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

60 Pages Posted: 3 Feb 2001 Last revised: 20 Oct 2010

Chang-Tai Hsieh

University of Chicago - Booth School of Business; University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Christina D. Romer

University of California, Berkeley - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: February 2001

Abstract

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

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

Chang-Tai Hsieh (Contact Author)

University of Chicago - Booth School of Business ( email )

5807 S. Woodlawn Avenue
Chicago, IL 60637
United States

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christina D. Romer

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

University of California, Berkeley - Department of Economics ( email )

549 Evans Hall #3880
Berkeley, CA 94720-3880
United States
510-642-4317 (Phone)
510-642-6615 (Fax)

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