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Change of monetary regime, contracts, and prices: Lessons from the great depression, 1932–1935

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  • Edwards, Sebastian

Abstract

In this paper I analyze the process leading to the abandonment of the gold standard in the U.S. in 1933, and the devaluation of the dollar in 1934. I argue that most changes of monetary regime have an impact on contracts. In this specific case, contracts that were written in terms of gold, or “gold equivalent,” were rewritten in paper dollars. Congress did this on June 5, 1933, when it abrogated the “gold clause” retroactively. The Supreme Court validated the move in February 1935. The result was a very large transfer of wealth from creditors to debtors. I use daily data on commodity prices to investigate the extent to which these policies contributed to ending deflation. I find that commodity prices reacted strongly to the announcement of policy changes, and to legal procedures involving contracts. These results are consistent with the “change in regime” hypothesis of Sargent.

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  • Edwards, Sebastian, 2020. "Change of monetary regime, contracts, and prices: Lessons from the great depression, 1932–1935," Journal of International Money and Finance, Elsevier, vol. 108(C).
    • Handle: RePEc:eee:jimfin:v:108:y:2020:i:c:s0261560620301467
    DOI: 10.1016/j.jimonfin.2020.102190
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    Cited by:

    1. Jason Lennard & Finn Meinecke & Solomos Solomou, 2023. "Measuring inflation expectations in interwar Britain," Economic History Review, Economic History Society, vol. 76(3), pages 844-870, August.

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    More about this item

    Keywords

    Great depression; Gold standard; Monetary policy; Gold; Contracts; Gold clause;
    All these keywords.

    JEL classification:

    • B22 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Macroeconomics
    • B21 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Microeconomics
    • B26 - Schools of Economic Thought and Methodology - - History of Economic Thought since 1925 - - - Financial Economics
    • E31 - Macroeconomics and Monetary Economics - - Prices, Business Fluctuations, and Cycles - - - Price Level; Inflation; Deflation
    • F31 - International Economics - - International Finance - - - Foreign Exchange
    • N12 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations - - - U.S.; Canada: 1913-
    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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