The Fed’s last QE experiment…
Posted by
Tracy Alloway on Jun 17 13:00. The
latest edition of the St Louis Fed’s Monetary Trends note — of
off-the-chart monetary base growth fame — has a short and punchy section on the United States’
first bout of
quantitative easing, in the, err, 1930s.
Here’s what the St Louis Fed’s Richard G Anderson says:
Few analysts recall, however, that this is the second, not the first, quantitative easing by U.S. monetary authorities. During 1932, with congressional support, the Fed purchased approximately $1 billion in Treasury securities (half, however, was offset by a decrease in Treasury bills discounted at the Reserve Banks). At the end of 1932, short-term market rates hovered at 50 basis points or less. Quantitative easing continued during 1933-36. In early April 1933, Congress sought to prod the Fed into further action by passing legislation that (i) permitted the Fed to purchase up to $3 billion in securities directly from the Treasury (direct purchases were not typically permitted) and, if the Fed did not, (ii) also authorized President Roosevelt to issue up to $3 billion in currency. The Fed began to purchase securities in the open market in April at the modest pace of $50 million per week.
During the summer of 1933, as excess reserves reached $500 million, Fed officials’ reluctance increased. Nevertheless, as Meltzer (2003) reports, President Roosevelt wished purchases to continue. On October 10, 1933, hoping to avoid a political confrontation, Fed officials decided to continue purchases. Yet, on October 12, these officials unanimously approved a statement to the president noting that (i) the System’s holdings of government securities exceeded $2 billion, (ii) bank reserves had reached a record high, and (iii) short-term money rates had dipped to record lows. They halted purchases in November 1933. Quantitative easing did not end there, however: It instead shifted to the Treasury and the White House through gold purchases.
The Fed’s reluctance could be overcome with gold. President Roosevelt controlled both the nation’s gold stock and monetary policy, so long as the Federal Reserve remained inactive. The president’s most effective tool was the Gold Reserve Act, passed January 30, 1934, which raised the value of gold from $20.67 to $35 per ounce. The mechanism by which the Treasury gained control was elegantly simple. On August 28, 1933, Roosevelt called all outstanding domestic gold into the Federal Reserve Banks; on January 30, ownership was transferred, before revaluation, to the Treasury from the Federal Reserve Banks in exchange for (paper) gold certificates. When gold’s price increased to $35 per ounce from $20.67, the Treasury realized a windfall profit of more than $2 billion. The Treasury, Meltzer (2003) reports, began purchasing gold “immediately” via the issuance of additional gold certificates—bank reserves and the monetary base expanded when the gold certificates later were received by the Federal Reserve Banks. During 1934-36, the Treasury purchased $4 billion in gold in international markets, sharply increasing bank reserves and the monetary base. The effect on bank reserves is displayed in
the table. In 1936, as today, concern arose regarding inflation. Then, the Fed’s exit strategy was higher statutory reserve requirements, infeasible today. Today, the Fed’s exit strategy includes increasing the remuneration rate on deposits at the Fed, offering banks term deposits at the Fed, and the use of repurchase agreements.
It seems that in late 2008, the Federal Reserve was not really in waters as uncharted as
we thought.
In 2008, of course, the US was without the ability to effectively severe the link between the dollar and the gold standard, but it could devalue the USD and expand the monetary base using other tactics.
The key difference appears to have been the timing. Where the 1930s Fed did not start QEasing until 1932 — about three years after the recession had started — Ben Bernanke’s Fed started QE-like programmes, such as the Tarp and MBS-buying, just a few weeks after Lehman collapsed.
Perhaps speed — if not actual policy — will be the key differentiator here. Bernanke, himself a
keen student of the Great Depression, certainly seems to
think so. But it does detract from some of his
assertions about the originality of the Fed’s 2008/2009 actions, if not their
aggressiveness:
. . . In the current episode, in contrast to the 1930s, policymakers around the world worked assiduously to stabilize the financial system. As a result, although the economic consequences of the financial crisis have been painfully severe, the world was spared an even worse cataclysm that could have rivaled or surpassed the Great Depression.
That lesson brings me to the second one–policymakers must respond forcefully, creatively, and decisively to severe financial crises. Early in the Depression, policymakers’ responses ran the gamut from passivity to timidity. They were insufficiently willing to challenge the orthodoxies of their day . . .
