Eggertsson “ Commodity Prices and the Mistake of 1937”
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Eggertsson “Commodity Prices and the Mistake of 1937” Vaughan / Economics 639 1
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Eggertsson “ Commodity Prices and the Mistake of 1937”. Vaughan / Economics 639. Mistake of 1937. Fed d ecision to double reserve requirements in three stages from August 1936 to May 1937. Rationale: Unprecedented build up of “excess” reserves in banking system. - PowerPoint PPT Presentation
Transcript of Eggertsson “ Commodity Prices and the Mistake of 1937”
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Eggertsson“Commodity Prices and the Mistake of 1937”
Vaughan / Economics 639
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Mistake of 1937• Fed decision to double reserve requirements in three stages from August 1936 to
May 1937.
• Rationale:– Unprecedented build up of “excess” reserves in banking system.
– Excess reserves could lead to lending explosion and (i) inflation and (ii) another asset bubble.
– Rapidly rising commodity prices were thought to show inflation was coming.
• Misunderstanding about Excess Reserves:– Banks held excess reserves not just because interest rates were low and loan demand was
wea, but to self-insure against “run risk.”
• Result: “Roosevelt Recession”– Banks scrambled to build excess reserves back up (causing money multiplier and money
stock to fall).
– Serious recession ensued (May 1937 to June 1938)↓ M2 = 2.4% (mean %Δ in post-1959 recessions = ↑7.3%)↓ Industrial production = 31.8% (mean %Δ in post-WWII recessions = ↓8.4%) ↑ Unemployment rose to 19%
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Commodity Prices MisleadingIncreases Driven by Supply Factors, Not Inflation
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Inflation not a Problem
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Fallout from “Mistake of 1937”
