Bernanke Defends Expansionary Monetary Policy

Bernanke continued: “By 1935 or 1936, when essentially all major countries had left the gold standard and exchange rates were market-determined, the net trade effects of the changes in currency values were certainly small. Yet the global economy as a whole was much stronger than it had been in 1931. The reason was that, in shedding the strait jacket of the gold standard, each country became free to use monetary policy in a way that was more commensurate with achieving full employment at home.”

Using monetary policy to pursue full employment is part of the Fed’s dual mandate. Bernanke adds: “Moreover, and critically, countries also benefited from stronger growth in trading partners that purchased their exports. In sharp contrast to the tariff wars, monetary reflation in the 1930s was a positive-sum exercise, whose benefits came mainly from higher domestic demand in all countries, not from trade diversion arising from changes in exchange rates.”

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The operative difference in current monetary policy is that its primary function is to boost domestic demand, not to devalue currency. The affect on currency is simply a side affect. This was a central part of the concern that surrounded the rapid devaluation of the yen recently, and what prompted the Group of Seven central bankers and finance ministers to issue a joint statement agreeing to refrain, as Bernanke put it, “from actions focused on achieving competitive advantage by weakening their currencies and reaffirming that fiscal and monetary policies would remain oriented toward meeting domestic objectives using domestic instruments.”

Don’t Miss: Here’s Why the Senate Budget is Unlikely to Spell Changes in Short-Term Policy.