Inflation, Deflation, The Historical Record Of Bank Reserves

Putting some charts and data behind Friday’s extensive essay about bank reserves and inflation intended to further highlight some key parallels…

The precursor event to yield caps being imposed in the United States actually took place during the Great Depression. Then – as now – officials at the central bank expected their “money printing” efforts to pay off in the reverse of deflation as the country shook off the effects of the collapse earlier in the decade. Way too late, the Federal Reserve had massively expanded its balance sheet, some willingly, mostly gold, creating what many worried might become rapid and uncontrolled consumer and wholesale price gains.

As I wrote on Friday, by 1936 monetary officials began to worry they’d done too much (we’ve heard this all before):

The volume of monetary reserves had massively expanded alongside the increase in business conditions from the previous trough. In fact, the money side achieved proportions like nothing else in the nation’s history; a period of growth so rapid it could scarcely be appreciated at the time.

Here’s what it looked like to Federal Reserve Chairman Marriner Eccles and his fellow Board policymakers; not all that different from what we hear about today.

Always a day (or year) late, the Federal Reserve didn’t really get going until 1934 – and even then the vast majority of its monetary/balance sheet expansion was due to gold inflows from overseas (FDR’s devalued paper dollar after confiscation). This didn’t mean that policy hadn’t contributed; on the contrary, though belated, too, the central bank also bought a significant amount of government bonds (just dwarfed by gold).

In 1933, as FDR was inaugurated, the Fed’s Open Market operations had carried out extensive purchases; increasing the total of government securities (both notes and bills) from $641 million to $1.4 billion in just eight months. Though it sounds small to our 21st century ears, this bond buying, equivalent to what’s today called quantitative easing, was enormous in scale.

With the early recovery from the trough proceeding irregularly at best, even though wholesale prices were often rising rapidly (consumer prices were not tracked as closely), the Fed undertook a second round beginning in the middle of 1934, having paused only for about six months. This GDQE2, let’s call it, raised the volume of government securities in stock to $2.0 billion by March 1935.

Another $450 million were purchased from the market in October 1935, GDQE3, sold back to it in March 1936, and then mostly bought back the following two months April and May as the FOMC “fine-tuned” its operations.

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Disclosure: This material has been distributed for informational purposes only. It is the opinion of the author and should not be considered as investment advice or a recommendation of any ...

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