Fed Board, Report: Recovery of 1933

“Roosevelt’s successful, if incomplete, reflation carries lessons for policymakers today. First, fiscal expansions always have two effects: Keynesian hydraulics and wealth effects from government debt. Wealth effects may be large, depending on expectations of future fiscal actions. Analyses that neglect these may underpredict the stimulative impacts and misguide policy responses to the resulting inflation.”

“A second lesson from the Roosevelt policies is that fiscal stimulus and fiscal sustainability need not be in conflict. When the aim is to raise inflation and economic growth, higher nominal government debt—if people are convinced it does not portend higher future taxes—can achieve both the macroeconomic objectives and the goal of stabilizing debt. To engineer an unbacked fiscal expansion, governments must understand that rapid growth in nominal debt need not threaten fiscal sustainability, just as it didn’t in 1930s America. On the other hand, to maintain the value of government debt, policy makers must assure—as with Roosevelt’s balanced ordinary budget—that unbacked fiscal expansion is a temporary measure to address an immediate need.”

“Finally, sometimes policy makers speak as clearly about fiscal intentions as Roosevelt did.30 But clarity is the exception in fiscal policy. Central bankers emphasize the importance of anchoring monetary expectations. Because fiscal expectations are equally important, fiscal actions could be more effective if coupled with communication about how those actions will be financed.”