Reflation and The Great Recovery: Concepts in the Air Keynesian Fiscal Stimulus Monetary Ease Self- correcting Mechanism Inflation Expectations Dynamic General Equilibrium Negative Real Interest Rate Utility Maximization Inter- temporal Substitution Multiple Equilibria Liquidity Trap (ZLB) Animal Spirits New Deal Distortions Real Wage Gold Standard Mindset

Reflation and The Great Recovery: Contributors to Debate John Cassidy: Fiscal Fallacy Evan Koenig Paul Krugman: It’s Baaack …Trapped Again Temin: Regime Change Minsky Rapping Akerlof & Shiller Inherent Instability Cole&Ohanian Eggertsson Duel’n’ DSGE Christina Romer: Money Matters Romer Eggertsson Krugman Expectations Rule Cole & Ohanian Codd’l’n Interests Eichengreen Temin Bernanke Break’n’ Fetters

Speculation led to too much capital (or wrong capital) investment: “malinvestment” Liquidate improper uses of capital and reallocate to other business sectors. “The Depression could have been good medicine for the economy” Let those who are going to fail… fail. Hold tight and let the economy fix itself! Recall Mellon’s mantra: Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate. It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people. Brad de Long: Liquidationist Argument

Onset of the Depression: Persistent Deflation…Persistent Job Loss $/pound DJIA Manufacturing Employment

Onset of the Depression: Bank Runs Deflationary Expectations

FDR Inaugural Address … the only thing we have to fear is fear itself —nameless, unreasoning, unjustified terror which paralyzes needed efforts to convert retreat into advance…This Nation is asking for action, and action now. Franklin Delano Roosevelt President, 1933 – 1945 A “New Deal”—A New Regime 1932 Reconstruction Finance Corp, Glass-Steagall (T-bonds back cash) March/April 1933 Loosened Fetters Emergency Banking Act/Gold to Treasury CCC and Reforestation Relief Act May 1933 AAA/Thomas Amendment (President & gold price/ BoG & reserve requirement), TVA, Federal Securities Act June 1933 NIRA, Glass-Steagall  FDIC October-November 1933 Commodity Credit Corp, Civil Works Administration January 1934 Gold Reserve Act : $ Devaluation: $20.67  $35/oz. June 1934 SEC, FSLIC 1935 WPA, REA, Wagner Act  NLRB Schechter Poultry – NRA

$/pound Producer Price Index

New Deal Reflation

Fiscal and Monetary Stimulus…And Retrenchment Romer: Money not Spending

Stimulus and Retrenchment: Recession in Depression

The End of One Big Deflation Peter Temin and Barrie A. Wigmore

Introduction US recovery from the Great Depression in the second quarter of 1933—Roovelt’s Inauguration – Sargent’s (1983) regime change paradigm

Recall Sargent “the key to a costless stabilization was the establishment of a new policy regime” “immediate effects were through rapidly revised expectations” “changing expectations were the key to stabilization”

Introduction US recovery from the Great Depression in the second quarter of 1933—Roovelt’s Inauguration – Sargent’s (1983) regime change paradigm Dollar devaluation was key to recovery...signaled change in policy regime and reversed expectations of deflation – Dispute Friedman and Schwartz who claim “the reopening of the banks was followed by a rapid spurt in personal income and industrial production” Temin & Wigmore: National Industrial Recovery act anticipated higher costs and prices which led to a rise in the money supply – Romer, however, maintains that money growth mattered

Before FDR Hoover supported gold standard—devaluation was not an option People expected continued contraction & deflation – The government’s monetary and fiscal policies warranted such expectations – Hoover focused on efforts to bolster credit markets rather than the economy directly – Hoover’s Reconstruction Finance Corporation  Relief of financial institutions to promote investment Recovery required a change in the policy regime--taking action FDR That action was devaluation...taken soon after inauguration – Signaled the abandonment of the gold standard  expansionary effects on American industry

Stock market as index of expectations – Stock prices rose because of expected inflation “change in expectations, therefore, stimulated business investment and expenditures on consumer durables, not consumption” Rise in the demand for automobiles encouraged a rise in auto production, steel production, and industrial production Grain and cotton prices rose as the value of the dollar fell  farmers had higher incomes If Hoover had done what FDR did, the economy would have recovered earlier