Finance and Economics Discussion Series (FEDS)
May 2023 (Revised February 2024)
Recovery of 1933
Margaret M. Jacobson, Eric M. Leeper, and Bruce Preston
Abstract:
When Roosevelt abandoned the gold standard in April 1933, he converted government debt from a tax-backed claim to gold to a claim to dollars, opening the door to unbacked fiscal expansion. Roosevelt followed a state-contingent fiscal rule that ran nominal-debt-financed primary deficits until the price level rose and economic activity recovered. Theory suggests that government spending multipliers can be substantially larger when fiscal expansions are unbacked than when they are tax-backed. VAR estimates using data on "emergency" unbacked spending and "ordinary" backed spending confirm this prediction and find that primary deficits made quantitatively important contributions to raising both the price level and real GNP after 1933. VAR evidence does not support the conventional monetary explanation that gold revaluation and gold inflows, which raised the monetary base, drove the recovery independently of fiscal actions.
Keywords: Great Depression; monetary-fiscal interactions; monetary policy; fiscal policy; government debt
DOI: https://doi.org/10.17016/FEDS.2023.032r1
PDF: Full Paper
Original Paper: PDF
Disclaimer: The economic research that is linked from this page represents the views of the authors and does not indicate concurrence either by other members of the Board's staff or by the Board of Governors. The economic research and their conclusions are often preliminary and are circulated to stimulate discussion and critical comment. The Board values having a staff that conducts research on a wide range of economic topics and that explores a diverse array of perspectives on those topics. The resulting conversations in academia, the economic policy community, and the broader public are important to sharpening our collective thinking.