Indicators, performance, and policy in the 1930s and today

Recent economic growth has been sluggish despite persistent attempts to stimulate the economy. The apparently . unresponsive nature of the economy is quite unusual in recent history, leading observers to search back in history for similar periods that might help explain the anomaly of the present. This article compares monetary policy and economic performance in the current period with monetary policy and economic performance in the 1930s. The article argues that the current period is in a number of important respects qualitatively, if not quantitatively, similar to the early 1930s. In particular, the last three years are similar to the early 1930s in having the absence of strong economic growth, sharply lower short term interest rates, widening spreads between long term and short term interest rates, and stronger growth in the monetary base (a narrow monetary aggregate) than in the broader aggregates (M2 and M3).' Of course, these two periods are also quite different in a number of respects. For example, the decline in national income was much steeper in the 1930s and broad velocity (the ratio of GNP to broader monetary aggregates) declined in the 1930s but not in the current period. This article argues that the aforementioned similarities between the two periods suggest that in the current period, as in the 1930s, there is likely to be a stronger correlation between economic growth and the broader aggregates, such as M2 and M3, than either the narrow aggregates, such as the monetary base and M1, 2 or interest rates and interest rate spreads. Hence, in the current period, the broader aggregates probably deserve greater weight than the narrower aggregates, the short term interest rate level, or interest rate spreads in the formation of monetary policy.