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Gold sterilization and the recession of 1937–19381

  • Douglas A. Irwin (a1)

The recession of 1937–8 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 article 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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I wish to thank Tim Guinnane, seminar participants at Yale, Dartmouth and Wesleyan, and two anonymous referees for their helpful comments.

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This list contains references from the content that can be linked to their source. For a full set of references and notes please see the PDF or HTML where available.

M. D. Bordo , E. U. Choudhri and A. J. Schwartz (1995). Could stable money have averted the Great Contraction?. Economic Inquiry, 33, pp. 484505.

T. F. Cargill and T. Mayer (2006). The effect of changes in reserve requirements during the 1930s: the evidence from nonmember banks. Journal of Economic History, 66, pp. 417–32.

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C. Hanes (2006). The liquidity trap and US interest rates in the 1930s. Journal of Money, Credit, and Banking, 38, pp. 163–94.

B.T. Mccallum (1990). Could a monetary base rule have prevented the Great Depression? Journal of Monetary Economics, 26, pp. 326.

F. Mishkin (1995). Symposium on the monetary transmission mechanism. Journal of Economic Perspectives, 9, pp. 310.

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L. G. Telser (2001–2). Higher member bank reserve ratios in 1936 and 1937 did not cause the relapse into depression. Journal of Post Keynesian Economics, 24, pp. 205–16.

P. Temin and B. WIGMORE (1990). End to one big deflation. Explorations in Economic History, 27, pp. 483502.

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Financial History Review
  • ISSN: 0968-5650
  • EISSN: 1474-0052
  • URL: /core/journals/financial-history-review
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