Pump Priming

What is 'Pump Priming'

Pump priming is the action taken to stimulate an economy, usually during a recessionary period, through government spending, and interest rate and tax reductions. The term "pump priming" is derived from the operation of older pumps; a suction valve had to be primed with water so that the pump would function properly. As with these pumps, pump priming assumes that the economy must be primed to function properly once again. In this regard, government spending is assumed to stimulate private spending, which in turn should lead to economic expansion.

BREAKING DOWN 'Pump Priming'

The phrase originated with President Hoover's creation of the Reconstruction Finance Corporation (RFC) in 1932, which was designed to make loans to banks and industry. This was taken one step further by 1933, when President Roosevelt felt that pump-priming would be the only way for the economy to recover from the Great Depression. Through the RFC and other public works organizations, billions of dollars were spent "priming the pump" to encourage economic growth.

The phrase was rarely used in economic policy discussions after World War II, even though programs developed and used since then, such as unemployment insurance and tax cuts, are automatic pump primers of sorts. However, during the financial crisis of 2007/2008 the term came back into use, as interest rate lowering and infrastructure spending was thought to be the best path to economic recovery.

RELATED TERMS
  1. Wall Street Journal Prime Rate

    An interest rate that large banks in the United States charge ...
  2. Prime Rate

    The interest rate that commercial banks charge their most credit-worthy ...
  3. Portfolio Pumping

    The illegal act of bidding up the value of a fund's holdings ...
  4. Prime Bank

    Term used to describe the top 50 banks (or thereabouts) in the ...
  5. Prime Cost

    A business's expenses for the materials and labor it uses in ...
  6. Reconstruction Finance Corporation ...

    An agency created by the the U.S. government to aid the troubled ...
Related Articles
  1. Economics

    Explaining Prime Rate

    Prime rate is the interest rate banks charge their best (e.g. prime) customers.
  2. Professionals

    The Role of a Prime Broker

    Understand the role of a prime brokerage, and learn about the services investment banks provide for hedge funds while in the role of being a prime broker.
  3. Term

    What is a Prime Brokerage?

    A prime brokerage offers special services to certain clients.
  4. Professionals

    PRIME BROKERAGE ACCOUNTS

    Prime Brokerage Accounts A prime brokerage account allows the customer to utilize several broker dealers to execute their orders, while designating a central or main firm to maintain custody ...
  5. Economics

    Explaining Prime Cost

    Prime cost is a way of measuring the total cost of the production inputs needed to create a given output.
  6. Economics

    What Is Fiscal Policy?

    Learn how governments adjust taxes and spending to moderate the economy.
  7. Fundamental Analysis

    Amazon Prime Now: A Strategy To Disrupt Retailers

    With Prime Now, Amazon tackles the on-demand economy and threatens to remove the instant gratification advantage of brick-and-mortar stores.
  8. Investing

    Why Low Oil Prices Don't Help U.S. Retail Sales

    If wages are stagnant, saving a few dollars at the gas pump is more likely to result in additional savings, not added spending.
  9. Economics

    Investment Scams: Different Types Of Scams

    Very few of the scams on the Internet are new. Most of the swindling techniques we see today originated long ago as telemarketing, direct mail, or even door-to-door selling schemes. But the ...
  10. Investing

    Amazon Prime Creates a Captive Audience (AMZN)

    Amazon Prime is an addictive service which has created a captive consumer audience for Amazon.com Inc.
RELATED FAQS
  1. How high has the prime rate ever gotten?

    Discover the highest value of the prime rate in United States' history and understand the assumptions and calculations that ... Read Answer >>
  2. Why is it important for a business to understand prime costs?

    Learn what constitutes prime costs for businesses, and discover why companies need to understand prime costs in business ... Read Answer >>
  3. What should ordinary borrowers know about the prime rate?

    Learn more about how prime rates are used in consumer lending and how consumers may obtain better interest rates at or near ... Read Answer >>
  4. How does the equity risk premium correlate with the Federal Reserve's prime rate?

    Learn about how the equity risk premium correlates with the Federal Reserve's prime rate. The Fed adjusts the prime rate ... Read Answer >>
  5. How does the Wall Street Journal prime rate forecast work?

    Learn about the Wall Street Journal's prime interest rate methodology. Discover trailing financial indicators, and engage ... Read Answer >>
  6. What is prime cost in managerial accounting?

    Learn about prime costs in managerial accounting such as direct material cost, labor and wages cost, and other direct costs ... Read Answer >>
Hot Definitions
  1. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  2. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  3. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  4. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
  5. Generally Accepted Accounting Principles - GAAP

    The common set of accounting principles, standards and procedures that companies use to compile their financial statements. ...
  6. DuPont Analysis

    A method of performance measurement that was started by the DuPont Corporation in the 1920s. With this method, assets are ...
Trading Center