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

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

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

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

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

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

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

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

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

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

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

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

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

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