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Politics : American Presidential Politics and foreign affairs -- Ignore unavailable to you. Want to Upgrade?

To: TimF who wrote (44799)	8/10/2010 5:19:22 PM
From: Peter Dierks	1 Recommendation Read Replies (1) \| Respond to of 71588

Did you notice that Romer is leaving? Did you know that she wrote a Journal of Economics article titled What ended the Great Depression? I suppose the morons in the Obama/Pelosi Administration got tired of being told their policies were ruining the nation and forced her out. Here is her conclusion: CONCLUSIONS Monetary developments were a crucial source of the recovery of the U.S. economy from the Great Depression. Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942. The very rapid growth of the money supply beginning in 1933 appears to have lowered real interest rates and stimulated investment spending just as a conventional model of the transmission mechanism would predict. The money supply grew rapidly in the mid- and late 1930s because of a huge unsterilized gold inflow to the United States. Although the later gold inflow was mainly due to political developments in Europe, the largest inflow occurred immediately following the revaluation of gold mandated by the Roosevelt administration in 1934. Thus, the gold inflow was due partly to historical accident and partly to policy. The decision to let the gold inflow swell the U.S. money supply was also, at least in part, an independent policy choice. The Roosevelt administration chose not to sterilize the gold inflow because it hoped that an increase in the monetary gold stock would stimulate the depressed economy.

To: TimF who wrote (44799)	8/12/2010 10:53:27 AM
From: Peter Dierks	1 Recommendation Respond to of 71588

Here is the comple text of Romer's conclusion: CONCLUSIONS Monetary developments were a crucial source of the recovery of the U.S. economy from the Great Depression. Fiscal policy, in contrast, contributed almost nothing to the recovery before 1942. The very rapid growth of the money supply beginning in 1933 appears to have lowered real interest rates and stimulated investment spending just as a conventional model of the transmission mechanism would predict. The money supply grew rapidly in the mid- and late 1930s because of a huge unsterilized gold inflow to the United States. Although the later gold inflow was mainly due to political developments in Europe, the largest inflow occurred immediately following the revaluation of gold mandated by the Roosevelt administration in 1934. Thus, the gold inflow was due partly to historical accident and partly to policy. The decision to let the gold inflow swell the U.S. money supply was also, at least in part, an independent policy choice. The Roosevelt administration chose not to sterilize the gold inflow because it hoped that an increase in the monetary gold stock would stimulate the depressed economy. That monetary developments were very important, whereas fiscal policy was of little consequence even as late as 1942, suggests an interesting twist on the usual view that World War I1 caused, or at least accelerated, the recovery from the Great Depression. Since the economy was essentially back to its trend level before the fiscal stimulus started in earnest, it would be difficult to argue that the changes in government spending caused by the war were a major factor in the recovery. However, Bloomfield's and Friedman and Schwartz's analyses suggested that the U.S. money supply rose dramatically after war was declared in Europe because capital flight from countries involved in the conflict swelled the U.S. gold inflow. In this way, the war may have aided the recovery after 1938 by causing the U.S. money supply to grow rapidly. Thus, World War I1 may indeed have helped to end the Great Depression in the United States, but its expansionary benefits worked initially through monetary developments rather than through fiscal policy. The finding that monetary developments were crucial to the recovery confirms or complements a number of analyses of the end of the Great Depression. Most obviously, it supports Friedman and Schwartz's view that monetary developments were very important during the 1930s. It suggests, however, that Friedman and Schwartz's emphasis on the inaction of the Federal Reserve after 1933 is somewhat misplaced. What mattered is that the money supply grew rapidly; the fact that this rise was orchestrated by the Treasury rather than the Federal Reserve is of secondary importance. The finding that fiscal policy contributed little to the recovery echoes Brown's finding that fiscal policy was not obviously expansionary during the mid- 1930s. My analysis also supports studies that emphasize the devaluation of 1933134 as the engine of recovery. Peter Temin and Wigmore argued that the devaluation signalled the end of a deflationary monetary regime and that this change in regime was crucial to improving expectation^.^^ In this explanation it was the change in expectations that brought about the turning point in the spring of 1933. My work bolsters Temin and Wigmore's conclusion by showing that the deflationary regime was indeed replaced by a very inflationary monetary policy. This may explain why the regime shift was viewed as credible. More importantly, it can explain why the initial recovery was followed by continued rapid expansion. Without actual inflation and actual declines in real interest rates, the recovery stimulated by a change in expectations would almost surely have been short-lived. In the same way, this article also bolsters the argument of Barry Eichengreen and Jeffrey Sachs that devaluation can stimulate recovery by allowing expansionary monetary policy.56 It shows that in the case of the United States, devaluation was indeed followed by salutary increases in the money supply. On the other hand, my findings appear to dispute studies that suggest that the recovery from the Great Depression was due to the selfcorrective powers of the U.S. economy in the 1930s. I find that aggregate-demand stimulus was the main source of the recovery from the Great Depression. Thus, the Great Depression does not provide evidence that large shocks are rapidly undone by the forces of mean reversion. Rather, it suggests that large falls in aggregate demand are sometimes followed by large rises, the combination of which leaves the economy back on trend.