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

49 Pages Posted: 30 Jul 1999  

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

Date Written: May 1999

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.

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: https://ssrn.com/abstract=165328

Michael D. Bordo (Contact Author)

Harvard University - Department of Economics ( email )

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Cambridge, MA 02138
United States

National Bureau of Economic Research (NBER) ( email )

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Ehsan U. Choudhri

Carleton University - Department of Economics ( email )

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Ottawa, Ontario
Canada

Anna J. Schwartz

City University of New York (CUNY) ( email )

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New York, NY 10010
United States

National Bureau of Economic Research (NBER) - NY Office

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New York, NY 10016-4309
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212-817-7957 (Phone)

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