When the North Last Headed South: Revisiting the 1930s

39 Pages Posted: 19 Jul 2010

See all articles by Carmen M. Reinhart

Carmen M. Reinhart

Peter G. Peterson Institute for International Economics; National Bureau of Economic Research (NBER)

Vincent R. Reinhart

American Enterprise Institute (AEI)

Date Written: May 2010

Abstract

The U.S recession of 2007 to 2009 is unique in the post-World-War-II experience by the broad company it kept. Activity contracted around the world, with the advanced countries of the North experiencing declines in spending normally the purview of the developing economies of the South. The last time that the economies of the North similarly headed south was the 1930s. This paper examines the role of policy in fostering recovery in that decade. With nominal short-term interest rates already near zero, monetary policy in most countries took the unconventional step of delinking currencies from the gold standard. However, analysis of a sample that includes developing countries shows that this was not as universally effective as often claimed, perhaps because the exit from gold was uncoordinated in time, scale, and scope and, in many countries, failed to bring about a substantial depreciation against the dollar. Fiscal policy was also active in the 1930s - many countries sharply increased government spending - but were prone to reversals that may have undermined confidence. Countries that were more consistent in keeping spending high tended to recover more quickly.

Keywords: devaluation, external debt, fiscal policy, government debt, growth, history, inflation

JEL Classification: F3, H6, N1, N10

Suggested Citation

Reinhart, Carmen M. and Reinhart, Vincent R., When the North Last Headed South: Revisiting the 1930s (May 2010). CEPR Discussion Paper No. DP7835. Available at SSRN: https://ssrn.com/abstract=1640357

Carmen M. Reinhart (Contact Author)

Peter G. Peterson Institute for International Economics ( email )

1750 Massachusetts Avenue, NW
Washington, DC 20036
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Vincent R. Reinhart

American Enterprise Institute (AEI) ( email )

1150 17th Street, N.W.
Washington, DC 20036
United States

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