The Journal of Economic History



ARTICLES

Was the Federal Reserve Constrained by the Gold Standard During the Great Depression? Evidence from the 1932 Open Market Purchase Program


CHANG-TAI HSIEH a1 and CHRISTINA D. ROMER a2
a1 Associate Professor of Economics, University of California, Berkeley, CA 94720, and Faculty Research Fellow, National Bureau of Economic Research, Cambridge, MA 02138. E-mail: chsieh@econ.berkeley.edu.
a2 Class of 1957 Professor of Economics, University of California, Berkeley, CA 94720, and Research Associate, National Bureau of Economic Research, Cambridge, MA 02138. E-mail: cromer@econ.berkeley.edu.

Abstract

Could the Federal Reserve have reversed the decline in the money supply during the Great Depression without causing a loss of confidence in the U.S. commitment to the gold standard? This article uses the $1 billion expansionary open market operation in 1932 as a crucial case study. Using forward exchange rates and interest rate differentials to measure devaluation expectations, we find virtually no evidence that the large monetary expansion led investors to believe that the United States would devalue. The financial press and Federal Reserve records also show scant evidence of expectations of devaluation or fear of speculative attack.



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