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Was Expansionary Monetary Policy Feasible During the Great Contraction? An Examination of the Gold Standard Constraint

  • Michael D. Bordo
  • Ehsan U. Choudhri
  • Anna J. Schwartz

The recent consensus view, that the gold standard was the leading cause of the worldwide Great Depression 1929-33, stems from two propositions: (1) Under the gold standard, deflationary shocks were transmitted between countries and, (2) for most countries, continued adherence to gold prevented monetary authorities from offsetting banking panics and blocked their recoveries. In this paper we contend that the second proposition applies only to small open economies with limited gold reserves. This was not the case for the US, the largest country in the world, holding massive gold reserves. The US was not constrained from using expansionary policy to offset banking panics, deflation, and declining economic activity. Simulations, based on a model of a large open economy, indicate that expansionary open market operations by the Federal Reserve at two critical junctures (October 1930 to February 1931; September 1931 through January 1932) would have been successful in averting the banking panics that occurred, without endangering convertibility. Indeed had expansionary open market purchases been conducted in 1930, the contraction would not have led to the international crises that followed.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7125.

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Date of creation: May 1999
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Publication status: published as Bordo, Michael D. & Choudhri, Ehsan U. & Schwartz, Anna J., 2002. "Was Expansionary Monetary Policy Feasible during the Great Contraction? An Examination of the Gold Standard Constraint," Explorations in Economic History, Elsevier, vol. 39(1), pages 1-28, January.
Handle: RePEc:nbr:nberwo:7125
Note: ME
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  1. Blanco, Herminio & Garber, Peter M, 1986. "Recurrent Devaluation and Speculative Attacks on the Mexican Peso," Journal of Political Economy, University of Chicago Press, vol. 94(1), pages 148-66, February.
  2. Robert P. Flood & Nancy P. Marion, 1996. "Speculative Attacks: Fundamentals and Self-Fulfilling Prophecies," NBER Working Papers 5789, National Bureau of Economic Research, Inc.
  3. Bordo, Michael D & Eichengreen, Barry, 1997. "Implications of the Great Depression for the Development of the International Monetary System," CEPR Discussion Papers 1680, C.E.P.R. Discussion Papers.
  4. Choudhri, Ehsan U & Kochin, Levis A, 1980. "The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 12(4), pages 565-74, November.
  5. Flood, Robert P. & Garber, Peter M., 1984. "Collapsing exchange-rate regimes : Some linear examples," Journal of International Economics, Elsevier, vol. 17(1-2), pages 1-13, August.
  6. Meltzer, Allan & Goodhart, C.A.E., 2005. "A History Of The Federal Reserve," Macroeconomic Dynamics, Cambridge University Press, vol. 9(02), pages 267-275, April.
  7. Barry Eichengreen & Peter Temin, 1997. "The Gold Standard and the Great Depression," NBER Working Papers 6060, National Bureau of Economic Research, Inc.
  8. Christina D. Romer, 1993. "The Nation in Depression," Journal of Economic Perspectives, American Economic Association, vol. 7(2), pages 19-39, Spring.
  9. Bernanke, Ben S, 1995. "The Macroeconomics of the Great Depression: A Comparative Approach," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 27(1), pages 1-28, February.
  10. Ben Bemanke & Harold James, 1991. "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison," NBER Chapters, in: Financial Markets and Financial Crises, pages 33-68 National Bureau of Economic Research, Inc.
  11. Michael D. Bordo & Barry Eichengreen, 1998. "The Rise and Fall of a Barbarous Relic: The Role of Gold in the International Monetary SYstem," NBER Working Papers 6436, National Bureau of Economic Research, Inc.
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