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Gold sterilization and the recession of 1937–19381

Published online by Cambridge University Press:  31 October 2012

Douglas A. Irwin
Douglas A. Irwin*
Affiliation:
Dartmouth College and NBER
*
douglas.irwin@dartmouth.edu
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Abstract

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.

Keywords

sterilizationrecession of 1937–8Federal Reservereserve requirements

JEL classification

E5: Monetary Policy, Central Banking, and the Supply of Money and Credit N13: Europe: Pre-1913 E63: Comparative or Joint Analysis of Fiscal and Monetary Policy • Stabilization • Treasury Policy E4: Money and Interest Rates
Type
The past mirror: notes, surveys, debates
Information
Financial History Review , Volume 19 , Issue 3 , December 2012 , pp. 249 - 267
Copyright
Copyright © European Association for Banking and Financial History e.V. 2012

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Footnotes

1

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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