NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Gold Sterilization and the Recession of 1937-38

Douglas A. Irwin

NBER Working Paper No. 17595
Issued in November 2011
NBER Program(s):   DAE   ME

The Recession of 1937-38 is often cited as illustrating the dangers of withdrawing fiscal and monetary stimulus too early in a weak recovery. Yet our understanding of this severe downturn is incomplete: existing studies find that changes in fiscal policy were small in comparison to the magnitude of the downturn and that higher reserve requirements were not binding on banks. This paper focuses on a neglected change in monetary policy, the sterilization of gold inflows during 1937, and finds that it exerted a powerful contractionary force during this period. The transmission of this monetary shock to the real economy appears to have worked through lower asset (equity) prices and higher interest rates.

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This paper was revised on November 16, 2011

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Document Object Identifier (DOI): 10.3386/w17595

Published: Financial History Review / Volume 19 / Issue 03 / December 2012, pp 249 - 267 Copyright © European Association for Banking and Financial History e.V. 2012 DOI: http://dx.doi.org/10.1017/S0968565012000236 (About DOI), Published online: 31 October 2012

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