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Was the Federal Reserve Fettered? Devaluation Expectations in the 1932 Monetary Expansion

  • Chang-Tai Hsieh
  • Christina D. Romer

A key question about the Great Depression is whether expansionary monetary policy in the United States would have led to a loss of confidence in the U. S. commitment to the gold standard. This paper uses the $1 billion expansionary open market operation undertaken in the spring of 1932 as a crucial case study of the link between monetary expansion and expectations of devaluation. Data on forward exchange rates are used to measure expectations of devaluation during this episode. We find little evidence that the large monetary expansion led investors to believe that the United States would devalue. The financial press and the records of the Federal Reserve also show little evidence of expectations of devaluation or fear of a speculative attack. We find that a flawed model of the effects of monetary policy and conflict among the twelve Federal Reserve banks, rather than concern about the gold standard, led the Federal Reserve to suspend the expansionary policy in the summer of 1932.

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File URL: http://www.nber.org/papers/w8113.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 8113.

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Date of creation: Feb 2001
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Publication status: published as Hsieh, Chang-Tai and Christina D. Romer. "Was The Federal Reserve Constrained By The Gold Standard During The Great Depression? Evidence From The 1932 Open Market Purchase Program," Journal of Economic History, 2006, v66(1,Mar), 140-176.
Handle: RePEc:nbr:nberwo:8113
Note: DAE EFG ME
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  1. 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.
  2. Rose, A.K. & Svensson, L.E.O., 1993. "European Exchange Rate Credibility Before the Fall," Papers 542, Stockholm - International Economic Studies.
  3. Krugman, Paul, 1979. "A Model of Balance-of-Payments Crises," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 11(3), pages 311-25, August.
  4. Wheelock, David C, 1990. "Member Bank Borrowing and the Fed's Contractionary Monetary Policy during the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, vol. 22(4), pages 409-26, November.
  5. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, edition 1, volume 1, number 0262700441, June.
  6. Romer, Christina D., 1992. "What Ended the Great Depression?," The Journal of Economic History, Cambridge University Press, vol. 52(04), pages 757-784, December.
  7. 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.
  8. Michael D. Bordo & Ehsan U. Choudhri & Anna J. Schwartz, 1999. "Was Expansionary Monetary Policy Feasible During the Great Contraction? An Examination of the Gold Standard Constraint," NBER Working Papers 7125, National Bureau of Economic Research, Inc.
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