Was the Great Depression a Watershed for American Monetary Policy?
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.
|Date of creation:||Mar 1997|
|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.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Epstein, Gerald & Ferguson, Thomas, 1984. "Monetary Policy, Loan Liquidation, and Industrial Conflict: The Federal Reserve and the Open Market Operations of 1932," The Journal of Economic History, Cambridge University Press, vol. 44(04), pages 957-983, December.
- V. V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996.
"Expectation Traps and Discretion,"
NBER Working Papers
5541, National Bureau of Economic Research, Inc.
- V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectations, traps and discretion," Working Papers in Applied Economic Theory 96-04, Federal Reserve Bank of San Francisco.
- V.V. Chari & Lawrence J. Christiano & Martin Eichenbaum, 1996. "Expectation traps and discretion," Working Paper Series, Macroeconomic Issues WP-96-5, Federal Reserve Bank of Chicago.
- Wheelock, David C., 1989. "The Strategy and Consistency of Federal Reserve Monetary Policy, 1919–1933," The Journal of Economic History, Cambridge University Press, vol. 49(02), pages 459-461, June.
- Lauchlin B. Currie, 1980. "Causes of the Recession," History of Political Economy, Duke University Press, vol. 12(3), pages 316-335, Fall.
- Michael D. Bordo, 1992.
"The Bretton Woods International Monetary System: An Historical Overview,"
NBER Working Papers
4033, National Bureau of Economic Research, Inc.
- Michael D. Bordo, 1993. "The Bretton Woods International Monetary System: A Historical Overview," NBER Chapters, in: A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, pages 3-108 National Bureau of Economic Research, Inc.
- Angela Redish, 1993. "Anchors Aweigh: The Transition from Commodity Money to Fiat Money in Western Economies," Canadian Journal of Economics, Canadian Economics Association, vol. 26(4), pages 777-795, November.
- Gary Anderson & William Shughart & Robert Tollison, 1988. "A public choice theory of the great contraction," Public Choice, Springer, vol. 59(1), pages 3-23, October.
- Lucas, Robert E, Jr, 1980. "Methods and Problems in Business Cycle Theory," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 696-715, November.
- Anderson, Gary M & Shughart, William F, II & Tollison, Robert D, 1990. "A Public Choice Theory of the Great Contraction: Further Evidence," Public Choice, Springer, vol. 67(3), pages 277-283, December.
- Bordo Michael D. & Kydland Finn E., 1995. "The Gold Standard As a Rule: An Essay in Exploration," Explorations in Economic History, Elsevier, vol. 32(4), pages 423-464, October.
- Karl Brunner & Allan H. Meltzer, 1968. "What Did We Learn from the Monetary Experience of the United States in the Great Depression?," Canadian Journal of Economics, Canadian Economics Association, vol. 1(2), pages 334-348, May.
- Wheelock,David C., 2004.
"The Strategy and Consistency of Federal Reserve Monetary Policy, 1924â€“1933,"
Cambridge University Press, number 9780521531399, December.
- Wheelock,David C., 1991. "The Strategy and Consistency of Federal Reserve Monetary Policy, 1924â€“1933," Cambridge Books, Cambridge University Press, number 9780521391559, December.
- Schwartz, Anna J, 1997.
"From Obscurity to Notoriety: A Biography of the Exchange Stabilization Fund,"
Journal of Money, Credit and Banking,
Blackwell Publishing, vol. 29(2), pages 135-153, May.
- 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.
- Caskey, John P, 1985. "Modeling the Formation of Price Expectations: A Bayesian Approach," American Economic Review, American Economic Association, vol. 75(4), pages 768-776, September.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:5963. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.