Money Matters: State Policy and Economic Growth in Post war America

What might a reexamination of 20^th-century banking and monetary policy tell us about the history and politics of economic growth and consumption in post-war America?  Specifically, how did Depression-era interventions in debt markets encourage new kinds of economic growth? Historians tell different stories about the relative importance of fiscal policy and monetary policy after WWII. The legacy of fiscal policy is well documented; we know that Keynesian spending and tax incentives promoted growth in specific sectors and regions.  By contrast, we know little about how banking and monetary policy promoted the dramatic increase in debt-financed production and consumption. With a handful of exceptions, historians have accepted neo-classical economists’ theory of growth—which treats money as an “exogenous” variable, a mediating force rather than a formative one—and thus have not explored how New Deal-era policy revolutionized credit markets by making the federal government both the insurer of consumer debt and lender of last resort.
This paper revisits those Depression-era policies. Between 1932 and 1935, the state began to regulate and provide capital for private banks and the savings and loan industry, transformed the Federal Reserve from a central bank into a regulatory body, and assumed control of discount rates and interest rates. By 1935, it had abolished the gold standard, was insuring private lenders against loss, had expanded its ability to buy and sell Treasury securities, and also its power to provide emergency loans to institutional lenders.  In short, state policy fundamentally altered the nation’s monetary system by socializing the market for debt.  The new state role in debt markets vastly increased consumers’ access to capital, creating a powerful new mechanism for wealth-creation.  Postwar economic growth was in part a function of a new federal role in the creation and distribution of money.