When relations within government were sensible – the US-Fed Accord – Part 1

I have all that much time today to write this up and it is going to be one of those multi-part blogs given the depth of the historical literature I am digging into. So this is Part 1. The topic centres on an agreement between the US Federal Reserve System (the central bank federation in the US) and the US Treasury to peg the interest rate on government bonds in 1942. What the agreement demonstrated is that a central bank can always control yields on government bonds, which includes keeping them at zero (or even negative in the current case of Japan). What it demonstrates is that private bonds markets, no matter how much they might huff and puff about their own importance or at least the conservatives who are ‘fan boys’ of the bond markets), the government always rules because of its currency monopoly

There is a rich set of documents now available, which help us understand what the 1942 agreement was all about.

There was also a special edition of the – Economic Quarterly, a quarterly publication put out by the US Federal Reserve Bank Richmond branch in the Winter of 2001, which “commemorated the 50th anniversary of the Accord”.

It is very interesting to read through the historical documents and the more recent (2001) interpretation of them.

On December 7th, 1941, the Japanese bombed Pearl Harbour, which provoked the US to formally enter the World War 2 conflict in an allied alliance with the United Kingdom and the Soviet Union.

On December 11, 1941, war was declared between Germany and Italy and the US.

In April 1942, as the US ramped up the prosecution of its War effort, the Treasury Department requested that the US Federal Reserve Bank use its monetary policy operations to maintain:

… a low interest-rate peg of 3/8 percent on short-term Treasury bills. The Fed also implicitly capped the rate on long-term Treasury bonds at 2.5 percent.

That is, control yields on government debt across a broad maturity range. By controlling the short-end of the yield curve (the structure of interest rates by maturity of the debt), the central bank would condition the longer term rates.

And they could directly control the longer rates, which would then influence the cost of investment type borrowing by the private sector.

All in a day’s work for a central bank that works in harmony with the fiscal authority.

The aim of the US Treasury was:

… to stabilize the securities market and allow the federal government to engage in cheaper debt financing of World War II …

Fairly simple.

The President, Harry Truman and the Secretary of the Treasury John Snyder were both, not only motivated by a desire to keep the ‘cost’ of borrowing down for the Government, but also, importantly, “to protect patriotic citizens by not lowering the value of the bonds that they had purchased during the war”.

What did they mean by that?

To fully understand that, we need to briefly understand how bond markets operate.

Ignoring specific nuances of a particular country, governments match their deficits by issuing public debt. For Eurozone Member States this is a funding operation, for other fiat currency issuing states it is a reserve draining operation.

What needs to be understood that in this fiat currency era where nations can float their exchange rates at will (if they issue their own currency), the act of issuing debt is a totally voluntary act for a sovereign government.

The only purpose debt-issuance serves is when it is used as part of a monetary operation (to maintain central bank control over target interest rates). And even then, it is unnecessary because the central bank can just pay a competitive return on excess reserves.

It does not have to drain them via open market operations (selling debt in return for extinguishing reserves).

But what we clearly know is that for a currency-issuing government, the debt issuance is entirely unnecessary for its spending decisions.

The practice of debt-issuance gives the impression that the borrowing is funding the spending but that is a chimera. The arrangements that motivate that perception are ephemeral and can be altered by the government should it have the will to do so.

Which is what happened in 1942 in the US.

To understand bond market auctions etc, we distinguish between a primary market and a secondary market.

Governments (more or less) use auction systems to issue debt. The auction model merely supplies the required volume of government paper at whatever price was bid in the market. Typically the value of the bids exceeds by multiples the value of the overall tender.

The primary market is the institutional machinery via which the government sells debt to a select group of nominated banks and financial institutions, who ‘make the market’.

The secondary market is where existing financial assets (that were previously issued in the primary market) are traded by interested parties. This is where the speculators live.

So the financial assets enter the monetary system via the primary market and are then available for trading in the secondary.

Clearly secondary market trading has no impact at all on the volume of financial assets in the system – it just shuffles the wealth between wealth-holders. In the context of public debt issuance – the transactions in the primary market are vertical (net financial assets are created or destroyed) and the secondary market transactions are all horizontal (no new financial assets are created).

Please read the following introductory suite of blogs – Deficit spending 101 – Part 1Deficit spending 101 – Part 2Deficit spending 101 – Part 3 – for basic Modern Monetary Theory (MMT) concepts.

The way the auction process works is simple. The government determines when a tender will open and the type of debt instrument to be issued. They thus determine the maturity (how long the bond would exist for), the coupon rate (the interest return on the bond) and the volume (how many bonds).

The issue is then put out for tender and demand relative to the fixed supply in the market determines the final price of the bonds issued. Imagine a $1000 bond had a coupon of 5 per cent, meaning that you would get $50 dollar per annum until the bond matured at which time you would get $1000 back.

Imagine that the market wanted a yield of 6 per cent to accommodate risk expectations. In this case, the bond is unattractive and so they would put in a purchase bid lower than the $1000 to ensure they get the 6 per cent return they sought.

The general rule for fixed-income bonds is that when the prices rise, the yield falls and vice versa. Thus, the price of a bond can change in the market place according to interest rate fluctuations.

When interest rates rise, the price of previously issued bonds fall because they are less attractive in comparison to the newly issued bonds, which are offering a higher coupon rates (reflecting current interest rates).

When interest rates fall, the price of older bonds increase, becoming more attractive as newly issued bonds offer a lower coupon rate than the older higher coupon rated bonds.

So for new bond issues the government receives the tenders from the bond market traders which are ranked in terms of price (and implied yields desired) and a quantity requested in $ millions. The government then issues the bonds in highest price bid order until it raises the revenue it seeks. So the first bidder with the highest price (lowest yield) gets what they want (as long as it doesn’t exhaust the whole tender, which is not likely). Then the second bidder (higher yield) and so on.

In this way, if demand for the tender is low, the final yields will be higher and vice versa. There are a lot of myths peddled in the financial press about this. Rising yields may indicate a rising sense of risk (mostly from future inflation although sovereign credit ratings will influence this).

But rising yields on government bonds do not necessarily indicate that the bond markets are sick of government debt levels. In sovereign nations (not the EMU) it typically either means that the economy is growing strongly and investors are willing to diversify their portfolios into riskier assets. It is also usually a time that the central bank pushes up rates and bond yields more or less follow.

The point is that if the central bank pushes up the demand for extant government bonds in the secondary market, it will, other things being equal, push up the price and the yields will fall (even though the coupon is fixed).

So it was a simple monetary operation by the central bank to control yields at whatever level they desired. In doing so, there were allegations raised (by conservatives and central bankers) that the central bank was being politicised.

This came to a head during the Korean War and conflict between the Treasury and the Federal Reserve saw the 1942 peg scrapped. More about that in Part 2.

But the whole ‘politicisation’ ruse is interesting because the original legislation establishing the Federal Reserve Bank system in the US (the Federal Reserve Act 1913) clearly allowed the the Federal Reserve Banks to buy unlimited amounts of Treasury bonds directly from the Treasury.

In 1935, the Federal Reserve Board was “renamed and restructured”.

Prior to 1935, that power to by unlimited amounts of US Treasury bonds directly from the Treasury was used regularly. The first time this was used was in 1917.

There was an article in the New York Times (March 28, 1917) – Reserve Banks Lend M’Adoo $50,000,000 – which said that:

To maintain the working level of the general fund of the Treasury, Secretary McAdoo has borrowed on Treasury certificates from the Federal Reserve Banks $50,000,000 at 2 per cent per annum … The Federal Reserve Banks subscribed with such promptness that at 3 P.M. today the entire amount had been taken.

The Secretary of the Treasury Mr McAdoo said that the “twelve Federal Reserve Banks … are fiscal agents of the Government”.

Part of the funds went to pay the sale price of the Danish West Indies, now the US Virgin Islands.

The other interesting aspect of the ‘loan’ was that the private bond markets were not interested in the deal and a spokesperson said that “other institutions would not care to invest their funds in these securities at the very unattractive rate”.

The prevailing market rate at the time on short-term Treasury certificates was 3 per cent.

So the principle was clear. At a time when competitive market rates were deemed higher than the government wanted to pay on any debt it issued, the solution was simple – get the central bank to buy the debt.

In 2014, Kenneth D. Garbade published a Federal Reserve Bank of New York Staff Report – Direct Purchases of U.S. Treasury Securities by Federal Reserve Banks – which recounts the way the central bank in the US could purchase unlimited amounts of treasury debt by creating funds out of thin air and how that capacity was eventually constrained.

Garbade documents how the Federal Reserve Board has some reluctance to purchase directly and considered “that the normal services of the Bank as fiscal agent will best be rendered by assisting in distributing Government securities rather than by acting as a purchaser of them.”

That is, buying government bonds in the secondary markets (once they had been issued via tender) from non-government bond holders.

Eventually, the growing central bank consternation about direct purchases led to a legislative change.

In 1935, the 1913 Federal Reserve Act was qualified by the the Banking Act of August 23, 1935, which meant that the Federal Reserve Banks could only purchase government bonds “in the open market” – that is, the secondary market.

The upshot of this new legislation was that the “proviso explicitly prohibited direct purchases of Treasury securities by Federal Reserve Banks.”

So a voluntary financial constraint was imposed on the relationship between the central bank and the US treasury despite history telling us that the central bank direct debt purchases from the Treasury between 1913 and 1935 had gone “without incident”.

It was conservative antagonism that led to the 1935 constraints. So we understand them to be purely ideological and political.

The debates at the time made it clear that the legislators knew there was smoke and mirrors at work here.

It was observed by the US House of Representatives Committee on Banking and Currency, which was overseeing the legislation that:

There is no logic in discriminating against obligations which, being in effect obligations of the United States Government, differ from other such obligations only in that they are not issued directly by the Government.

In other words, it was flim flam to prohibit the central bank from purchasing debt from the Treasury directly when it could simply signal to the private bond markets that upon issue, it would buy unlimited quantities of bonds from them (indirectly).

These sort of accounting ruses dominate government fiscal operations today and place a smokescreen over what is really the intrinsic nature of the monetary system.

It is also the way that the ECB is getting around the Treaty of Lisbon constraints, which prevent bailouts of governments.

If the central bank is creating demand for financial assets (bonds) in the secondary market then people can be tricked into believing that it is the private sector that ‘funds’ government, despite the reality being that it is the same government that issues the currency in the first place and has to spend it first before it can borrow it back.

Of course, the effect of pointless exercises like that are that they provide the neo-liberals with ammunition by linking government deficits with public debt buildup and then all the rest of the nonsense about ‘mortgaging the grandchildrens’ futures’ and the like are wheeled out on a largely ignorant public to engender political support for austerity-type fiscal stances.

It is all a total ruse and the US House Committee in 1935 clearly knew that.

But their colleagues in the US Senate changed the legislation to prohibit “direct purchases of Treasury securities by Federal Reserve Banks” although the Senate Banking Committee “did not explain the reason for the prohibition”.

Kenneth Harbade cannot find a clear answer to why they introduced this prohibition against the wishes of the Treasury at the time, which considered it essential to have that direct capacity in times of emergency.

The obvious reasons are entertained in the Report.

First, “direct purchases may have been prohibited to prevent excessive government expenditures”.

Second, to prevent “chronic deficits” and force the government to the “test of the market”. As if the private bond markets have the interests of the entire nation at their hearts.

In relation to these motivations, it is clear that the neo-liberal expression of this over the last three decades has overwhelmingly imposed massive political restrictions on the ability of the government to use its fiscal policy powers under a fiat monetary system to ensure we have full employment.

In Europe they took the constraints to one higher level of idiocy by banning any ECB bailout (since violated) and imposing the Stability and Growth Pact. But in other monetary systems where the national government still issues the currency, the voluntary constraints are also oppressive.

We now accept very high unemployment and underemployment rates as a more or less permanent feature of our economic lives because of the ideological constraints imposed on government.

The collapse of the Bretton Woods system in 1971, which freed currency-issuing governments of any financial constraints, did not prevent the logic that applied in the fixed exchange rate-convertibility days from being imposed despite the economic fact that it does not apply in the fiat currency era.

As a result, governments impose voluntary constraints on themselves to satisfy the dominant ideological demands of the elites.

However, the 1935 shifts were not to last very long. The 1935 prohibition of direct central bank purchases of US Treasury debt were relaxed in 1942, which is where I began.

From 1942, the Treasury borrowed “huge sums of money” from the central bank as part of its war effort.

In this blog – Time for fiscal policy as we learn more about monetary policy ineffectiveness – I considered some of the views of the Federal Reserve Bank Chairman Marriner Eccles in 1935.

Mariner Eccles wrote at the time that by allowing direct purchase of debt by the central bank the nation could:

… avoid the necessity of having the Treasury offer Government obligations for sale on the open market at a time when the market is demoralized and an additional public offering might add to the confusion and demoralization of the market and do incalculable harm to the Government’s credit and to the holders of outstanding Government obligations.”

Eccles went further though and believed that the Treasury should never be at the behest of the private bond markets. He said:

If the market situation happens to be unfavorable on any given day when a financing operation is up … the Federal Reserve System should be in a position where it can take care of it by a direct purchase from the Treasury of an issue of securities.

Whether a government buys debt directly from the Treasury or indirectly makes little difference in this respect. The former avenue is always preferable from a Modern Monetary Theory (MMT) perspective because it cuts out the corporate welfare element inherent in exclusive primary issuance to non-government dealers.

The 1942 amendment allowed the central bank to buy debt directly from the Treasury but only up to a certain limit ($US5 billion).


In Part 2, we will examine the breakdown of the pegged arrangement as central bank politics overcame the pragmatism of the US Federal Treasury.

Reclaiming the State Lecture Tour – September-October, 2017

For up to date details of my upcoming book promotion and lecture tour in Late September and early October through Europe go to – The Reclaim the State Project homePage.

I have run out of stock of the discounted book offer. I might have some more in mid-October. But you can still purchase the book at various bookshops including Amazon, Pluto Books, Barnes and Noble, Dymocks, Readings etc.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

This Post Has 23 Comments

  1. “What needs to be understood that in this fiat currency era where nations can float their exchange rates at will (if they issue their own currency), the act of issuing debt is a totally voluntary act for a sovereign government.”

    Hi Bill,
    Just for clarification, I assume the USD was not floating prior to 1971 (as was not the AUD before 1983 I think). Was bond issuance still only voluntary prior to floating?


  2. Dear Bill

    You wrote, “The President, Harry Truman[,] and the Secretary of the Treasury John Snyder were both…”. The President at the time was Franklin Roosevelt. Or were there 3 persons involved, but in that case why the pronoun “both”?

    Regards. James

  3. Let’s get real, ethically speaking: Sovereign debt (e.g. US Treasury Bonds and Notes, e.g. account balances at the central bank, aka “reserves” in the case of banks ), being inherently risk-free, should yield at most ZERO PERCENT MINUS ADMINISTRATIVE COSTS* and that’s for the longest maturity sovereign debt (e.g. 30 yr. US Treasury Bonds); shorter maturity sovereign debt should cost even more (negative yield/interest) with demand account balances at the central bank costing the most (most negative interest).

    So not only should the National Debt not be a revenue consumer, it can and should be, over time, be transformed into a revenue PRODUCER.

    May I posit that turning ethics on its head is the root cause of our problems with the banks and the economy?

    *or else we are providing welfare proportional to account balance.

  4. On reading this, I am minded of the possible effect of the Gold Reserve Act of 1934 and the virtually immediate devaluation of the dollar. The Act effectively nationalized gold holdings with only the federal government able to hold gold. The goal seems to have been to stabilize the government’s fiscal position, as the New Deal had not yet had much effect and, if fact, didn’t until about 1939-1940 upon the beginning of war preparations.

    Robert Stinnett, in Day of Deceit, argues that FDR engineered the Japanese attack, though it is relatively clear that he didn’t completely control events. Herbert Yardley shows that the US had cracked every Japanese code used at the time before the end of the thirties, so was aware of every communique made by the Japanese, whether civilian or military or imperial. Even Purple had been cracked. The cracking of the Enigma code seems to have been harder, requiring a nascent computer and Alan Turing.

    FDR didn’t seem to have considered entering the war in order to increase government spending though it had that effect, effectively ending the Depression and generating full employment for men and women, though the country went backwards after the war was over. Similarly to now. For contemporary decision makers and pundits, the New Deal seems to be yesterday’s news. As Bill shows, then as now thinking outside a given frame appears to be exceedingly difficult, and possibly impossible for some. A recent study of child ‘geniuses’ argues that, unlike their contemporaries, they can think outside the box, as it were.

  5. Dingo, under the Bretton Woods system, the US dollar was pegged at $35 per Troy ounce and other currencies were pegged to the dollar at whatever rate they picked. This immediately devalued the dollar. This system ended in 1971, though it did not stop all countries from pegging their currencies. Gold bug fever seems to be like a virus, affecting the brains of decision-makers everywhere.

  6. Dingo,

    “Just for clarification, I assume the USD was not floating prior to 1971 (as was not the AUD before 1983 I think). Was bond issuance still only voluntary prior to floating?”

    Pegging a currency to other currencies or to a commodity (like gold) is voluntary. But if the government indeed chooses to peg, it will have to execute operations to keep the peg, including buying/selling gold, issuing debts denominated in gold (or in instruments convertible to gold) and others.

    So, once you made that choice, you will be obliged to do some operations the keep yourself in the chosen path – unless, of course, you realize that’s not a good path. Than you are not obliged to keep in that path. You can choose something else, something better.

  7. Currencies are like bonds, the only difference being they have zero maturity. Everyone seems to understand that when rates go up bond prices go down. It’s an inverse relationship. The discount to par reflects the implied yield and that discount increases as rates go up.

    Same with currencies. The spot price of a currency can be considered par. In a rising-rate environment the forward prices of a currency are lower. The market is literally pricing in a lower exchange rate. The degree of discount to par reflects the implied yield. Buy a forward and hold it over time until it converges to spot and you will earn the implied yield.

    Gold and commodities exhibit the opposite behavior. They don’t earn. They cost you to hold. There are interest payments and storage costs so the natural “curve” of gold and commodity markets has a positive slope. (Deferred contracts are priced higher than spot.)

    In a rising-rate environment, forward contracts for gold are priced higher. That reflects the “cost” of holding, which equals the interest rate plus storage, etc. Prices rise in a rising-rate environment and they fall in a falling rate environment.

    Yet look at the markets they have it arse over tit.

  8. “Just for clarification, I assume the USD was not floating prior to 1971 (as was not the AUD before 1983 I think). Was bond issuance still only voluntary prior to floating?”

    “Was bond issuance still only voluntary prior to floating?”

    “But if the government indeed chooses to peg it will have to execute operations to keep the peg, including buying/selling gold, issuing debts denominated in gold (or in instruments convertible to gold) and others”

    So in answer to my question – was bond issuance still voluntary prior to free floating exchange rates – I think you are saying yes

  9. Re: “In the context of public debt issuance – the transactions in the primary market are vertical (net financial assets are created or destroyed) and the secondary market transactions are all horizontal (no new financial assets are created).”

    Can someone explain to me why primary market transactions create net financial assets?

    Why is it not just the reverse of QE, considered an asset swap?

    Don’t the bond dealers and banks have to pay for their purchases by yielding reserves?

    “So quantitative easing is really just an accounting adjustment in the various accounts to reflect the asset exchange. The commercial banks get a new deposit (central bank funds) and they reduce their holdings of the asset they sell.”

  10. Larry:as the New Deal had not yet had much effect and, if fact, didn’t until about 1939-1940 upon the beginning of war preparations.

    The myth that only the war & not the New Deal got the US out of the depression is wrong, but very widespread & pernicious: “the New Deal had not yet had much effect” until 1939-40 “in fact” is a terribly wrong, in fact preposterous unfact. The strongest peacetime growth the USA has ever seen is “not much effect”? ! It is also rather insulting to the intelligence of any USAns great?-grand?-parents, whichever side they were on. By 1940 the opponents of New Deal policies were a small minority – even in the Republican party.

    Marshal Auerbach, who unfortunately hasn’t been writing much recently, has done yeoman labor on dispelling this myth, which as he notes is largely propagated by the “liberal historians” of the period. With very few exceptions the economic history of this period is revisionist crap, for as that era recedes more into history, economic illiteracy has become more & more widespread among writers of such “histories.” Alain Parguez has also written invaluable stuff “revising the revisionists”. All in all, yet another testament to how Big Lies are much easier to swallow than small ones.

  11. Larry, I don’t believe they do, it is just an asset swap after all. However, treasury issuing bonds to match deficit spending creates net financial assets, maybe that’s the inference with primary market operations.

  12. Can someone explain to me why primary market transactions create net financial assets?
    Because the government is spending. And if they match spending with bond issuance, the increase in NFA will be in the form of increased government bonds. Aggregate deposits and reserves will be unchanged in the end since the reserve increase was used to purchase the newly issued bonds.
    If you go to the heteconomist site (listed in “Other Blogs”) and look for a post titled: “Exercising Currency Sovereignty Under Self-Imposed Constraints” Dec 10, 2014, you can get a good overview of the operations in the US context.

  13. “So in answer to my question – was bond issuance still voluntary prior to free floating exchange rates – I think you are saying yes”

    Dingo, your question is complex.

    I would say that the bond issuance was voluntary prior to floating exchange rates – but if the government had chosen to stop bond issuance, probably it would have to end the peg before 1971.

    The way that the Bretton Woods Agreementd were designed was unsustainable. Inevitably, there would be no bond issuance or operation that could keep the peg.

  14. “Can someone explain to me why primary market transactions create net financial assets?”

    Larry Kazdan: Well, I think Bill was a bit confusing here. He was talking about a specific financial asset: treasuries. He was not talking about net financial assets in general.

    Primary market transactions put treasuries in the hands of the private sector or central bank (treasuries are created). Secondary market transactions just make the treasuries change hands between private markets participants and/or the central bank (no treasuries are created or destroyed).

    But if you are talking about net financial assets as a whole, including currency (dollar notes, coins, and bank reserves) and treasuries, then things change a bit. The primary market just swaps one kind of asset (currency) for another (treasuries), so there is not creation or destruction of net financial assets. Warren Mosler likes to put it that way: currency is like current account, and treasuries is like savings account. One is used for transactions and do not bear interest, and the other is used for savings and bear interest. Primary market transactions just changes one kind of asset for another, but do not create or destroy net financial assets.

    “Why is it not just the reverse of QE, considered an asset swap?”

    If you are talking about net financial assets as a whole, yes, it is the reverse of QE. Except QE involves not only treasuries, put private financial assets too, but I guess this is not much important for your question.

  15. It does not seem from the history that the end of Bretton woods and the
    establishment of floating rates of exchange made any fundamental difference to
    state monetary sovereignty .
    Was it more a question of ex trade surplus countries hanging on to the gold that they had

  16. The asset swap either way does not change the net monetary position of the
    private sector .It is the government spending more into the accounts of the private
    sector than it removes in taxation which does that.
    Surely what Bill is saying is that issuing bonds to account for the difference or buying
    them back in the secondary market is irrelevant to the net monetary position of
    the private sector ,that is the chimera the spending and tax is the substance.

  17. At the time, countries were committed with the Bretton Woods Agreements – no matter what we think of it today, or what MMTers believe. I believe that pegging the currency to gold or another currency is a very bad idea, but that was not the feeling at the time.

    The USA was committed to keeping the convertibility of the dollar to gold. It means that USA gave up some aspects of the sovereignty of the currency to keep the peg. Eventually, USA run out of gold and could not keep the commitment anymore.

    Nowadays there is no commitment in pegging the US dollar to gold or another currency, so the monetary regime is indeed fundamentally distinct form what it was before the end of Bretton Woods.

    I believe that the end of Bretton Woods is related to the impossibility of US to keep the convertibility, and not to some “ex trade surplus countries hanging on to the gold that they had accumulated”. But I’m no expert in the subject.

  18. I hope it is made explicit that net financial assets change with a primary issue only if government spends the funds, as government has the option of stockpiling its deposits:

    Bank of Canada Magic

    Read about a $35 Billion planned increase in federal government deposits “with no impact on budgetary balance or the federal debt”.


    “To improve prudential liquidity management, over the next three years, the Government will borrow an additional amount of $35 billion to safeguard its ability to meet payment obligations in situations where normal access to funding markets may be disrupted or delayed. This financing activity will have no material impact on the budgetary balance or the federal debt as the cost of the additional borrowing will be offset by a corresponding increase in returns on interest-bearing assets.”

    Prudential Liquidity Management

    “…..over the next three fiscal years, government deposits held with financial institutions and the Bank of Canada will increase by about $25 billion. Liquid foreign exchange reserves will increase by US$10 billion over the next fiscal year, and subsequently rise sufficiently to maintain their level at or above 3 per cent of nominal gross domestic product. In total, prudential liquidity will increase by about $35 billion by the end of 2013-14.

    The financing activity necessary to increase prudential liquidity will have no material impact on the budgetary balance or the federal debt as the cost of the additional borrowing will be offset by a corresponding increase in returns on interest‑bearing assets.”

    Bank of Canada

    Quarterly Financial Report
    Third Quarter 2011


    Operational Highlights and Changes

    Shortly after the quarter ended, the Bank and the Department of Finance signed a
    Memorandum of Understanding in relation to a deposit to be established at the Bank
    by the Government of Canada in connection with its prudential liquidity management. The
    maximum deposit amount will be $20 billion. The Bank, in consultation with the
    Department of Finance, will determine the pace of the initial build up of balances. The
    deposit will earn interest at rates that are equivalent to those paid on other Receiver
    General balances.

    On 19 October, the Bank announced an increase in its minimum purchase of nominal bonds at auction to 20 per cent, effective immediately, in order to accommodate the projected increase in the Bank’s liabilities.

  19. Larry Kazdan, you have misconstrued what I wrote or I was unclear. The New Deal, which was always a problematic affair with Roosevelt if not for Hopkins and Eleanor. But if you look at the data, the recovery is tepid until FDR injected a huge amount of money into the system for the upcoming war. It isn’t that the New Deal had no effect whatever, only that the fiscal stimulus, while moderately or mildly effective, had a massive effect as a consequence of war spending.

  20. Larry, I think you may be replying to me, not Larry Kazdan. I don’t think I misconstrued anything. You comments clearly say the New Deal wasn’t effective until the war spending. I find your comments usually very insightful & enlightening, among the best and deepest & most worth pondering here. Which is why I am so nasty when I see a comment as wrong as the one I criticized & as the one just above. Yes, what you are saying is the consensus view. Even Bill sometimes veers that way IMHO. Well, then Bill is wrong too. He isn’t an expert on US history & even Homer nods. BTW before I forget again, Leijonhufvud makes the same criticism of economists’ misuse of the word “model” that you do.

    The New Deal, which was always a problematic affair with Roosevelt if not for Hopkins and Eleanor.
    Not sure what this means. But pretty sure I would disagree. Roosevelt was the #1 New Dealer.

    But if you look at the data, the recovery is tepid until FDR injected a huge amount of money into the system for the upcoming war.
    My point is that this modern consensus view of “the data”, repeated in both your comments, is quite false. If you look at “the data”, until 1937-38 it was the strongest US peacetime recovery ever. This was of course obvious to the people who lived through it and commented on this, like Paul Samuelson for instance. So even if a consensus or large majority of even liberal historians of an (ignorant) later age calls the recovery “tepid”, this is nuts, because it flatly contradicts “the data”. And some of “the data” usually seen & trotted out to suppport the consensus view are just plain false, like the unemployment numbers Auerback spotlights.

    The first New Deal’s fiscal stimulus was extremely, not moderately or mildly, effective. By Parguez’s analysis perhaps the most effective ever anywhere in terms of bang for each buck spent. Later revisionists like Christine Romer, say, are misled by the size in comparison to the much larger but less effective per buck WWII spending. As Parguez notes, I think, her theses were refuted by Lauchlin Currie before she was born (Currie called them “the Business Economists view” IIRC.)

    True, the First New Deal spending was not enough for a complete & immediate recovery over 4 years, but it still was spectacularly effective, which is why Roosevelt was elected and again and again and again. It is clear that for a quicker & more complete recovery, the New Deal needed to be only somewhat bigger, rather than anything like the size of WWII spending. And there was the problem of the short but very sharp Roosevelt Recession. Interestingly, FDR & his advisors understood that the commencement of Social Security taxation for one thing would hurt the recovery, but FDR said it couldn’t be avoided. IMHO getting the Social Security system was worth this price. As Theda Skocpol notes, the New Deal built the largest welfare state (by GDP percentage) that the world had ever seen anywhere. Again, the standard view of the New Deal’s inefficacy couldn’t be wronger.

  21. I like ‘Some Guy’s’ description of history here. It was what I was taught in school back when plenty of people who lived through the Depression were still around. Even if I wasn’t born until 30 years after the 1937 recession part of the Depression, I trust what was originally taught to me in school because it agreed with what my grandparents told me about that time. My Grandparents were far more trustworthy than revisionist economists will ever be.

  22. Some Guy, I didn’t think you were nasty, only forthright. We will have to agree to disagree about FDR and the New Deal’s effectiveness. I would agree that it was effective, but I would not agree that it was spectacular until after 1938. My comparison is the two periods, before 1937 and after 1938. I wouldn’t like to say what he was thinking in 1937. If you compare the two periods, the differences are stark. Unfortunately, I am unable to show you a chart I have made of the period from the ’20s to the early ‘4os. I am not misusing the data nor am I utilizing the consensus view. While I would not claim that the data I use speaks for itself, it does indicate a lot. It doesn’t say everything, of course, nor would I claim that it did. To claim that FDR was a New Dealer through and through and was completely committed, as your remarks suggest, would not be historically accurate. Without the support of Hopkins and his wife and some others, he may not have been as steadfast as he was. I don’t view this as unusual. He came into his own with his New Deal 2 speech delivered shortly before he died. I like to think that FDR’s illness allowed the Democratic Party to substitute Truman for Wallace in his last election and doesn’t indicate any falling away from principle on his part.

  23. Whether or not the First New Deal era, before the Roosevelt Recession was the period where the USA experienced the strongest peacetime growth ever, measured the usual way, by GDP growth, is not really a vague question where people can differ. It’s yes or no question, like whether the most spectacular rise in the US stock market ever occurred during the First New Deal (Yes. The Dow doubled in one month IIRC) or some time in the post 1938 period (No. And this even includes any war era.)

    To claim that FDR was a New Dealer through and through and was completely committed, as your remarks suggest, would not be historically accurate.

    I beg to differ. So did people like Eleanor Roosevelt, Harry Hopkins, Frances Perkins, Robert Sherwood etc. See for instance the Hopkins bio by his granddaughter June Hopkins as well as Sherwood’s classic “Roosevelt & Hopkins”. See Perkins’s “The Roosevelt I Knew”. What evidence makes you think FDR wasn’t “committed”? Many historians say such things – by focusing on gnats and ignoring elephants – and then produce quite inaccurate histories and impressions – like those you have, that I too vaguely once had.

    Don’t look at histories written in a dark age of macroeconomics, that selectively quote from such (far better) primary sources. These people aren’t intentionally lying, though. But they are showing how bad the effects of bad theories are. Their theory of money is bad, their (macro)economics is bad, so they cannot see things that are staring them in the face. Unthinkingly, they measure the New Deal by standards no other era is measured by – by its failure in instantly, magically returning to boom employment & production levels. So their books hide what is and was important, what was important to the people at the time. There are very few histories that can be read with any degree of trust. Alain Parguez likes Robert McElwaine from what I have read, with good reason.

    When you compare pre 37 and post 38 FDR’s USA you are basically comparing a peacetime and wartime economy. This is not the usual procedure, because by using the usual measures you will arrive at an inevitable result that war is better than peace. The understanding that there is something wrong with that is prevalent enough that it is basically never done, unless there is something more important at stake, like diminishing the pre 1937 achievements of the New Deal. I do agree that on the eve of the war, the USA had a very robust economy, but what was most remarkable about it was how well designed it was, how close to MMT recommendations, how extensive the welfare state was, which was a legacy of the New Deal, not the simpler factor of the hydraulic Keynesianism of adequate (mainly military) spending.

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