TY  - JOUR
AU  - Bordo,Michael D.
AU  - Choudhri,Ehsan U.
AU  - Schwartz,Anna J.
TI  - Was Expansionary Monetary Policy Feasible During the Great Contraction?  An Examination of the Gold Standard Constraint
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 7125
PY  - 1999
Y2  - May 1999
UR  - http://www.nber.org/papers/w7125
L1  - http://www.nber.org/papers/w7125.pdf
N1  - Author contact info:
Michael D. Bordo
Department of Economics
Rutgers University
New Jersey Hall
75 Hamilton Street
New Brunswick, NJ 08901
Tel: 732/822-7152
Fax: 732/932-7416
E-Mail: bordo@econ.rutgers.edu

Anna J. Schwartz
NBER
365 Fifth Ave, 5th Floor
New York, NY  10016
Tel: 212/817-7957
Fax: 212/817-1597
E-Mail: aschwartz@gc.cuny.edu
AB  - 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.
ER  -