Causes of the Recession

Currie, Lauchlin

doi:10.1215/00182702-12-3-316

“…Recently, the Friedman and Schwartz view of the origins of the recession of 1937–38 has been challenged. Currie (), Calomiris and Wheelock (), Calomiris, Mason, and Wheelock (), and Irwin () argue that the increase in reserve requirements did not change the lending behavior of member banks because member banks held excess reserves sufficient to meet the new requirements.…”

Section: Resultsmentioning

confidence: 99%

Did the Reserve Requirement Increases of 1936–37 Reduce Bank Lending? Evidence from a Quasi‐Experiment

Park¹,

Horn²

2015

J of Money Credit Banking

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We analyze the impact of contractionary monetary policy through increases in reserve requirements on bank lending. We compare the lending behavior of banks that were subject to the requirement increases in 1936-37, Federal Reserve member banks, to a group of banks that were not subject to the reserve increase, Federal Reserve nonmember banks. After implementing the difference-in-difference estimators, we find that the increases in reserve requirements did not create financing constraints for member banks and lead them to reduce lending. Therefore, the actions of the Federal Reserve concerning the required reserve ratios cannot be blamed for instigating the economic downturn of 1937-38.

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“…The change, once it has begun, will feed on itself. ... 192219241926192819301932193419361938 Notes: Weekly data. The solid line denotes the yield on new issues of 3-month Treasury bills or equivalents.…”

Section: Discussionmentioning

confidence: 99%

“…Following the actions announced by the President on April 14, excess reserves once again rose to high levels and, with additional gold inflows, they continued to rise (Figure 4 In addition to monetary policy, several changes in the stance of fiscal policy occured during the mid-1930s. Following the lead of analysis by the Federal Reserve (such as the study by Currie (1980Currie ( , [1938 In summary, the historical evidence suggests that the U.S. economy was not in a liquidity trap during this episode and that characterizations of monetary policy as ineffective during this period are misleading, despite the fact that short-term interest rates were close to zero for a long time. During the recovery from the Great Depression, additional monetary expansion was not permitted to occur for a time, not because it was not possible, but because the Federal Reserve believed that such expansion was not warranted.…”

Section: Mr Williams Had Stated That He Felt the Business And Economimentioning

confidence: 99%

Monetary policy in deflation: the liquidity trap in history and practice

Orphanides

¹

2004

The North American Journal of Economics and Finance

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The experience of the U.S. economy during the mid-1930s, when short-term nominal interest rates were continuously close to zero, is sometimes taken as evidence that monetary policy was ineffective and the economy was in a "liquidity trap." Close examination of the historical policy record for the period indicates that the evidence does not support such assertions. The incomplete and erratic recovery from the Great Depression can be traced to a failure to pursue consistently expansionary policy resulting from an incorrect understanding of monetary policy in an environment of very low short-term nominal interest rates. Commonalities with the Japanese experience during the late 1990s, and the inadequacy of short-term interest rates as indicators of the stance of monetary policy are discussed and a robust operating procedure for implementing monetary policy in a low interest rate environment by adjusting the maturity of targeted interest rate instruments is described.

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“…The change, once it has begun, will feed on itself. ... 192219241926192819301932193419361938 Notes: Weekly data. The solid line denotes the yield on new issues of 3-month Treasury bills or equivalents.…”

Section: Discussionmentioning

confidence: 99%

Monetary Policy in Deflation: The Liquidity Trap in History and Practice

Orphanides

¹

2003

FEDS

15

0

View full text Add to dashboard Cite

The experience of the U.S. economy during the mid-1930s, when short-term nominal interest rates were continuously close to zero, is sometimes taken as evidence that monetary policy was ineffective and the economy was in a "liquidity trap." Close examination of the historical policy record for the period indicates that the evidence does not support such assertions. The incomplete and erratic recovery from the Great Depression can be traced to a failure to pursue consistently expansionary policy resulting from an incorrect understanding of monetary policy in an environment of very low short-term nominal interest rates. Commonalities with the Japanese experience during the late 1990s, and the inadequacy of short-term interest rates as indicators of the stance of monetary policy are discussed and a robust operating procedure for implementing monetary policy in a low interest rate environment by adjusting the maturity of targeted interest rate instruments is described.

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Causes of the Recession

Cited by 14 publications

References 0 publications

Did the Reserve Requirement Increases of 1936–37 Reduce Bank Lending? Evidence from a Quasi‐Experiment

Did the Reserve Requirement Increases of 1936–37 Reduce Bank Lending? Evidence from a Quasi‐Experiment

Monetary policy in deflation: the liquidity trap in history and practice

Monetary Policy in Deflation: The Liquidity Trap in History and Practice

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