A Monetary Policy Comparison: 1929-30 to 2008-9

The chart below compares monetary policy, as measured by the size of the monetary base, in 1929-30 with 2008-9. The red line measures the (seasonally adjusted) monetary base in each month through July 1930, normalized so that October 1929 is 100 (for example, the value of 99.2 in April 1929 means that the monetary base then was 0.8 percent lower than it would be in October).

Click to enlarge:


As you can see, the monetary base evolves very differently now than in 1929-30. Back then, the monetary base fell somewhat (Milton Friedman and Anna Schwartz long criticized the Fed for that, blaming the deflation and a significant part of the Depression on the Fed's failure to expand money). In the fall of 2008, the monetary base exploded. You might say that is exactly what Friedman and Schwartz would have them do (although Friedman's AEA Presidential Address says "no sharp turns" -- the chart above looks like a sharp turn to me).

Using the same format as the chart above (except no seasonal adjustments, as those CPI adjustments are not available for 1929-30), the chart below shows the CPI in 1929-30 and 2008-9.

Click to enlarge:


Despite the dramatic difference in monetary policy, I fail to see a dramatic difference in the CPI. Of course, the CPI continued to fall for a long time after 1929, so maybe we can look at this graph a year from now and see a more obvious difference.

Comments

[The Geoffster:]

Anna Schwartz gave an interview shortly after the banking crisis erupted. She said monetary easing is necessary to provide liquidity in a liquidity crisis not a solvency crisis as we were experiencing. The significance of her research with Milton Friedman is that inflation is caused by excess liquidity. This partly explains the reflation trade. We may not be seeing inflation now but hold on to your hats.

Jun 12 09:24 AM

[Carlos Lam:]

Casey, are you using the BLS CPI figures for '08-'09? If so, did you adjust the '29-'30 figures for hedonics & substitutions? If not, then you're comparing apples to oranges. If not, then the '29-'30 figure is a true fixed basket of goods, whereas the '08-'09 figure in no way reflects a fixed basket of goods over time.

Jun 12 09:37 AM

[Mayer Amsch...:]

What about GDP? And was CPI ex-food & energy back then? Because if not, today's CPI would be a lot higher by comparison.
I don't see how our situation right now is comparable in that the gov't is in a much deeper hole now, debt-wise and deficit-wise. So as far as natural inflation coming from consumers, sure, that's not a problem. Part of the real problem is that nobody has addressed how the government is going to avoid printing a ton more money.

Jun 12 09:52 AM

[Graham and ...:]

Monetary policy is the main difference between now and the early 1930s. They hope to avoid another Depression because they believe that monetary policy (and not weaknesses in the real economy) was at fault in the earlier period. Lots of luck.

Jun 12 09:52 AM

[Tomcat101:]

With OweBama and Pelosi in charge you sill soon be seeing a big difference on the inflation part of the chart comparisons.

Jun 12 09:55 AM

[thiazole:]

Clearly we'll see serious inflation starting within about 12 months. I think 3-5 years from now, everyone will feel the same way about inflation as they do about the housing market crash now. Why didn't anyone do anything about it when they could have (ie, right now). Almost no stimulus spending has occurred yet so it would be pretty easy to decrease the amount spent in the coming months pending signs of inflation. That alone could make a world of difference. I can pretty much guarantee that the current administration has no intention if minimizing inflation, though.

Jun 12 10:14 AM