[PEN-L:28399] The D word surfaces

["Devine, James" <jdevine@xxxxxxx>]

Title: The D word surfaces

I wrote:
> >I wouldn't call what happened in 1930 "aggressive Fed easing."
> >Though interest rates fell, it was mostly due to a fall in the
> >demand for loans. The Fed wasn't interested in stimulating the
> >economy. As Milton Friedman notes, the money supply fell during this
> >period.

Doug writes:
> The discount rate went from 6.0% in Sep 29 to 1.5% in Jun 31. That's
> not as aggressive as the Greenspan Fed, but that's nothing to sneeze
> at.

I'd have to look again at this, but the Fed often has let the discount rate follow the market -- and market rates were clearly falling. According to Friedman & Schwartz, market rates may have fallen more than the discount rate: "Though discount rates fell absolutely [before Oct. 1930], it probably rose relative to the relevant market interest rates, namely, those on short-term securities with essentially zero risk of default." (_The Great Contraction_, p. 45.)

In any event, one of the keys to what happened in the 1930s was the increase in rates (including the discount rate) after 1931, due to the UK's going off gold. The Epstein/Ferguson article that I cited emphasized this period, when the economy really crashed and the Fed should have done something much more.

> And if the money supply is endogenously determined, Friedman's
> observation is just a tautology.

Right. The Fed's policy impact on monetary aggregates can best be seen by looking at high-powered money (monetary base), which was pretty flat from 1929 to 1933, which suggests very weak monetary stimulus, considering what was going on with the banks those days (panics). (Strangely enough, the last time I read MF, he was saying that the Fed shoud keep the MB constant, which would have allowed the "great contraction" of the money supply to have occurred after 1929.)

In any event, I don't think the events of 1929 to 1933 could have been dealt with successfully using monetary policy.
Jim