Courtesy of Pam Martens.
Charles Evans, President of the Federal Reserve Bank of Chicago
On November 6, Bloomberg News reporter, Matthew Boesler, set off a flurry of comments with an article headlined: “Fed Concern With Repeat of 1937 Blunder Echoed by Markets.”
The reference to 1937 relates to the fact that as the U.S. economy was showing signs of improvement from the conditions of the Great Depression of the 1930s, the Federal government and the Federal Reserve overreacted to inflationary concerns with contractive measures in 1937, sending the economy into a sharp slump in late 1937 and 1938.
The chief worrier at the Fed about it making the same mistake today is Charles Evans, President of the Federal Reserve Bank of Chicago. Evans’ background is that of a long-term researcher. Prior to becoming President of the Chicago Fed, he served as its Director of Research, and earlier, its Senior Economist in charge of the Macroeconomics Research Group.
In four speeches beginning on September 24, Evans has been effectively telling Fed Chair Janet Yellen and the Federal Open Market Committee of the Federal Reserve Board of Governors not to crash the economy again by ignoring the lessons of 1937 and 1938. Evans’ most pointed warnings came in the September 24 speech with direct references to 1937:
“Past experience with the zero lower bound also counsels patience. History has not looked kindly on attempts to prematurely remove monetary accommodation from economies that are in or near a liquidity trap. The U.S. experience during the Great Depression — in particular, in 1937 — is a classic example for monetary historians: In response to the positive growth and reinflation that occurred after devaluation and suspension of gold convertibility, the Fed raised reserve requirements, the Treasury sterilized gold inflows, and there was a fiscal contraction. Subsequently, the economy dropped back into recession and deflation. During this time, interest rates remained very low. The discount rate was lower after 1937 than before, and Treasury bill rates were less than 1 percent. By many economic accounts, it took the big fiscal expansion associated with World War II to exit the Great Depression.”
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