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Was the Great Depression a Watershed for American Monetary Policy?

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  • Charles W. Calomiris
  • David C. Wheelock

Abstract

The Great Depression changed the institutions governing monetary policy. These changes included the departure from the gold standard, an opening of a a new avenue for monetizing government debt, changes in the structure of the the Federal Reserve System, and new monetary powers of the Treasury. Ideo- logical changes accompanied institutional changes. We examine whether and how thes changes mattered for post-Depression monetary policy. With regard to the period 1935-1941, the tools of Fed policy, but not its goals or tactics, changed. But structural reforms weakened the Federal Reserve relative to the Treasury, and removed a key limit on the monetization of government debt. The increased power of the Treasury to determine the direction of policy, along with the departure from gold and the new ment debt produced a new (albeit small) inflationary bias in monetary policy that lasted until the Treasury-Fed Accord of 1951. The Fed regained some independence with the Accord of 1951. The Fed returned to its traditional pre-Depression) operating methods, and the procyclical bias in these procedures--along with pressures to monetize government debt--explains how the Fed stumbled into an inflationary policy in the 1960s. Depression-era changes--especially the departure from the gold standard in 1933 and the relaxation of an important constraint on deficit monetization in 1932--made this inflationary policy error possible, and contributed to the persistence of inflationary policy.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5963.

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Date of creation: Mar 1997
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Publication status: published as Calomiris, Charles W. and David C. Wheelock. "Was the Great Depression a Watershed for American Monetary Policy?" The Defining Moment: The Great Depression and the American Economy in the Twentieth Centruy. Edited by Michael D. Bordo, Claudia Goldin, and Eugene N. White, Chicago. The University of Chicago Press, 1998, pp. 23-65.
Handle: RePEc:nbr:nberwo:5963

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  1. Anna J. Schwartz, 1996. "From Obscurity to Notoriety: A Biography of the Exchange Stabilization Fund," NBER Working Papers 5699, National Bureau of Economic Research, Inc.
  2. Angela Redish, 1993. "Anchors Aweigh: The Transition from Commodity Money to Fiat Money in Western Economies," Canadian Journal of Economics, Canadian Economics Association, Canadian Economics Association, vol. 26(4), pages 777-95, November.
  3. Anderson, Gary M & Shughart, William F, II & Tollison, Robert D, 1990. " A Public Choice Theory of the Great Contraction: Further Evidence," Public Choice, Springer, Springer, vol. 67(3), pages 277-83, December.
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  6. Michael D. Bordo, 1992. "The Bretton Woods International Monetary System: An Historical Overview," NBER Working Papers 4033, National Bureau of Economic Research, Inc.
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  11. Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(4), pages 696-715, November.
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