Some follow up questions.
BN 11:27 Fed's Bernanke Speaks on Great Depression (Transcript)
March 2 (Bloomberg) -- Federal Reserve Governor Ben Bernanke
speaks about monetary policy and the gold standard. Bernanke
speaks at Washington and Lee University in Lexington, Virginia.
(This report is an excerpt of the event.)
(This is not a legal transcript. Bloomberg LP cannot
guarantee its accuracy.)
UNIDENTIFIED: Dr. Bernanke has agreed to accept some
questions and, if I may, I'll ask the first question.
What was the importance in your judgment of the fact that the
United States, prior to the Great Depression itself, began to
sterilize gold and, in that sense, helped, perhaps forced, some of
the foreign countries off the gold standard?
BERNANKE: The - this is an interesting question, because
sterilization is relative even today in some cases, but the point
is - the question is the following: the United States was
receiving lots of gold and - as was France during this period. In
fact, late in the 20s the United States and France put together
had about 40 percent of all the gold in the world they controlled.
Now, the gold standard was supposed to be a symmetric system.
Countries that received gold were supposed to increase their money
supplies and inflate. The countries that lost gold were supposed
to reduce their money supplies and deflate. But it was asymmetric
because if you received gold, there was nothing to force you to
raise your money supply and, in fact, that's what happened.
The Fed was receiving all this gold in the 20s but, as I
mentioned, they raised interest rates in order to try to stop the
stock market speculation. So, the Fed was sterilizing, that means
they were not transforming the gold into money. And therefore,
they were not doing their half of the deal, so to speak.
Meanwhile, other countries were - like Britain and others,
were losing gold. They had very little to spare. As they lost
gold, if they wanted to stay in the gold standard, they had no
choice but to tighten - raise interest rates and reduce money
supplies, reduce the price level.
So, that behavior by the Fed and by France - which came from
other reasons, because France had had very high inflation during
the 1920s and was very reluctant to have any inflation - created a
sort of a shortage of gold among most countries like Britain and
Germany and others and forced them inadvertently to raise interest
rates and tighten their policies. So, it was a factor -
contributing factor. So, it was important.
Any questions on - I brought - I can - I'll take questions on
broad topics if you'd like. Ask about the Federal Reserve,
whatever - it's fine.
Yes?
BERNANKE: Well, first of all, let me just say that I think
that communication and what's often called transparency, which
means being clear about your goals, objectives and your policies,
is very important for central banks, because it helps the public
understand what we're trying to do.
And it also helps make policy more effective, because to the
extent that financial markets, for example, can forecast or
predict what - you know, what a policy is going to do, that will
transmit our policy into the financial markets more effectively
and give us a better level on the economy. So, I think the
communication and transparency is extremely important.
How to do it is a very difficult problem. We do have a large
committee - the FOMC has 19 members. So, you want to speak for
the whole committee, it's not so easy to come up with a simple
statement that will reflect the views of the entire committee.
I have suggested, in the past, various measures, including
lengthening our - making our forecast longer, releasing our
minutes earlier. And an idea, which I have also talked about a
lot, is the idea that we should announce our inflation target. We
should tell the public where we think the inflation rate ought to
go in the medium term. All those measures would help to
communicate more clearly what our policy intentions are.
I should say that the Federal Reserve is in ongoing
discussion about communications issues. It's a very big problem.
That problem - a very big issue for us to understand better how to
communicate. But again, it's not that easy with a large committee
and many different points of view. So, it's something we'll be
working on and trying to improve over time.
Yes?
UNIDENTIFIED: (inaudible).
BERNANKE: All right. That's a very good question about the
- one interesting misconception a lot of people have about the
Depression is that it was just one long period of low output.
That's not true.
There was a very, very sharp decline from `29 to '33, and
from `33 to `37 there was actually a substantial recovery. Here's
a - here's a little bar fact that you can use to win bar bets.
What is the best year in United States in the 20th century for the
U.S. Stock Market? The answer is 1933. There was a tremendous
recovery in that year, OK?
So, the economy came back quite a bit between `33 and `37
during the first Roosevelt term. Much common view is that the
works projects and things of that were important. I think most
economists actually argue that it wasn't so important - they
weren't big enough; that the monetary recovery and the
stabilization of the banking system were the most important
factors in this recovery period.
Now, this recovery of the Depression was interrupted by a
pretty severe recession in 1937 and `38, which sort of brought
things back down again - at least not all the way, but part way
back - and slowed the recovery - ultimate recovery. And it's a
long debate about exactly what caused that recession. So, the
conventional view was that there were both monetary and fiscal
elements.
The Federal Reserve was afraid that inflation was going to
get too high, and they tightened policy by raising reserve
requirements for banks and - excuse me, Friedman (ph) and Schwartz
(ph) argue and others have argued that that was an important part
of the tightening part of the recession.
Others have also pointed to the fact that there was a
tightening of fiscal policy that Roosevelt - which we think of him
as being an aggressive spender and a deficit-type person - was
actually very nervous about deficit. He campaigned on an anti-
deficit platform, and he did his best to reduce deficits when he
could.
And in '37, '38, there was a significant reduction in
government expenditures for bonuses to veterans and things of that
sort, and that probably also contributed to the recession. Maybe
also the economy was just reaching a pause after the strong
recovery of '33-'37. So, in short, the standard view is that both
monetary and fiscal policy had an important role in that. But
once again, monetary was once again not being a constructive
element in the - in the recovery.
Any other questions? OK. Ah, a question from the man on the
right.
UNIDENTIFIED: (inaudible).
BERNANKE: Question's what's the appropriate exchange rate
regime? I think - I think recent history pushes me towards what's
called the bipolar view, that a fixed exchange rate, which is not
a secure fixed exchange rate - that is one in which there is a lot
of uncertainty about whether it can be maintained - is a very
dangerous situation. And that's an example - that's what the gold
standard was. It was very prone to speculative attack, because
there was no confidence that that exchange rate would be
maintained.
So, I think that the best exchange rate systems are polar,
that is they're either complete monetary union, like in Europe,
for example, where countries now share the euro. Perhaps some
strong forms of currency board, for example, where countries
essentially tie their monetary policy to a bigger country, like
Hong Kong actually ties to the U.S., actually. Unless on one side
- or the other side, I think, is to have floating exchange rates
like the U.S. has.
The United States is a big country. We need to have the
freedom to use monetary policy to focus on our own domestic macro-
conditions, employment and inflation. To do that, we need to get
rid of this extra concern about stabilizing the exchange rate.
So, after the exchange rate can float gives us extra freedom
to use monetary policy for domestic stabilization purposes. So, I
think one of the two extremes is probably what's best indicated.
UNIDENTIFIED: (inaudible).
BERNANKE: No, I wouldn't recommend that. I think that
monetary policy in the United States ought to focus on domestic
output, domestic inflation, and let the dollar be the shock
absorber and absorb those differences between countries and allow
for the independence of monetary policy across countries.
UNIDENTIFIED: If there are no more questions, Dr. Bernanke,
we thank you for a most perceptive interpretation of the Great
Depression and lessons it leaves for us for monetary policy today.
Thank you.
***END OF TRANSCRIPT***
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