Excerpt from Bernanke’s testimony

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BROWN: Specifically, what worked that Roosevelt did? What did we learn from that? What worked that applies to now?

BERNANKE: Well, there were two things that he did almost within months of taking office that were extremely important. One was the bank holiday and the subsequent measures, like the deposit insurance program that stabilized the banking system.

Yes, deposit insurance allowed banks to fund themselves on an unsecured basis via federal deposit insurance.

The lesson was the liability side of banking is not the place for market discipline.

Which is why I’ve been proposing all along that the Fed needs to get immediate permission from Congress to lend to member banks on an unsecured basis. This would instantly clear up the interbank lending issues.

The problem is the FOMC doesn’t understand reserve accounting and how the monetary system actually works.

And it’s a point I’ve been making all morning, that we need to stabilize the banks.

And they need borrowers to have sufficient net incomes to make their payments. Hence my payroll tax holiday.

The second thing he did was to take the U.S. off the gold standard, which allowed the Federal Reserve to ease monetary policy, allowed for a rise in prices, which, after three years of horrible deflation, allowed for recovery.

Yes, it removed the supply side constraints on the ‘money supply’ with the gold standard this constraint makes it problematic for even the Treasury to fund its deficit spending, as competition to borrow a finite amount of reserves drives up interest rates.

When the currency is instead allowed to float interest rates are then instead set by the government rather than market forces. This allows the Fed to cut rates and the Treasury to deficit spend without risking the loss of gold reserves.

So those were the two perhaps most important measures that he took.

He did some counterproductive things, like the National Recovery Act, which put the floors under prices and wages and prevented necessary adjustment.

Excuse me??? His new Keynesian roots are showing. They believe lower wages will allow labor markets to ‘clear’ when deficits are too small to support demand.

The most controversial issue recently, of course, has been fiscal policy and I think there are two sides to that.

The classic work on this by an old teacher of mine from MIT, E. Cary Brown, said that fiscal policy under Roosevelt was not successful, but only because it wasn’t tried, and he argued that it wasn’t big enough relative to the size of the problem.


Other people, other writers have argued that this wasn’t the right medicine.

So that one is more controversial, but if you ask me what I think the most important things were, I think they had to do with stabilizing monetary policy and stabilizing the financial system.

Which he hasn’t yet been able to do.