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Change of Monetary Regime, Contracts, and Prices: Lessons from the Great Depression, 1932-1935

Sebastian Edwards

NBER Working Paper No. 26085
Issued in July 2019
NBER Program(s):Program on the Development of the American Economy, International Finance and Macroeconomics Program, International Trade and Investment Program

In this paper I analyze the process leading to the abandonment of the gold standard in the U.S. in1933, and the devaluation of the dollar in 1934. I argue that most changes of monetary regime have an impact on contracts. In this specific case, contracts that were written in terms of gold, or “gold equivalent,” were rewritten in paper dollars. Congress did this on June 5 1933, when it abrogated the “gold clause” retroactively. The Supreme Court validated the move in February 1935. The result was a very large transfer of wealth from creditors to debtors. I use daily data on commodity prices to investigate the extent to which these policies contributed to ending deflation. I find that commodity prices reacted strongly to the announcement of policy changes, and to legal procedures involving contracts. These results are consistent with the “change in regime” hypothesis of Sargent.

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Document Object Identifier (DOI): 10.3386/w26085

 
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