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 50 basis points or less. Quantitative easing continued during 1933-36.
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.
You will notice that during the period of quantitative easing (money printing), bond rates stayed low even though money printing eventually leads to inflation. This situation is eerily similar to today's market with the two-year Treasury note at 0.64% and the 10 year at 2.99%. Furthermore, the chart below shows how bank reserves have skyrocketed to new records. It seems the Fed is in the same place as it was back in November, 1933. Their money printing operation failed, and the economy remained weak. This was because the banks were not lending and the money supply was still contracting.
Due to the Fed's hesitancy to go along with more money printing, FDR took it upon himself (illegally) to find another way of debasing the purchasing power of the dollar:
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..........
In August 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. During 1934-36, the Treasury purchased $4 billion in gold in international markets, sharply increasing bank reserves and the monetary base.So the solution was to debase the value of the dollar against gold (real money). It was, of course, criminal to steal gold from the American people (through confiscation) and pay them $20.67 per ounce right before the Government planned to revalue gold up (dollar down) to $35, but then again, that never stopped FDR. Anyway, this currency devaluation has been credited by economists as an important catalyst for the US economy recovering from the Great Depression. To me this is a specious argument, but more importantly this is what our current Chairman of the Federal Reserve believes. In one of his speeches on the depression, Bernanke notes:
The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level.................
With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly.We can see from statements like this that the Fed believes that currency debasement was the key to solving the Great Depression. It was the one tool available that quickly forced prices up (inflation) and relieved over indebted banking institutions. This is exactly what the Fed plans to do this time with the price of gold acting as a measurement of dollar debasement. For the dollar devaluation to be similar to the 70% in 1933, the price of gold would have to go to roughly $1570 (using $925 as the price of gold on the day the Fed announced QE--March 18, 2009). This will be the ultimate signal to Bernanke that he was successfully reflated the economy. So far the Fed is only half way there, that is where QE 2 comes in.
One last issue has to be resolved before I end this article. The more curious reader may wonder why the American people would ever tolerate dollar debasement and a severe loss of purchasing power (in effect the Federal government was stealing from them). The best way to explain this is for you to watch the video below. The video shows clips of government propaganda in 1933 which told people that inflation was a "good thing" because it would create jobs and spur industrial production. As is usually the case, desperate people are easily influenced and the people put up no resistance to FDR's plans.
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