Was the Federal Reserve Fettered? Devaluation Expectations in the 1932 Monetary Expansion

Chang-Tai Hsieh and Christina Romer

No 8113, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: A key question about the Great Depression is whether expansionary monetary policy in the United States would have led to a loss of confidence in the U. S. commitment to the gold standard. This paper uses the $1 billion expansionary open market operation undertaken in the spring of 1932 as a crucial case study of the link between monetary expansion and expectations of devaluation. Data on forward exchange rates are used to measure expectations of devaluation during this episode. We find little evidence that the large monetary expansion led investors to believe that the United States would devalue. The financial press and the records of the Federal Reserve also show little evidence of expectations of devaluation or fear of a speculative attack. We find that a flawed model of the effects of monetary policy and conflict among the twelve Federal Reserve banks, rather than concern about the gold standard, led the Federal Reserve to suspend the expansionary policy in the summer of 1932.

JEL-codes: E5 N1 (search for similar items in EconPapers)
Date: 2001-02
New Economics Papers: this item is included in nep-ifn and nep-mon
Note: DAE EFG ME
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Published as Hsieh, Chang-Tai and Christina D. Romer. "Was The Federal Reserve Constrained By The Gold Standard During The Great Depression? Evidence From The 1932 Open Market Purchase Program," Journal of Economic History, 2006, v66(1,Mar), 140-176.

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