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Thursday, May 23, 2013

Generating the Wealth of Nations 23: US Monetary Policy in the Great Depression

I found it difficult (without typing a lot of numbers into a spreadsheet) to get data on the US money supply.  However, I could find data on the US monetary base.  Many economists think there is generally a stable relationship between the base and the money supply, and, in any event, what the Federal Reserve can control (and affect) is the base.  Presumably, it adopts policies that lead to increases in the base when it wants to expand the economy and it adopts policies that slow the growth of the base--or shrink it--when it's trying to combat inflation.

(Click to enlarge.)
The Federal Reserve essentially did not begin to increase the base until early in 1931, about 18 months after the downturn in US industrial activity began.  And between early 1933 and the end of 1936, it expanded the base quite dramatically (at an average annual rate of 11.7%).  As Prof. Borland indicated, acting on the basis of fears of inflation (which were not really well-founded), the Fed slashed the base by nearly 20% over a little more than a year, which led to the decline in economic activity in 1937/38.
Source:  The Federal Reserve Bank of St. Louis, FRED database.


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