Ben Bernanke Spoke of Printing Money and Distributing It from Helicopters and about Roosevelt's 40% Devaluation of the Dollar Against Gold As Effective Weapons Against Deflation

This doctrine of globally beneficial dollar devaluation in recession had got further embellishment in Bernanke’s reading of the Japanese experience of the 1990s. Bernanke sympathized with the view that where monetary policy became constrained (in bringing about recovery) by a zero-rate bound (inability of rates to fall below zero even though the equilibrium level of rates may indeed be negative), then devaluation was the way out of this (partly through generating inflation expectations) and internationally acceptable (not beggar-your-neighbour) in that all would gain from the return route to equilibrium. Bernanke, as recently appointed governor to the Federal Reserve, had reinforced this view in his notorious speech to the National Economists Club in Washington (November 2002) under the title of ‘Deflation: making sure it doesn’t happen here’.

Bernanke’s comments about printing money and distributing it from helicopters got the headlines at the time (and since). But in addition the new governor noted aloud:

Though a policy of intervening to affect the exchange value of the dollar is nowhere on the horizon today, it’s worth noting that there have been times when exchange rate policy has been an effective weapon against deflation. A striking example from US history is Franklin Roosevelt’s 40% devaluation of the dollar against gold in 1933–4, enforced by a program of gold purchases and domestic money creation. The devaluation and the rapid increase in money supply it permitted ended the US deflation remarkably quickly. Indeed consumer price inflation in the US, year-on-year, went from −10.3% in 1932 to −5.1% in 1933 to 3.4% in 1934. The economy grew strongly and by the way 1934 was one of the best years of the century for the stock market. If nothing else, the episode illustrates that monetary actions can have powerful effects on the economy, even when the nominal interest rate is at or near zero, as was the case at the time of Roosevelt’s devaluation.

--Brendan Brown, The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution (Houndmills, UK: Palgrave Macmillan, 2011), 115.

Austrian School Revolutionaries Must Stir Popular Anger!

The starting point of the blueprint is the growing awareness that monetary policies determined by inflation-targeting regimes were responsible for breeding the vast monetary disequilibrium, which was the essential condition for the global credit bubble and bust of the last decade. This ‘growing awareness’, however, is far from being the dominant or even majority view (however that is determined) among monetary economists. The present and previous head of the Federal Reserve (Ben Bernanke and Alan Greenspan respectively) strenuously deny that their policies were responsible for the credit bubble and bust. They would blame all on the massive Asian saving surpluses, claiming that these drove interest rates so low in the US (and Europe) as to set off a credit and asset bubble. . . .

Outside the central banks and in the academic world the main redoubt for attack on the central banks has been the so-called Austrian school (with writings collected, for example, on the von Mises website). The underlying theme is that considerable fluctuations of the price level, sometimes downwards, must occur over short- or medium-term periods of time if overall monetary stability in its widest sense – including asset and credit markets remaining in a temperate zone – is to be achieved as best as possible. Modern writers close to this school refine the notions of ‘asset and credit market inflation’ or ‘mal-investment’ found in the original texts (whether von Mises or Hayek, for example). There the mal-investment which resulted from monetary disequilibrium (characterized by a monetary authority driving rates far below neutral for an extended period) was wholly in the form of ‘ over-investment’ (excess production of capital goods relative to consumer goods). Production processes would become more capital intensive (or ‘time-intensive’) and consumer goods production would be curtailed relative to what would occur under conditions of monetary equilibrium. All of these distortions have to be reversed in the ensuing economic downturn.

The more relevant, and quantitatively much more important, concept of mal-investment, of which today’s ‘Austrians’ write, starts with a tale of temperature rise (irrational exuberance) in various credit and related asset markets stirred by monetary disequilibrium. This (temperature rise) stimulates an excess build-up of capital stock in certain sectors of the economy, which subsequently becomes obsolescent in economic terms when the bubble bursts (or temperature falls), with the result that vast stocks of physical and human capital waste away. The process of renaissance from these devastating experiences requires much new capital (savings), risk-appetite, entrepreneurship, technological progress (bringing new investment opportunity), and overall economic flexibility (including of prices and wages).

--Brendan Brown, The Global Curse of the Federal Reserve: Manifesto for a Second Monetarist Revolution (Houndmills, UK: Palgrave Macmillan, 2011), 79-81.