Question

what were some of the limitatioans or successes during the great depression and the covid19 recession

Answer 1

The Great Depression was primarily due to a failure of monetary policy. Under the rules of the gold exchange standard that was being operated at that time, countries with net inflows such as the US or France should have allowed their money supplies to expand, fuelling increased spending, higher inflation, and a reversal of the capital inflows. This adjustment mechanism was short-circuited by sterilization - i.e. by open market operations by the Fed and the Bank of France which offset the impact of gold inflows.

Although the Fed cut the discount rate six times between October 1929 and the end of 1930 - from 6.0% to 2.5% and later to 1.5% in 1931 - the size of the Fed's balance sheet consistently declined for a whole year after the stock market crash. On the asset side, the Fed's holdings of gold increased steadily by about US$1 billion as funds from Europe poured in, but Fed credit - bills bought and discounted together with holdings of securities - declined by over US$1 billion, with the result that high-powered money or the monetary base also declined continuously.

Instead of facilitating or promoting positive monetary growth by conducting open market purchases, Fed officials looked at low-interest rates, and wrongly concluded that monetary conditions were easy. This was despite the on-going decline in the volume of deposits and the quantity of money. In October 1930 the first of three banking crises produced runs on banks.

Customers converted deposits to cash currency, which meant that the monetary base did start rising, but deposit withdrawals meant that banks were forced to reduce loans with the result that the money supply fell even further.Still, the Fed did not supply adequate reserves to the banks - although it could have easily done so by purchasing securities.By April 1933 the broad money supply had declined by a cumulative and catastrophic 35%.

When the pandemic struck the developed economies in March 2020, instead of being unable to extend credit as they had been in 2008-09, these reforms allowed commercial banks to extend credit to the private non-financial sector in response to the sudden drawdown of credit lines by corporates.

As a bonus, US banks were also in a position to purchase US Treasury bills to partially fund the fiscal deficit. Three factors explain the surge in US broad money growth: the US$400 billion increase in lending by the banks to meet credit line drawdowns by companies, bank purchases of US$200 billion of Treasury bills, and Fed purchases of securities from non-banks, which would be reflected in additions to deposits of the sellers of those securities.

In combination, these developments have caused US broad money growth to rise above 20% year-on-year - in marked contrast to what happened in the GFC. US broad money growth in the aftermath of the GFC with money growth during the Covid-19 pandemic recession. In our view, the injection of substantial purchasing power into the US, UK, and Euro-area economies in 2020 will almost certainly ensure a vigorous recovery in 2020-21.