Fiscal Inflation in 1933
Margaret Jacobson Eric M Leeper Bruce Preston
Indiana University Indiana University University of Melbourne
Next Steps for the Fiscal Theory of the Price Level
Becker Friedman Institute
The University of Chicago
April 1 2016
Any opinions findings and conclusions or recommendations expressed in this material are those of the
authors and do not necessarily reflect the views of the National Science Foundation
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 1 12
Introduction
Role of fiscal financing in the Great Depression
Was an unbacked fiscal expansion behind the 1933 recovery in the United States
Previous work emphasizes regime change associated with Roosevelt
Leaving the gold standard brought on a large depreciation in the dollar stimulating
exports and demand (Temin and Wigmore)
But France and the UK had similar devaluations without the boom What was
different about the US
We argue that leaving gold was a necessary condition
Converted effectively real government debt into nominal debt
Not sufficient because policy could have opted to aggressively target inflation and
adjust surpluses to stabilize debt =rArr tepid recovery
Instead monetary policy pegged the nominal interest rate
Contribution fiscal sustainability and fiscal stimulus need not be in conflict
Roosevelt convinced people that fiscal expansion would not be followed by fiscal
contraction
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 2 12
US Inflation
Abandon gold standard
Wholesale PriceInflation (right axis)
Consumer PriceInflation (left axis)
100
120
140
160
70
80
90
100
1930 1932 1934 1936 1938 1940
Index 1957-1959=100 Sources BEA amp BLS from NBER Macrohistory Database Eggertsson (2008)
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 3 12
US Output
Real GDP
Abandon gold standard08
09
10
11
12
1930 1932 1934 1936 1938 1940
IndustrialProduction
Abandon gold standard40
60
80
100
120
1930 1932 1934 1936 1938 1940
Real GDP in trillions of 2009 dollars Industrial production 2012=100 Sources Measuring Worth Federal Reserve Board
Unemployment Rate
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 4 12
Monetary Policy
In 1933 the Fed was not adjusting interest rates in response to the price level
Meltzer (2003) Fed followed Rielfer-Burgess doctrine and the gold standard
Friedman amp Schwartz (1963) recovery in the spring of 1933
ldquoowed nothing to monetary expansionrdquo
Pegged interest rates laid groundwork for unbacked fiscal expansion by pushing
all revaluation of government debt into the short run producing higher inflation
and lower real interest rates
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 5 12
US Short Term Interest Rates and Monetary Aggregates
Abandon gold standard
1 Year
3 Month0
1
2
3
4
1930 1932 1934 1936 1938 1940
Abandon gold standard
M2(left axis)
M1 (left axis)
MonetaryBase
(right axis)
5
10
15
20
20
30
40
50
60
1930 1932 1934 1936 1938 1940
Interest rates in percent Monetary aggregates in billions of dollars Sources Cecchetti (1998) Eggertsson (2008)
Friedman and Schwartz (1970) Banking and Monetary Statistics 1914-1941 (1943) More
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 6 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Introduction
Role of fiscal financing in the Great Depression
Was an unbacked fiscal expansion behind the 1933 recovery in the United States
Previous work emphasizes regime change associated with Roosevelt
Leaving the gold standard brought on a large depreciation in the dollar stimulating
exports and demand (Temin and Wigmore)
But France and the UK had similar devaluations without the boom What was
different about the US
We argue that leaving gold was a necessary condition
Converted effectively real government debt into nominal debt
Not sufficient because policy could have opted to aggressively target inflation and
adjust surpluses to stabilize debt =rArr tepid recovery
Instead monetary policy pegged the nominal interest rate
Contribution fiscal sustainability and fiscal stimulus need not be in conflict
Roosevelt convinced people that fiscal expansion would not be followed by fiscal
contraction
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 2 12
US Inflation
Abandon gold standard
Wholesale PriceInflation (right axis)
Consumer PriceInflation (left axis)
100
120
140
160
70
80
90
100
1930 1932 1934 1936 1938 1940
Index 1957-1959=100 Sources BEA amp BLS from NBER Macrohistory Database Eggertsson (2008)
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 3 12
US Output
Real GDP
Abandon gold standard08
09
10
11
12
1930 1932 1934 1936 1938 1940
IndustrialProduction
Abandon gold standard40
60
80
100
120
1930 1932 1934 1936 1938 1940
Real GDP in trillions of 2009 dollars Industrial production 2012=100 Sources Measuring Worth Federal Reserve Board
Unemployment Rate
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 4 12
Monetary Policy
In 1933 the Fed was not adjusting interest rates in response to the price level
Meltzer (2003) Fed followed Rielfer-Burgess doctrine and the gold standard
Friedman amp Schwartz (1963) recovery in the spring of 1933
ldquoowed nothing to monetary expansionrdquo
Pegged interest rates laid groundwork for unbacked fiscal expansion by pushing
all revaluation of government debt into the short run producing higher inflation
and lower real interest rates
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 5 12
US Short Term Interest Rates and Monetary Aggregates
Abandon gold standard
1 Year
3 Month0
1
2
3
4
1930 1932 1934 1936 1938 1940
Abandon gold standard
M2(left axis)
M1 (left axis)
MonetaryBase
(right axis)
5
10
15
20
20
30
40
50
60
1930 1932 1934 1936 1938 1940
Interest rates in percent Monetary aggregates in billions of dollars Sources Cecchetti (1998) Eggertsson (2008)
Friedman and Schwartz (1970) Banking and Monetary Statistics 1914-1941 (1943) More
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 6 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Inflation
Abandon gold standard
Wholesale PriceInflation (right axis)
Consumer PriceInflation (left axis)
100
120
140
160
70
80
90
100
1930 1932 1934 1936 1938 1940
Index 1957-1959=100 Sources BEA amp BLS from NBER Macrohistory Database Eggertsson (2008)
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 3 12
US Output
Real GDP
Abandon gold standard08
09
10
11
12
1930 1932 1934 1936 1938 1940
IndustrialProduction
Abandon gold standard40
60
80
100
120
1930 1932 1934 1936 1938 1940
Real GDP in trillions of 2009 dollars Industrial production 2012=100 Sources Measuring Worth Federal Reserve Board
Unemployment Rate
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 4 12
Monetary Policy
In 1933 the Fed was not adjusting interest rates in response to the price level
Meltzer (2003) Fed followed Rielfer-Burgess doctrine and the gold standard
Friedman amp Schwartz (1963) recovery in the spring of 1933
ldquoowed nothing to monetary expansionrdquo
Pegged interest rates laid groundwork for unbacked fiscal expansion by pushing
all revaluation of government debt into the short run producing higher inflation
and lower real interest rates
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 5 12
US Short Term Interest Rates and Monetary Aggregates
Abandon gold standard
1 Year
3 Month0
1
2
3
4
1930 1932 1934 1936 1938 1940
Abandon gold standard
M2(left axis)
M1 (left axis)
MonetaryBase
(right axis)
5
10
15
20
20
30
40
50
60
1930 1932 1934 1936 1938 1940
Interest rates in percent Monetary aggregates in billions of dollars Sources Cecchetti (1998) Eggertsson (2008)
Friedman and Schwartz (1970) Banking and Monetary Statistics 1914-1941 (1943) More
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 6 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Output
Real GDP
Abandon gold standard08
09
10
11
12
1930 1932 1934 1936 1938 1940
IndustrialProduction
Abandon gold standard40
60
80
100
120
1930 1932 1934 1936 1938 1940
Real GDP in trillions of 2009 dollars Industrial production 2012=100 Sources Measuring Worth Federal Reserve Board
Unemployment Rate
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 4 12
Monetary Policy
In 1933 the Fed was not adjusting interest rates in response to the price level
Meltzer (2003) Fed followed Rielfer-Burgess doctrine and the gold standard
Friedman amp Schwartz (1963) recovery in the spring of 1933
ldquoowed nothing to monetary expansionrdquo
Pegged interest rates laid groundwork for unbacked fiscal expansion by pushing
all revaluation of government debt into the short run producing higher inflation
and lower real interest rates
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 5 12
US Short Term Interest Rates and Monetary Aggregates
Abandon gold standard
1 Year
3 Month0
1
2
3
4
1930 1932 1934 1936 1938 1940
Abandon gold standard
M2(left axis)
M1 (left axis)
MonetaryBase
(right axis)
5
10
15
20
20
30
40
50
60
1930 1932 1934 1936 1938 1940
Interest rates in percent Monetary aggregates in billions of dollars Sources Cecchetti (1998) Eggertsson (2008)
Friedman and Schwartz (1970) Banking and Monetary Statistics 1914-1941 (1943) More
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 6 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Monetary Policy
In 1933 the Fed was not adjusting interest rates in response to the price level
Meltzer (2003) Fed followed Rielfer-Burgess doctrine and the gold standard
Friedman amp Schwartz (1963) recovery in the spring of 1933
ldquoowed nothing to monetary expansionrdquo
Pegged interest rates laid groundwork for unbacked fiscal expansion by pushing
all revaluation of government debt into the short run producing higher inflation
and lower real interest rates
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 5 12
US Short Term Interest Rates and Monetary Aggregates
Abandon gold standard
1 Year
3 Month0
1
2
3
4
1930 1932 1934 1936 1938 1940
Abandon gold standard
M2(left axis)
M1 (left axis)
MonetaryBase
(right axis)
5
10
15
20
20
30
40
50
60
1930 1932 1934 1936 1938 1940
Interest rates in percent Monetary aggregates in billions of dollars Sources Cecchetti (1998) Eggertsson (2008)
Friedman and Schwartz (1970) Banking and Monetary Statistics 1914-1941 (1943) More
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 6 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates and Monetary Aggregates
Abandon gold standard
1 Year
3 Month0
1
2
3
4
1930 1932 1934 1936 1938 1940
Abandon gold standard
M2(left axis)
M1 (left axis)
MonetaryBase
(right axis)
5
10
15
20
20
30
40
50
60
1930 1932 1934 1936 1938 1940
Interest rates in percent Monetary aggregates in billions of dollars Sources Cecchetti (1998) Eggertsson (2008)
Friedman and Schwartz (1970) Banking and Monetary Statistics 1914-1941 (1943) More
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 6 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Fiscal Policy
Unbacked fiscal expansion expansion in nominal government debt not associated
with a belief that the present value of primary surpluses will rise by an amount
equal to the value of the increase in debt evaluated at the pre-expansion prices
Roosevelt touted the evils of deficits
Balanced the ldquoregularrdquo budget
Ran deficits on ldquoemergency budgetrdquo
Vague promises to finance emergency spending in the future
Kept focus on the need to raise prices
Deficits were widely perceived as inflationary particularly by bankers
Fiscal rule surplus in normal times deficits in emergencies to re-inflate
Roosevelt seemed committed to running budget deficits financed by nominal debt
issuance until the price level rose
Nominal debt growth without the expectation of higher taxes induces
substitution out of bonds and into goods raising aggregate demand
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 7 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Unbacked Fiscal Expansion
Primary surplusto real GDP
Abandon gold standard-06
-04
-02
00
02
1928 1930 1932 1934 1936 1938 1940
Abandon gold standardNominal
market valueto par value
Realmarket valueto par value
090
100
110
120
130
1930 1932 1934 1936
Primary surplus to real GDP in percent CPI 100=1926 Sources various Annual Reports of the Treasury various
monthly Treasury Bulletins NBER Macrohistory Database CRSP Measuring Worth
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 8 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Leaving the Gold Standard
Lesson for today policymakers in the US could have chosen not to reinflate
Many countries today choose not to reinflate as did France and the UK in the 1930s
Departing gold was ldquoregime changerdquo rather than shift in ldquopolicy dogmasrdquo from balanced
budgets to a belief in deficits (contrast to Eggertsson)
Preliminary theoretical results of price level determination under the gold standard hinge on
how the gold cover ratio is modeled
Gold cover ratio statutory requirement that every Federal Reserve bank maintain 35 gold
or lawful money against deposits and 40 of gold against FRS notes in circulation
Fixed gold cover ratio
Government cannot vary the money supply independently of the monetary gold stock
With the price of gold pegged the price level depends on all shocks particularly
shocks to gold supply and demand
Fiscal and monetary policy must be passive
Gold cover ratio as a function of endogenous variables
Possible for either monetary or fiscal policy to determine the price level
May require fluctuations in the cover ratio unlike those observed Gold Cover Ratio
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 9 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))(PMt BM
t (1minus πt) + St minus (1 + rtminus1)PMtminus1B
Mtminus1
)PM
t BMt
PMt BM
t Market value of US debt
πt Inflation forecast error (πt minus πtminus1) where πt is the log difference of the CPI
St Primary surplus
rt One-year interest rate on Treasuries
Correlation of Surprise Gains and Losses with Components
Gold standard After gold standard
21929-31933 41933-121936
PMt BM
t 03237 01726
πt -04175 -04093
St 00953 03610
rt -03597 -00780
(PMt BM
t Pt)Bt 03317 -01154
St(PMt BM
t Pt) 00975 04085
Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly Treasury Bulletins NBER
Macrohistory database CRSP Graph
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 10 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Calculation of Revaluation Effects
Par value of all outstanding debt at t minus 1 Btminus1 =suminfin
j=0
sumNi=1 Bitminus1(t + j)
Where i = 1 N are the securities that mature in t + j
And j = 0 infin are all possible maturities in month t minus 1
Let
microjt equivBtminus1(t + j)
Btminus1=
sumNi=1 Bitminus1(t + j)
Btminus1 where
sumj
microjt = 1
Let the market value of debt be defined as
PMt BM
t =infinsumj=0
Bt(t + j)Nminus1Nsumi=1
Qit(t + j)microjt
Where PMt equiv
suminfinj=0 N
minus1sumNi=1 Qit(t + j)microjt
Let weighted real returns from holding the portfolio of zero coupon bonds be given as
rMt equivRMt
πt=infinsumj=0
Qt(t + j)Pt
Qtminus1(t + j)Ptminus1
Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Then the surprise component in real returns on the bond portfolio can be given as
ηMt equiv rMt minus Etminus1r
Mt =
sum(Qt(t + j)Pt
Qtminus1(t + j)Ptminus1minus 1
)Qtminus1(t + j)Btminus1(t + j)
PMtminus1B
Mtminus1
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 11 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
ConclusionQuestions
Can an unbacked fiscal expansion of the size engineered by Roosevelt quantitatively account
for the increase in the price level and economic recovery in the spring of 1933
Going off gold allowed fiscal policy to pursue goals other than debt stabilization and allowed
monetary and fiscal policy to determine the price level
Other equally plausible alternative explanations
Departure from the gold standard allowed inflationary fiscal policies
How important is modeling intrsquol gold flows for the unbacked fiscal expansion story
What determined gold cover ratio policies
Did Rooseveltrsquos backtracking on fiscal expansion contribute to the recession of
1937-1938
Contrasting the US to the UK and France
Weaker recoveries because they did not take full advantage of their policy latitude
once departed from the gold standard
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
References
[1] Eggertsson Gauti 2008 ldquoGreat Expectations and the End of the Depressionrdquo American Economic Review
984 1476-1516
[2] Friedman Milton and Anna Schwartz 1963 A Monetary History of the United States Princeton NJ
Princeton University Press
[3] Johnston Louis and Samuel H Williamson Measuring Worth
[4] Meltzer Alan 2003 A History of the Federal Reserve Volume 1 1913-1951 the University of Chicago
Press
[5] Sargent Thomas J 1983 ldquoThe Ends of Four Big Inflationsrdquo in Inflation Causes and Effects ed Robert
Hall 41-97 Chicago Chicago University Press
[6] Stein Herbert 1969 The Fiscal Revolution in America The University of Chicago Press
[7] Temin Peter and Barrie A Wigmore 1990 The End of one Big Deflation Explorations in Economic
History volume 27 pages 483-502
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Unemployment Rate
Abandon gold standard
00
50
100
150
200
250
1930 1932 1934 1936 1938 1940
Source NBER Macrohistory database Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US Short Term Interest Rates
US abandons gold
1 Year
3 Month
UKabandons
gold
Dollarpound exchange rate(right axis)
30
35
40
45
50
00
10
20
30
40
1930 1932 1934 1936 1938 1940
Sources Cecchetti (1998) Eggertsson (2008) and Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
US and UK Recoveries
US leaves gold
UK Inflation
US Inflation
UKleavesgold
-200
-150
-100
-50
00
50
100
150
200
1930 1932 1934 1936 1938 1940
US leaves gold
UKleavesgold
Dollarsterlingexchange rate
30
35
40
45
50
1930 1932 1934 1936 1938 1940
Annual growth rate in percent Sources UK Office of National Statistics and OrsquoDonoghue et al (2004) and BEA amp BLS from NBER
Macrohistory Database Eggertsson (2008) Banking and Monetary Statistics 1914-1941 (1943) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Gold Cover Ratio
Abandon gold standard
40 minimum
02
04
06
08
10
12
14
16
18
20
1930 1932 1934 1936 1938 1940 Gold reserves of federal reserve banks to currency in circulation Sources NBER Macrohistory database Annual
Reports of the Federal Reserve Board and Federal Reserve Bulletins Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Rooseveltrsquos ldquoBalancedrdquo Budget
Fiscal Year
1934 1935
Total receipts $3116 $3800
Total expenditures (excluding debt retirement) $6745 $6802
Regular $3084 $3733
Recovery amp Relief $3661 $3002
Net deficit (total expenditures) $3629 $3002
Millions of dollars Source Stein (1969) Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12
Surprise Gains and Losses on Debt (Sims (2013))
Abandon gold standard-010
-005
000
005
010
1930 1932 1934 1936 Proportion of market value Sources BLS Eggertsson(2008) Annual Reports of the Treasury various monthly
Treasury Bulletins NBER Macrohistory database CRSP Return
Jacobson Leeper Preston (2016)
Fiscal Inflation in 1933 12 12