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http://ssrn.com/abstract=165328
 
 

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


Michael D. Bordo


Harvard University - Department of Economics; National Bureau of Economic Research (NBER)

Ehsan U. Choudhri


Carleton University - Department of Economics

Anna J. Schwartz


City University of New York (CUNY); National Bureau of Economic Research (NBER) - NY Office

May 1999

NBER Working Paper No. w7125

Abstract:     
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.

Number of Pages in PDF File: 49

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Date posted: July 30, 1999  

Suggested Citation

Bordo, Michael D. and Choudhri, Ehsan U. and Schwartz, Anna J., Was Expansionary Monetary Policy Feasible During the Great Contraction? an Examination of the Gold Standard Constraint (May 1999). NBER Working Paper No. w7125. Available at SSRN: http://ssrn.com/abstract=165328

Contact Information

Michael D. Bordo (Contact Author)
Harvard University - Department of Economics ( email )
Littauer Center
Cambridge, MA 02138
United States
National Bureau of Economic Research (NBER)
1050 Massachusetts Avenue
Cambridge, MA 02138
United States
Ehsan U. Choudhri
Carleton University - Department of Economics ( email )
1125 Colonel By Drive
Ottawa, Ontario
Canada
Anna J. Schwartz
City University of New York (CUNY) ( email )
17 Lexington Avenue
New York, NY 10010
United States
National Bureau of Economic Research (NBER) - NY Office
365 Fifth Avenue, 5th Floor
New York, NY 10016-4309
United States
212-817-7957 (Phone)
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