The New Deal and Recovery, Part 4: FDR ’s Fed

George Selgin“Roosevelt had conducted an active monetary and fiscal program of recovery…working along lines suggested by Keynes.” Eric Rauchway,The Money Makers, p. xvi.As we saw inthe last installment to this series, New Deal fiscal policies did little to help the U.S. economy recover from the Great Depression. Yet the U.S. did see substantial gains in output and employment between 1933 and 1937. If those gains weren ’t a result of fiscal stimulus, what caused them? And just what did New Deal policies have to do with these causes?A Money ‐​Fueled RecoveryThe answer to the first question, according to most economic historians, is growth in the U.S. money stock, which rose from just over $4 million in late 1933 to nearly under $23 million by late 1941. “Nearly all of the observed recovery,” Christina Romer says in the abstract toher influential 1992 article, “was due to monetary expansion.” Just as the monetary collapse of 1929–33 contributed to the “Great Contraction” of 1929–33 (to use Milton Friedman and Anna Schwartz’s famous term for it), money growth fueled a “Great Expansion” between 1933 and 1937, reviving the overall demand fo r goods and services, raising equilibrium prices, and boosting output.According to Romer ’s calculations, illustrated in the chart below, if instead of growing exceptionally rapidly the U.S. money stock had only grown at its average historical rate, “real GNP would have been approximately 25 percent lower i...
Source: Cato-at-liberty - Category: American Health Authors: Source Type: blogs