway to really start consistently hitting it. Unfortunately, my fear is that the BOE is not sufficiently interested in important variables like M4 (and its offshoots) and it has no interest in intra-aggregate movements.

  14. Gravatar of JimP JimP
    18. August 2011 at 13:01

    W. Peden

    Ys – an explicit target would be vastly better. Then people would know what is going on.

  15. Gravatar of JimP JimP
    18. August 2011 at 13:04

    A quote from that article in the Telegraph:

    In macro-economic terms, then, the Bank of England’s policy is probably the right one, but much as Sir Mervyn likes to lecture us to the contrary, it is a breach of the spirit of the Bank’s remit. It would be more honest to target a nominal GDP growth rate of 4-5pc, which in normal times would be made up of 2pc inflation and the rest real growth. In extreme circumstances such as these, however, it’s better to have nominal GDP growth made up largely of inflation than no growth at all.

  16. Gravatar of Benjamin Cole Benjamin Cole
    18. August 2011 at 13:05

    Please Mr. Ben Benanke-san, please read Scott Sumner’s blog. Or your own studies on Japan.

    Really—Governor Perry is not a better economist than you.

  17. Gravatar of JimP JimP
    18. August 2011 at 13:16

    http://www.economist.com/blogs/freeexchange/2011/08/countercyclical-policy

  18. Gravatar of JimP JimP
    18. August 2011 at 13:17

    A quote from the above Free Exchange post:

    We just need some sort of sign
    Aug 18th 2011, 18:52 by R.A. | WASHINGTON

    THE Fed’s latest policy statement was confusing, even by Fed policy statement standards. The members of the Federal Open Market Committee clearly saw a darkening of the economic picture, likely to produce slower growth and lower inflation than they’d previously expected. And they clearly took action, changing the language of the statement to reflect that the federal funds rate target would most likely be held at the current, low level until 2013. What wasn’t so clear, however, was just what the Fed expected that policy change to accomplish. Markets looked it over, thought about it one way and sold off, thought about it another way and bought back in, and then generally went on reading the financial papers, not sure what Bernanke and Co. were aiming for

  19. Gravatar of Liberal Roman Liberal Roman
    18. August 2011 at 13:17

    “Thankfully we can learn from their mistakes.”

    Nope.

  20. Gravatar of Liberal Roman Liberal Roman
    18. August 2011 at 13:24

    @JimP,

    Why don’t we just conclude what’s most obvious here. Bernanke knows more needs to be done. But politically, he is afraid that steps he takes will lead to a loss of Fed independence.

    But you are right Scott, the parallels are painful to watch play out. Down to the emergence and success of Far Right parties around the developed world. I just really hope this doesn’t lead to the same conclusion the 1930s did.

  21. Gravatar of Greg Marquez Greg Marquez
    18. August 2011 at 13:46

    Scott here’s something from 1932 I came across yesterday: Herbert Hoover, Statements on Efforts To Balance the Budget. It reads like it could have been written last week. Here’s the link: http://goo.gl/2pkWY

    Here’s my favorite part: “Nothing is more important than balancing the budget with the least increase in taxes. The Federal Government should be in such position that it will need issue no securities which increase the public debt after the beginning of the next fiscal year, July 1.”

    Read more at the American Presidency Project: Herbert Hoover: Statement on Efforts to Balance the Budget http://www.presidency.ucsb.edu/ws/index.php?pid=23478#ixzz1VQ44oLjw

  22. Gravatar of Bababooey Bababooey
    18. August 2011 at 14:24

    This highlights an under appreciated obstacle to your campaign. The Fed can’t act too unconventionally without at least some of one party’s support, because Congress created it and Congress can take it away (or change its statutory objectives). You have to #1 get media/public attention by elevating the urgency of this monetary problem over the politics of the day and once sustained coverage is obtained, #2 convince them that the solution is other than what they believe. Your NYT research shows that #1 and maybe #2 never occurred.

    Working on Krugman might help but the “New York Times is a walled garden where the ideas of John Maynard Keynes remain not only viable but so evidently true as to require no factual support.”

    I dunno about MSNBC or CNN, but I know FBN (and therefore the GOP) has nothing but faith-based inflation hawks. No one questions their priors, no one offers a compelling alternative and that is meager sum of their treatment. Some of your recent posts don’t help, you’ll get exiled from FBN when some researcher sees your harsh attacks on GOP candidates and paladins.

    And, in fairness to David Stockman, Rick Perry, me and other adequate-IQ types that dabble, your scheiße is complicated and doesn’t connect to intuition. We don’t picture AD/AS models and sloping curves.

    As practice, dumb down your FAQ to layman cognition and rename it “Introduction to Basic, Correct Monetary Policy”. Use plain language, sports allegory, etc. If you must, use economic terms that an Art History major understands. (I sound like Morgan, ordering you around.)

  23. Gravatar of Everything DOWN, but inflation UP | Historinhas Everything DOWN, but inflation UP | Historinhas
    18. August 2011 at 14:41

    […] Scott Sumner has a post about “passivity” in the 1930´s and ends it on a “positive” note: Thankfully we can learn from their mistakes. […]

  24. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2011 at 14:41

    As I have said over and over…

    Only one side can deliver Scott’s baby, slap it on the ass, and make it breathe.

    And Scott doesn’t want / can’t bring himself to to join their cause, so he can also get his way.

    Even though HE WILL VOTE FOR PERRY. Even though he is a libertarian.

    Punching hippies is fun Scott, all the cool kids are doing it, just ask DeKrugman.

  25. Gravatar of Bababooey Bababooey
    18. August 2011 at 15:12

    Because only an ingrate (or your wife) should tell you what to do, I submit my first draft of “Introduction to Basic, Correct Monetary Policy”. This is submitted at the risk of great embarrassment because I don’t know scheiße:

    1. What does it mean when money flow is “tight”, “easy” and “just right”? (No sloping curves!, something like: Say you’re about to finance a new Hyundai (or house, or TV). When you see the monthly payment, you ask: can I afford the monthly payment, now AND in the future. If you think money will be tight for you in the future, you don’t buy the Hyundai; if you think money will be plentiful, maybe you upgrade to a Mercedes you can’t presently afford; if you think money will be just right, you stick with the plan and get the Hyundai. The whole economy thinks the same way, whether its hiring labor, building a new plant, investing in new technology, planting crops, etc.)

    2. How do we measure current and past money flow and how do we project future money flow? (We DON’T measure it using the Fed’s rate that you always hear about, that’s small potatoes in the economy. We measure people’s expectation about future money flow by looking at whether: (a) they’re borrowing to expand purchases (if yes, we see higher interest rates), (b) buying stocks as a bet on growth (rising stock prices), and (c) hiring labor to expand their services (lower employment rate). Lower interest rates, falling stock prices, higher unemployment means the opposite.)

    3. Why does it matter that money flow is (or will be) “tight”, “easy” and “just right”? What happens? (When you expect tight money (less money flowing into your account), you won’t borrow money to buy that Hyundai or anything but necessities. When everyone starts doing this, the whole economy is spending less, hiring less, expanding less, investing less, and so on. The economy tanks, we get slow GDP growth or contraction. We want the economy to expect continued money growth, so it expands.)

    4. Won’t easing or increasing the flow of money cause inflation? Isn’t inflation bad? (Inflation is like weight, hair, drinking a beer and other things that are not “good” or “bad” unless you have too much or too little. Sometimes the economy is too fat, hairy and drunk and sometimes its too thin, bald and boring. When it is, you can’t fix it right now, you have to eat less, shave more, and stop drinking into the future months, days, and hours. Lately, money has been tight, so we need extra eating, extra ponytails and extra beer for a little while to “catch up”. Before we get too fat, too hairy and too drunk, the Fed will slow inflation down.

    The lesson here is this: don’t listen to anyone screaming about inflation (or weight, hair or beer) unless they tell you how much is good, bad or just right.

    5. How does the Fed get money flow just right? (Not the Fed’s fund rate you hear so much about, although it plays a small role. When money is too tight, like now, the Fed…… When money gets too loose, like in 20__, the Fed should have…..)

    6. If your solution is so self-evident, why aren’t they already doing it? Why do others disagree with you? TV pundits get there by sounding confident and authoritative, so they avoid stuff they don’t understand. Politicians become politicians because they think they have the solution to every single problem, so they avoid stuff they don’t understand. Most economists learned slightly more than you about monetary policy and quickly forgot it to focus on freakonomic oddities, interesting mathematical models and other stuff. Neither pundit, politician or micro-economist appreciates a pointy-headed monetary economists telling them that their diagnosis and solutions are irrelevant at best and likely harmful, so they ignore him or pooh pooh him.

  26. Gravatar of Scott Sumner Scott Sumner
    18. August 2011 at 15:41

    I’m running behind, So just a few brief replies.

    Ron, Thank God FDR wasn’t a MMTer. He understood that dollar devaluation was much more stimulative than fiscal deficits.

    Mike, No, because I had already read them.

    Gabe, Too cynical for me.

    Donald, Yes, some excellent economists.

    johnleemk, I hope he gains some traction.

    Thanks JimP, That’s a good link.

    Liberal Roman, At least we can be reassured that the political situation is far from being as bad as the 1930s. Count that as a blessing.

    Greg, Yes, and in 1932 he raised the top income tax rate from 25% to 57%. Not a good move on either the supply or the demand side.

    Bababooey, Heh, don’t lump yourself in with Perry and Stockman. You don’t go on TV telling the Fed what to do, and yet you know more about monetary policy than they do.

    Morgan, You’d slap it so hard it’d be stillborn. I need credibility to have influence. If I was a mouthpiece for the Perry campaign I’d be trashed by all the other blogs. I have more influence by saying what I really believe.

  27. Gravatar of Scott Sumner Scott Sumner
    18. August 2011 at 15:43

    bababooey, Those are good ideas, but one problem is that the core of monetary theory involves the fallacy of composition–and thus is hard to bring down to the commonsense micro level.

  28. Gravatar of Morgan Warstler Morgan Warstler
    18. August 2011 at 15:48

    Yes because the other blogs have so much power.

    Rick Perry might not know anything about Monetary, but in one day he became the new reality.

    So again, exactly who do you need to convince? And will that group be impressed with the bloggers you are talking about?

  29. Gravatar of marcus nunes marcus nunes
    18. August 2011 at 17:21

    “Passivity”=”Patince”. This is Charles Plosser:
    http://www.youtube.com/watch?v=rBqaZasM1ao

  30. Gravatar of MTD MTD
    18. August 2011 at 18:29

    Sumner’s Laws:

    1. Don’t reason from a price change;
    2. Interest rates can be a misleading guide to monetary policy;
    3. The interest rate is the price of credit;
    4. The price of money is 1/p;
    5. Money supply and demand are in equilibrium at the trend level of NGDP;
    6. NGDP and RGDP are positively correlated in the short/medium run due to price stickiness/nominal wage rigidity and the ‘money illusion’;
    7. Central banks should respond to demand shocks, not supply shocks;
    8. The base is the tool, the trend level of NGDP is the goal and expected future NGDP is the intermediate target;
    9. Fiscal stimulus is unnecessary and unwarranted with an inflation or NGDP targeting central bank;
    10. Progressives, while often smart and usually well intentioned, have a blind spot/go off the rails when it comes to the issue of taxing wealth/capital/savings.

    8.

  31. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 05:27

    Morgan, Other blogs put me on the map.

    Marcus. History repeats. He would have fit right in on the Hoover FOMC.

    MTD, Good list, except that #5 isn’t quite right. I view money supply and money demand as always being in equilibrium. I favor the equilibrium that stabilizes NGDP growth, because I think that is socially optimal.

  32. Gravatar of Donald Pretari Donald Pretari
    19. August 2011 at 07:48

    Scott, I’m interested to know if you agree that we did follow Raising the Price Level plus Govt Borrowing for helping people out, as the Chicago Plan advocated, and that it helped. Indeed, raising taxes was the big mistake that followed.

  33. Gravatar of Silas Barta Silas Barta
    19. August 2011 at 12:02

    “Gee, I think we can get out of this if we falsely reassure people that everything’s going to be okay so they go back to blowing their whole paychecks on crap.” Oh wait, that’s only a modern illusion.

  34. Gravatar of Morgan Warstler Morgan Warstler
    19. August 2011 at 12:21

    “7. Central banks should respond to demand shocks, not supply shocks”

    I’d like an example of a supply shock the Fed should not respond to.

  35. Gravatar of Scott Sumner Scott Sumner
    19. August 2011 at 16:50

    Donald, I don’t follow. You mean FDR? Yes, he did some of that. But the spending didn’t help (much), only the monetary stimulus helped.

    Morgan. Any of them. Keep targeting constant NGDP growth and forget about supply shocks.

  36. Gravatar of Ron T Ron T
    22. August 2011 at 20:06

    SS,
    Ron, Thank God FDR wasn’t a MMTer. He understood that dollar devaluation was much more stimulative than fiscal deficits.

    Devaluation comes from demand, not the other way round. He caused devaluation as a byproduct by producing demand.

  37. Gravatar of Morgan Warstler Morgan Warstler
    22. August 2011 at 21:32

    Ok, so PEAK OIL?

    What if the entire current Fed policy is actually an elaborate plot to wait until the ultimate supply shock happens, so the US can default and leave the sovereign funds with worthless paper and very little oil to rebuild on?

    I’m not saying this is true, I’m trying to see if you accept the Fed being political in some other way.

  38. Gravatar of Scott Sumner Scott Sumner
    23. August 2011 at 07:46

    Ron, No, you need to study some history. The devaluation was an exogenous shock, which occurred before any significant recovery in demand. The US devalued by changing the price of gold. They can set gold prices as high as they wish. They didn’t need more “demand” to raise the gold price from $20.67/oz. to $35/oz. They are simply changing the definition of the dollar. Please tell me your views don’t represent MMT. If they don’t think countries can devalue without first having more demand, then the theory is even worse than I imagined. By your logic a 100 to 1 monetary reform would have to be preceded by a massive drop in demand.

    Morgan, The Fed doesn’t do elaborate plots–it doesn’t know how.

  39. Gravatar of Ron T Ron T
    23. August 2011 at 13:02

    Scott S,

    So if the US govt decided to pay for staplers 2x as much as now they would devalue the dollar, or it has to be gold?

  40. Gravatar of Ron T Ron T
    24. August 2011 at 09:34

    Scott S,

    Let me ask you again, b/c it is interesting, and you might have missed what I am asking about. You said:

    They didn’t need more “demand” to raise the gold price from $20.67/oz. to $35/oz. They are simply changing the definition of the dollar.

    Since now the dollar is not convertible to gold, could we use anything else? The govt buys tons of stuff – from fighter jets to staplers. Could it redefine the dollar if it started paying double? (This is a very MMT thinking – warning). Notice that this would be a good ole fiscal policy. Are you advocating that?

  41. Gravatar of Scott Sumner Scott Sumner
    10. September 2011 at 07:43

    Ron, We could target the price of a commodity, but I’m certainly not advocating it.

  42. Gravatar of “…political news kept slipping into the financial section” « The Market Monetarist “…political news kept slipping into the financial section” « The Market Monetarist
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    21. October 2011 at 20:21

    […] in VoxEu reminded me of this recent post by Lars Christensen who referenced an earlier post by Scott Sumner. From Scott: I once read all the New York Times from the 1930s (on microfilm.)  You can’t even […]

  44. Gravatar of Spanish and Italian political news slipped into the financial section « The Market Monetarist Spanish and Italian political news slipped into the financial section « The Market Monetarist
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