Mary O’Sullivan, Professor of Economic History, Université de Genève.
At the start of the COVID-19 pandemic in March 2020, US Federal Reserve System governor Jerome Powell made an extraordinary declaration: “We’re not going to run out of ammunition.” The central bank stood ready to take any action necessary to stem the mounting economic crisis. Three months later, the Fed injected nearly USD 3 trillion dollars of liquidity into the US economy.
Such radical action by central banks – quantitative easing (QE) – has its critics on the right and left. Just as striking is that many prominent economists and economic historians have rallied in support of QE in responding to the threat of economic crisis. Their remarkable certainty reveals a story about how our understanding of present crises came to be dominated by lessons drawn from past crises, and in particular the Great Depression in the 1930s and its interpretation by economists, Milton Friedman and Anna Schwartz, in their 1963 book, A Monetary History of the United States.
Friedman and Schwartz claimed that the Federal Reserve System was responsible for turning an ordinary economic downturn into the Great Depression. When a massive financial crisis led to a sharp decline in the stock of money in the US economy, the Fed failed to take action to mitigate the problem.
By the end of the 20th century, their interpretation of the Great Depression had become sufficiently dominant in economics and economic history to qualify as the orthodoxy. When the global financial crisis struck in 2008, the Federal Reserve System proposed aggressive policies of monetary expansion to avoid its supposed mistakes during the Great Depression.
That flood of liquidity into capitalism’s financial system is remarkable in historical perspective, surpassing all previous records for monetary interventions, outside of wartime, since the beginning of the 20th century. It defines our economic reality to such an extent that the fictional story of a mysterious “Professor”, who meticulously plans a raid on the Royal Mint of Spain to print billions of euros, became the basis for the wildly popular television series, La Casa de Papel. As the Professor explained:
In 2011, the European Central Bank made EUR 171 billion out of nowhere. Just like we’re doing. Only bigger … ‘Liquidity injections,’ they called it. I’m making a liquidity injection, but not for the banks. I’m making it here, in the real economy.
The Professor made these remarks long before central banks responded to the coronavirus crisis with an even greater flood of liquidity.
Historical analysis as economic heresy
The onset of the Great Depression coincided with “a golden age” of…
Go to the news source: The Great Depression and Money Printers of Today