Is George Selgin defending Keynes on liquidity traps?
By Scott Sumner
George Selgin recently quoted Keynes, from late 1933:
“Rising output and rising incomes will suffer a set-back sooner or later if the quantity of money is rigidly fixed. Some people seem to infer from this that output and income can be raised by increasing the quantity of money. But this is like trying to get fat by buying a larger belt. In the United States to-day your belt is plenty big enough for your belly. It is a most misleading thing to stress the quantity of money, which is only a limiting factor, rather than the volume of expenditure, which is the operative factor.”
And then George made this curious request:
This near the very bottom of the Great Depression. Perhaps Keynes was wrong then. But is there not a strong case to be made, nevertheless, that the recent rounds of QE were, what with all that heaping-up of excess reserves, just so much unhelpful belt-loosening?
What say ye, my Market Monetarist friends?
Not quite sure what to make of this, as I seriously doubt that George is trying to defend Keynes’ odd views on liquidity traps. But let’s start with the letter itself (one I’ve often quoted over the years.) The letter was dated December 16, 1933, and was a critique of FDR’s gold-buying program. The first thing to emphasize is that the gold-buying program was not QE. Quantitative easing was the policy of Herbert Hoover in 1932. The monetary base was $8.41 billion in March 1933, right before the dollar was devalued, and $8.41 billion in February 1934, the first month after the dollar was re-fixed to gold (at $35/ounce.) So the program that Keynes was criticizing was clearly not QE. Why then did Keynes consider it QE?
I can only speculate, but perhaps professional jealousy played a role. The dollar depreciation program was both highly successful, and it was widely seen as enacting the preferred policies of Irving Fisher and George Warren. Keynes initially favored dollar depreciation, but turned against it later in the year. He preferred fiscal stimulus. Since Fisher was widely viewed as a quantity theorist, perhaps Keynes assumed that Fisher’s program was designed to work by increasing the quantity of money. But that was not the case.
Is QE a good policy today? Compared to what? Surely it’s a lousy way of achieving higher aggregate demand; NGDP level targeting is far simpler. But if central banks insist on such a clumsy, roundabout method, then it’s worth contrasting their actions with “not QE.” And there is lots of evidence that QE is marginally better than not QE. I put the most weight on strongly positive market reactions to QE announcements. But for those that prefer actual macro data, Japanese inflation has risen since their QE was adopted in 2013, and the US has done far better in terms of both inflation and NGDP growth that the eurozone, which refrained from QE.
Dollar devaluation under FDR did much better than QE under Hoover for exactly the same reason that NGDP targeting would be much better than QE today.
So do market monetarists favor QE? It depends what you mean by “favor.”