60 Pages Posted: 3 Feb 2001 Last revised: 20 Oct 2010
Date Written: February 2001
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.
Suggested Citation: Suggested Citation
Hsieh, Chang-Tai and Romer, Christina D., Was the Federal Reserve Fettered? Devaluation Expectations in the 1932 Monetary Expansion (February 2001). NBER Working Paper No. w8113. Available at SSRN: https://ssrn.com/abstract=258511