Is it 1937 again?
There are many commentaries on David Leonhardt's article today on whether we should be raising taxes and cutting government spending, as was done in 1937. Yet I don't see anyone -- at least not today -- talking about monetary policy during 1936-7. A bit earlier, David Beckworth stepped up to the plate:
Is the Federal Reserve (Fed) making a similar mistake to the one it made in 1936-1937? If you recall, the Fed during this time doubled the required reserve ratio under the mistaken belief that it would reign in what appeared to be an inordinate buildup of excess reserves. The Fed was concerned these funds could lead to excessive credit growth in the future and decided to act preemptively. What the Fed failed to consider was that the unusually large buildup of excess reserves was the result of banks insuring themselves against a replay of the 1930-1933 banking panics. So when the Fed increased the reserve requirements, the banks responded by cutting down on loans to maintain their precautionary level of excess reserves. As a result, the money multiplier dropped and the money supply growth stalled...
The second link in this post offers the critical figure. If monetary policy is sufficiently accommodative, I do not see that we are risking a 1937-8 repeat. In 1936-7, monetary policy was not just insufficiently expansionary, it was absolutely draconian. Read this paper too. Here is Scott Sumner.
As the stimulus is pulled away, there is a reasonable chance that the Fed will be more accommodative. Remember, the monetary authority moves last.
I do not see why we are discussing this issue without placing monetary policy at the center of the analysis.