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Money and Interest Rates in the United States during the Great Depression

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  • Peter F. Basile
  • John Landon-Lane
  • Hugh Rockoff

Abstract

This paper reexamines the debate over whether the United States fell into a liquidity trap in the 1930s. We first review the literature on the liquidity trap focusing on Keynes's discussion of "absolute liquidity preference" and the division that soon emerged between Keynes, who believed that a liquidity trap had not been reached, and the American Keynesians who believed that the United States had fallen into a liquidity trap. We then explore several interest rates that have been neglected in previous analyses: yields on corporate debt (from Aaa to junk), bank lending rates, and mortgage rates. In general, our results strengthen the case for believing that there was no liquidity trap in the 1930s in the sense of one that covered the full spectrum of interest rates. The small segment of time in which a liquidity trap might have been present, however, makes drawing firm conclusions risky.

Suggested Citation

  • Peter F. Basile & John Landon-Lane & Hugh Rockoff, 2010. "Money and Interest Rates in the United States during the Great Depression," NBER Working Papers 16204, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:16204
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    Cited by:

    1. Le Riche, Antoine & Magris, Francesco & Parent, Antoine, 2017. "Liquidity Trap and stability of Taylor rules," Mathematical Social Sciences, Elsevier, vol. 88(C), pages 16-27.
    2. Barens, Ingo, 2011. "To use the words of Keynes...": Olivier J. Blanchard on Keynes and the "Liquidity Trap," Darmstadt Discussion Papers in Economics 208, Darmstadt University of Technology, Department of Law and Economics.
    3. Michael D. Bordo, 2014. "Exiting from Low Interest Rates to Normality: An Historical Perspective," Economics Working Papers 14110, Hoover Institution, Stanford University.
    4. Peter F. Basile & Sung Won Kang & John Landon-Lane & Hugh Rockoff, 2015. "Towards a History of the Junk Bond Market, 1910-1955," Departmental Working Papers 201514, Rutgers University, Department of Economics.
    5. Geoff Tily, 2012. "Keynes’s monetary theory of interest," BIS Papers chapters, in: Bank for International Settlements (ed.), Threat of fiscal dominance?, volume 65, pages 51-81, Bank for International Settlements.

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    JEL classification:

    • N22 - Economic History - - Financial Markets and Institutions - - - U.S.; Canada: 1913-

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