Christina Romer, the appointee-designate (or whatever) as director of the president’s Council of Economic Advisors is said to have argued, in her influential article “What Ended the Great Depression?” [JSTOR link], that “expansionary monetary policy was the key to the partial recovery of the 1930s” and therefore, “monetary policy is key.” And indeed Romer does argue this, but contrary to a variety of panicky emails that have shot through my inbox, her argument is not inconsistent with the president-elect’s stated plan for fiscal stimulus. Why?

Romer’s argument goes something like this:

(1) Per E. Cary Brown, and Keynes before him, the New Deal did not provide enough fiscal stimulus to spur recovery during the 1930s—not that it didn’t work, but that it wasn’t tried.

(2) Yet there was significant recovery during the 1930s, both as to economic growth and to job growth.

(3) So we have a mystery: where did the recovery come from? Did it come from the ordinary operations of the economy? No; there was an inflow of money from outside.

(4) Why was there an inflow of money? Not because of the Fed—it wasn’t cooperative. But by stabilizing the banks and devaluing the dollar, Roosevelt’s administration set policy that drew overseas investments into the US.

(5) This money came from overseas at first because of the devaluation, but it came in quantity later because it needed someplace safer to go than a Europe menaced by Hitler. Other countries’ misfortune was America’s good luck. (Which means you can’t necessarily say that there would have been a recovery without the war; the inflow of overseas investment owed partly to the war.)

(6) Romer’s conclusion then is that “the rapid rates of monetary growth were due to policy actions and historical accidents.”

She’s very clear throughout that deliberate policy choices were key, and she thinks the deliberate policy choice of FDR to devalue in 1933/34 was most key.

But there’s nothing particularly prejudicial there against fiscal policy. Nor an argument about the superiority of monetary policy. But an empirical case that owing to planning and luck, monetary policy worked in the 1930s.

And just now we haven’t stabilized the banks quite as the New Deal did in 1933.


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