United States 1930-1979

Herbert Hoover was in office at the start of the 1930’s. The Money
Supply fell because of nominal interest rates and lack of M2 data. The
lack of M2 data was because we did not know how much the money
supply was falling. The Fed makes most of its mistakes when they
excessively focus on interest rates. The nominal interest rate
decreased to 0 yet real interest rates were going up, and inflation was
decreasing. The Great Depression bottomed out in 1933 as Franklin D.
Roosevelt resumed office. The Fed was bailed out with the creation of
Federal Deposit Insurance Corporation. From 1933 to 1937 the
economy grows for four years (usually a recession every four years)
and recovers as reversion to mean measured by industrial production.
In 1937 the Fed starts to worry about inflation because of economic
growth so they raised reserve requirements. Raising RR reduces
excess reserves (ER) and in 1937 we enter a double dip depression.
From the end of 1937 to 1941 the United States recovers. FDR
increased wages while there was high unemployment
(unconstitutional). Gilbert dubbed him as a “bad President”.

The 1940s operated under interest rate policy (1941-1951) with a

pegged interest rate at low levels (lower than market interest rate).
World War II lasted from 1941 to 1945 with high economic growth. It
was a time of high tax (increased up to 90%), no change in the
standard of living because of war material production, huge capital
investment that led government spending to exceed taxation. High
government spending during this time led to the national debt.
“Monetizing the economy” is positively changing the base, which leads
to an increase in the change of price. This period also experienced
wage and price controls, and quantitative rationing. Harry Truman
assumed office as World War II ends in 1945 with big increases on
prices. The United States experienced the highest inflation rate from
1946 to 1948 since the Civil War. Lost control of money because of the
pegged interest rate.

The 1950’s and 1960’s were overall prosperous periods in the United
States. There were two distinct interest rate policies. The 1950’s were
“bills only” where the Fed bought and sold treasury debt on the
balance sheet. The belief was that it only affected short-term interest
rate and the policy could be neutral in the long run. The market is not
segmented due to speculation (speculators careless; i.e. day traders).
The second policy was operation twist in the 1960’s. The objective
was to twist the yield curve. Neither worked. Both assumed market
segmentation hypothesis buy you cannot do things in one market and
not affect other.
The 1970s Fed targeted borrowed reserves and interest rates. They
set target interest rate less than the market rate, which led to losing
control of non-borrowed reserves, the base, and the money supply. In
1979 the Fed changed the operating procedures to target non-
borrowed reserves. Monetary policy has been far better since this.