Eggertsson commodity prices and the mistake of 1937
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Eggertsson “ Commodity Prices and the Mistake of 1937” PowerPoint PPT Presentation


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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.

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Eggertsson “ Commodity Prices and the Mistake of 1937”

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Eggertsson commodity prices and the mistake of 1937

Eggertsson“Commodity Prices and the Mistake of 1937”

Vaughan / Economics 639


Mistake of 1937

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%


Commodity prices misleading increases driven by supply factors not inflation

Commodity Prices MisleadingIncreases Driven by Supply Factors, Not Inflation


Inflation not a problem

Inflation not a Problem


Fallout from mistake of 1937

Fallout from “Mistake of 1937”


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