This paper should provide very useful information for those of you trying to determine whether the data shows fiscal policy is effective. (This shows it is)

Carmen and Vince decided only to use govt spending rather than net spending so keep that in mind.

My take is that exiting the gold standard per se does nothing if all nations do it together. Export advantages gained by doing it first are reversed when the rest join in. What exiting the gold standard did do is allow for fiscal expansion otherwise not possible.


I don’t know if I ever sent this to you. But I’ve attached an article that Carmen and I published in the Brookings Papers on Economic Activity last year about the Great Depression. The bottom line is that inconsistent fiscal stimulus lengthened the adjustment.


From the abstract:

Fiscal policy was also active—most countries sharply increased government spending—but was prone to reversals that may have undermined confidence. Countries that more consistently kept spending high tended to recover more quickly.

And later under fiscal policy:

Although fiscal impetus was forceful in some countries, in almost all it was also erratic. Figure 4 further reveals that each of the three large increases in spending in the United States and Canada was followed by some retrenchment. The impetus from government spending in the United States in 1932, 1934, and 1936 appeared on track to provide considerable lift to the economy, but after each of those years real spending dropped off, imparting an arithmetic drag on expansion. The fact that fiscal expansion has been aggressive in many countries in 2009 works to help contain the contraction in the global economy. That it will continue to do so is far from assured, if history is any guide.

11 Responses

  1. My take is that exiting the gold standard per se does nothing if all nations do it together. Export advantages gained by doing it first are reversed when the rest join in. What exiting the gold standard did do is allow for fiscal expansion otherwise not possible.

    This is what would happen if the world would chose to go back to fixed rates set by an international board of unelected and unaccountable technocrats in charge of a global currency, as some are now suggesting quite seriously: No real advantage externally and a big disadvantage domestically for everyone.

  2. Interesting paper, thanks, and thanks to Vince R for sending to you.

    One way to think about this, and it can be helpful in explaining MMT, especially to pro-gold types, is that under classical gold, gold mines had to run “deficits”, i.e., emitting more gold than they took in. When deficits were too small relative to real economic growth, monetary deflation resulted with its attendant consequences and costs. When they were large, they could offset deflation, as appeared to happen after Witswatterand c. 1896, and even cause sharp (but temporary) bursts of inflation, with its attendant costs.

    Today, as long as deflation remains the greater risk, govt needs to do what the gold mining industry had a much harder time doing under classical gold — run sufficient deficits!

    1. “Blitz the market with bond purchases, but do so outside the banking system by buying from insurers, pension funds, and the public. This would gain traction on the broad M3 money instead of letting it collapse (yes, the “monetary base” has exploded, but that is a red herring), working through the classic Fisher/Friedman mechanisms of the quantity of money theory…This is quite different from the Fed’s QE which buys bonds from the banks and works by trying to drive down borrowing costs. While Bernanke’s ‘creditism’ is certainly better than nothing, it is not gaining full traction… Bernanke continues to babble on about futile credit easing: neither he nor his staff seems to appreciate the difference between purchases of assets from non-banks and from banks,” said Tim Congdon from International Monetary Research. Crudely, banks sit on the money. Others use it.”

      This is silly.

      Banks act as dealers in QE – they buy bonds from non-banks to sell to the Fed.

      Same difference.

      1. Nothing changes without an increase in aggregate demand. The root of the problem is the wage productivity gap; from World War II to the 1970’s, as the economy grew more productive, wages increased line, so aggregate demand moved up at roughly the same pace as aggregate supply. Since the 70’s, a gap has developed because wages have not kept up. To quote economist Ravi Batra (though Robert Reich and Jared Bernstein, who’s now on Biden’s staff, have made the same point):

        Productivity is the main source of supply, whereas wages are the main source of demand. If this wage-productivity gap keeps rising over time, supply will rise faster than demand and then we face the problem of overproduction…. Each time the wage-productivity gap goes up, the economy will contract because of overproduction. What they [the Fed] did was come up with a scheme to create debt in the economy because, by creating debt, they could raise demand to the level of supply.

        I can’t think of any way for the Fed to fill in that gap without creating a new bubble. It can only be done by fiscal means (payroll tax cuts, Edmund Phelps-style wage subsidies).

      2. right, in any case lending is not liquidity constrained. corps aren’t constrained from buying things by lack of credit.

        what we need is an increase in sales- top line growth- which increases private sector employment

        businesses are supposed to do as much as possible with a few people as possible, so we can get that much more done which makes us ‘richer’ (presuming the incentives are there for sensible output).

        govt is supposed to size itself right and then keep taxes low enough so the private sector employs the rest of us.

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