Recovery of 1933

Margaret Jacobson, Eric Leeper and Bruce Preston

No 2023-032, Finance and Economics Discussion Series from Board of Governors of the Federal Reserve System (U.S.)

Abstract: When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this prediction and find that primary deficits made quantitatively important contributions to raising both the price level and real GNP after 1933. VAR evidence does not support the conventional monetary explanation that gold revaluation and gold inflows, which raised the monetary base, drove the recovery independently of fiscal actions.

Keywords: Great depression; Monetary-fiscal interactions; Monetary policy; Fiscal policy; Government debt (search for similar items in EconPapers)
JEL-codes: E31 E52 E62 E63 N12 (search for similar items in EconPapers)
Pages: 85 p.
Date: 2023-05-12
New Economics Papers: this item is included in nep-ban, nep-cba and nep-his
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https://www.federalreserve.gov/econres/feds/files/2023032pap.pdf (application/pdf)

Related works:
Working Paper: Recovery of 1933 (2019)
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Persistent link: https://EconPapers.repec.org/RePEc:fip:fedgfe:2023-32

DOI: 10.17016/FEDS.2023.032

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