Financial History Review

The past mirror: notes, surveys, debates

Gold sterilization and the recession of 1937–1938   1

Douglas A. Irwin 

Dartmouth College and NBER


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.

(Received July 07 2012)

(Revised September 19 2012)

(Accepted September 28 2012)


  • sterilization;
  • recession of 1937–8;
  • Federal Reserve;
  • reserve requirements

JEL classification

  • E4;
  • E5;
  • E63;
  • N13


1   I wish to thank Tim Guinnane, seminar participants at Yale, Dartmouth and Wesleyan, and two anonymous referees for their helpful comments.