Was expansionary monetary policy feasible during the great contraction? An examination of the gold standard constraint

Michael D. Bordo, Ehsan U. Choudhri, Anna J. Schwartz

Research output: Contribution to journalArticlepeer-review

45 Scopus citations

Abstract

The recent consensus view that the gold standard was the leading cause of the worldwide Great Depression 1929-1933 stems from the 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 article we contend that the second proposition applies only to small open economies with limited gold reserves. This was not the case for the United States, the largest country in the world, holding massive gold reserves. The United States 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.

Original languageEnglish (US)
Pages (from-to)1-28
Number of pages28
JournalExplorations in Economic History
Volume39
Issue number1
DOIs
StatePublished - 2002

All Science Journal Classification (ASJC) codes

  • History
  • Economics and Econometrics

Fingerprint Dive into the research topics of 'Was expansionary monetary policy feasible during the great contraction? An examination of the gold standard constraint'. Together they form a unique fingerprint.

Cite this