I always enjoy finding interesting resonances from the past…

Here is Peter Bernstein, writing in the 1960s, in A Primer on Money, Banking and Gold, pp 165-7:

We know that interest rates reflect the interaction of the demand for and supply of money. With business activity rising so slowly, the need for cash to finance expanding production during the 1930s was obviously also growing at a slow rate. With ever-rising amounts of money in the checking accounts of individuals and corporations, those who held these idle dollars pressed to find some employment for them. Long-term yields on corporate bonds had been above 4 percent when Roosevelt took office in 1933; by 1938 they had fallen to little more than 3 percent and at Pearl Harbor were down to only 2 3/4 percent. At the same time, yields on short-term paper, which had run well above 4 percent before the crash of 1929, fell to nearly zero.

Yet, while the pattern of interest rates conformed to the theoretical proposition that yields will go down when the supply of money exceeds the demand for it, the most striking feature of this period from our viewpoint was really the degree to which the banks and their depositors were willing to hold dollars idle. Despite the avalanche of reserves that the gold rush brought to the banks, the banks were willing to lend and invest only a small part and were content to let cash resources in the billions sit idle, earning nothing. Even though the money supply rose about one-third faster than the output of goods and services from 1933 to 1941, the decline in interest rates was persistent rather than precipitous. Finally, it was clear that the sheer pressure of funds was by no means a sufficient condition to drive business activity upward to its full potential - nobody's money seemed to be burning a hole in his pocket.

Monetary policy as a means of stimulating business activity fell into wide disrepute as a result of this combination of circumstances. Some people saw little point in efforts to increase the the supply of money if no one wanted to spend those additional dollars on goods and services. What was the point of giving banks the resources to buy bonds that people wanted to sell of the sellers just sat on the proceeds instead of spending them? Others argued that the banks were clearly unwilling to buy long-term bonds at low interest rates; therefore, no means existed to push interest rates down far enough to encourage businessmen to take the risks of borrowing and investing money in new factories to create new jobs.

Indeed, as a result of both a general sense of insecurity and of a basic reluctance to part with cash for such a small reward in interest, the fetish for liquidity during the 1930's was extraordinarily powerful — the simple creation of money (or receipt of money from abroad in the form of gold) was no guarantee that it would be spent. Some observers compared the stimulus of monetary policy with the effectiveness of pushing on a string. As a result, increasing interest and attention was focused on Government spending in excess of tax revenues - deficit financing, as it came to be called — in which the Government would borrow the idle dollars no one else wanted to use and spend them for things the community needed.





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