Christina Romer On FDR’s Gold Policy

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On the subject of Executive Order 6102 it’s worth emphasizing that though monetary policy plays relatively little role in folk histories of the Great Depression, the conclusion that Roosevelt’s gold policy was his biggest contribution to recovery is the main view of economists. Take, for example, Christina Romer’s “What Ended The Great Depression”:

In addition to estimating the effects of the tremendous monetary expansion during the mid-and late 1930s, I also examine the source of this expansion and the transmission mechanism that operated between the monetary changes and the real economy. The increase in the money supply was primarily due to a gold inflow, which was in turn due to devaluation in 1933 and to capital flight from Europe because of political instability after 1934. My estimates of the ex ante real interest rate suggest that, coincident with this gold inflow, real interest rates fell precipitously in 1933 and remained low or negative throughout most of the second half of the 1930s. These low real interest rates are closely correlated with a strong rebound in interest-sensitive spending. Thus, it is plausible that expansionary monetary developments were working through a conventional interest-rate transmission mechanism.

And later in the same paper:

Finally, the Roosevelt Administration’s decisions to devalue and not to sterilize the gold inflow were clearly not endogenous. Barrie Wigmore showed that Roosevelt spoke favorably of devaluation in January 1933. Since this was many months before recovery commenced, Roosevelt could not have been responding to real growth. Indeed, G. Griffith Johnson’s analysis of the Roosevelt administration’s gold policy suggested that, if anything, the Treasury was trying to counteract the Depression through easy money, rather than trying to accommodate the recovery. Johnson and Wigmore also showed that Roosevelt’s desire to encourage a gold inflow was not based on a conventional view of the monetary transmission mechanism, but rather on the view that devaluation would directly raise prices and reflation would directly stimulate recovery.

See also Gauti Eggertsson “Great Expectations and the End of the Depression”. The unfortunate thing is that economists, being economists, are not political historians. Consequently, these kind of accounts tend to slight factors like legal, political, and institutional constraints that loom large in any serious discussion of practical policy options. But obviously the issue that exists today is what measures are available to a President faced with a hostile congress? Or, if you prefer, what measures are available to a Congress faced with an obstinate President in the grips of Kenyan anti-colonial mania?

In her 2009 speech “Lessons From The Great Depression”, Romer summarized this work and cautioned:

In thinking about the lessons from the Great Depression for today, I want to tread very carefully. A key rule of my current job is that I do not comment on Federal Reserve policy. So, let me be very clear – I am not advocating going on a gold standard just so we can go off it again, or that Tim Geithner should start conducting rogue monetary policy.

Romer could, however, be given a job on the Federal Reserve Board of Governors. What’s more, it appears to be the case that a weird loophole in the controlling coinage statute does in fact allow Secretary Geithner to conduct rogue monetary policy by minting large denomination platinum coins. That would be a strange thing to do. But confiscating the nation’s supply of monetary gold based on a WWI-era Trading With The Enemy Act was also a strange thing to do.