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ANSWER 20: in the study guide: According to C. Romer, an unusual rise in money supply for the period 1933 1937 due to the shift from a deflationary policy to devaluation and to an inflow of international capital from Europe (due to political instability in Europe and to the consequent Roosvelt’s administration choice to not sterilize that inflow) caused a fall in the interest rate and stimulated aggregate demand. The same explanation applies for the 1942 recovery. Romer, What Ended Great depression ?

Object: US recovery in period 1933-37 and in 1942

- What caused recovery  ? Many authors don’t believe that it was because of a stimulus on the aggregate demand due to international factors and policy decision to abandon deflationary policy for dollar devaluation.

1) Fiscal policy was unsuccessful (Cary Brown) 2) It wasn’t monetary policy (Friedman Schwartz); they are right when they say that monetary policy was important, but they stress only the FED inaction and not the Treasury policy. In fact it was particularly important to abandon the gold standard in 1933 and substitute deflationary policy with devaluation and not sterilize the capital inflow. 3) New Deal ? it cleared the way for natural recovery but wasn’t the engine of the recovery (Bernanke and Parkinson)

- Romer ‘s point is that the stimulus to aggregate demand through money supply was the main cause of recovery through interest rate transmission mechanism (when Ms is more, rates are less and you have more consumption and investment, as a result aggregate demand rises). This is true also for the second recovery in 1942, where the main force behind it was, again, the higher money supply due to large capital inflows from Europe, in turn due to the war. This explanation is in contrast with the usual one that were the govt expenditures for warfare that sustained aggregate demand.

DATA to support

- M1 growth was 10% on average between 1933 and 1937, much higher than usual - Simulations show that without M1 increase the growth could be 25% lower in 1937 and 50% lower in 1942 - The increase in money supply was due to gold inflow, in turn due to 1933 devaluation and capital flight from Europe due to political instability. Moreover, Roosvelt administration did not sterilize the gold inflow. - The increase in money supply implied a fall in the interest rates with the recovery of interest sensitive spending

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