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The London Monetary and Economic Conference of 1933 and the End of the Great Depression

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Abstract

In this paper I analyze the London Monetary and Economic Conference of 1933, an almost forgotten episode in U.S. monetary history. I study how the Conference shaped dollar policy during the second half of 1933 and early 1934. I use daily data to investigate the way in which the Conference and related policies associated to the gold standard affected commodity prices, bond prices, and the stock market. My results show that the Conference itself did not impact commodity prices or the stock market. However, it had a small effect on bond prices. I do find that the events associated with the abandonment of the gold standard impacted prices in a significant way, even before the actual monetary and currency channels were at work. These results are consistent with the “change in regime” hypothesis of Sargent (1983).

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Notes

  1. On the economics views of the senior members of the “Brains Trust,” see Edwards (2017a).

  2. For an account of these events by one of FDR’s closest and most influential advisers, see Moley (1939, 1966).

  3. See Pasvolsky (1933).

  4. Roosevelt (1938), Vol. 2. P. 264–265.

  5. For recent analyses of the gold buying program see Sumner (2015) and Edwards (2017b).

  6. Other scholars who have emphasized the role of the devaluation include Eichengreen and Sachs (1985), Eichengreen (1992), Bernanke (2000), Bernanke and James (1991), Temin (1991), Mundell (2000), and Irwin (2012). It is not possible to do justice to the copious literature on the Great Depression; see, however, Bordo et al. (2002), Bordo and Kydland (1995), Meltzer (2003), De Long (1990), Wigmore (1987), Obstfeld and Taylor (1997), and Calomiris and Wheelock (1998). Friedman and Schwartz (1963) continues to be the basic study on monetary policy during this period.

  7. The Conference attracted considerable attention from contemporary analysts, including Lindley (1933) and Pasvolsky (1933). Schlesinger (1957) provides a detailed account, which draws on many of the participants recollections. Nussbaum (1957) dedicates two pages to it and Eichengreen (1992), in the most complete treatise on the gold standard, covers it in five pages. With time, however, the gathering has faded in stories on the evolution of economic policy during the first year of the Roosevelt Administration. Ahamed (2009) devotes two pages to it, as does Rauchway (2015). Eichengreen (2015) recently discusses the attempts to stabilize the exchanges in London in a comparative setting.

  8. Since the publication of this important paper, a number of authors have investigated aspects of the change in regime explanation. See, for example, Eggertsson (2008), for an analysis using DSGE model, Coe (2002) for a probability switching model. See also Hausman (2013), Hausman et al. (2016), and Jalil and Rua (2016).

  9. League of Nations (1933), No. 3, p. 8. See Roosevelt (1938), Vol. 2, p. 242.

  10. Hull knew, however, that these were empty words. At the last minute the President had informed him that he would not request from Congress authority to negotiate lower tariffs. The Times of London, “Sweeping U.S. measures,” June 5, 1933, p. 15.

  11. League of Nations (1933), No. 5, p. 26.

  12. League of Nations (1933), No. 4, p. 12.

  13. The New York Times, “Paris doubts help at London parley,” June 12, 1933, p. 2.

  14. The New York Times, “Paris doubts help at London parley,” June 12, 1933, p. 2.

  15. The New York Times, “France insistent on stable money,” June 12, 1933, p. 25.

  16. Lindley (1933), p. 198.

  17. Roosevelt (1938), Vol 2. P. 166–167.

  18. Morgenthau Diaries, Volume 1, May 29, 1933. P. 37.

  19. Feis (1966), p. 144.

  20. Leith-Ross (1968), p. 168.

  21. For a discussion on exchange rate misalignment see Edwards (2011) and the literature cited therein.

  22. Cassel (1923), Keynes (1924).

  23. White (1935).

  24. The rumor was started after James Cox, the former Governor of Ohio, and newly appointed chair of the Monetary Committee of the Conference, uttered that a $4.00 per pound rate was appropriate.

  25. Roosevelt (1938), Vol. 2. P. 245.

  26. Times of London, “America’s Two Paths.” June 21, 1933; pg. 14.

  27. In 1932 a group of economists criticized the Fed for not undertaking counter cyclical policy. See Appendix I in Wright (1932). In mid-1933 a smaller group of Chicago economists made a more specific proposal for reforming the monetary system, which they sent to the Secretary of Agriculture Henry A. Wallace. This scheme received the name of the “Chicago Plan.” See Tavlas (1997) for a detailed analysis.

  28. Warburg (1934), p. 107. The Warburg plan had some similarities to the plan unveiled by Keynes in a series of articles in the Times, which he collected in the pamphlet The means to prosperity. Keynes (1933).

  29. Lindley (1933), p. 204–206.

  30. Lindley (1933), p. 206.

  31. Moley (1939), p 235.

  32. Warburg (1934), p. 117.

  33. All the quotes in this paragraph come from Roosevelt (1938), Vol. 2. P. 264–265.

  34. Hull (1948), Vol. 1, p. 262, emphasis added.

  35. Hull (1948), Vol. 1, p. 263.

  36. Roosevelt (1938), Vol. 2, p. 186, emphasis added.

  37. The New York Times (NYT), December 31, 1933, p. 2 XX. For a formal statistical analysis of dollar gyrations during that period see Edwards (2017b).

  38. The Thomas Amendment gave the President several options for generating inflation. The devaluation of the dollar was one of them. For details see, for example, Moley (1939).

  39. Roosevelt (1938), p. 137. Emphasis added.

  40. As pointed out below, these questions are conceptually related to the “change of regime” hypotheses of expectations models, such as Sargent (1983). A study along these lines was undertaken with monthly data for cotton by Temin and Wigmore (1990).

  41. For details see Edwards (2017b).

  42. This bond was issued on May 8, 1918, and was redeemable between 1933 and 1938.

  43. For details on the abrogation see Edwards et al. (2015).

  44. See Lippman (1936) for a collection of columns written during 1933 on agricultural prices and exchange rates.

  45. Fisher (1913, 1920), Warren and Pearson (1931).

  46. During 1933 the discount rate was increased once and reduced thrice. See Federal Reserve Board of Governors (1943). See, also, the discussion below.

  47. Temin and Wigmore (1990) proposed the “change of regime” hypothesis for explaining the recovery from the Great Depression. See, also, Eggertsson (2008) and Jalil and Rua (2016) for recent work along these lines.

  48. The U.S. issued bonds without the gold clause for the first time in 16 years in mid-June 1933. Thus, it is not possible to compare yields on gold and non-gold bonds before that time. For a thorough discussion, see Edwards et al. (2015). The Supreme Court ruled on the abrogation on February 18, 1935.

  49. See Samuelson and Kross (1969), Volume 4, p. 377.

  50. For a discussion along these lines see Sumner (2001, 2015).

  51. This statement assumes that we are sitting in late June 1933; we cannot see the data that became available after that time.

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Authors and Affiliations

  1. National Bureau of Economic Research, University of California, Los Angeles, Los Angeles, CA, USA

    Sebastian Edwards

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Correspondence to Sebastian Edwards.

Additional information

I thank Michael Poyker for his assistance. I thank Michael Bordo and George Tavlas for comments. I have benefitted from conversations with Ed Leamer.

Appendix: Data Sources

Appendix: Data Sources

1.1 Commodity Prices

(Source: Daily; New York Times).

Closing wholesale cash $ prices for commodities in the New York Market.

Wheat #2 red, per bushel.

Corn #2 yellow, per bushel.

Rye #2 Western, per bushel.

Cotton, middling upland, per pounds

1.2 Bond Prices

(Source: Daily; New York Times).

Fourth Liberty Loan: Liberty bond 4th 41/4s, 1933–38, issued May 8, 1918, interest paid on April 15, October 15; Closing cash $ prices for bonds traded in on the Stock Exchange.

1.3 Exchange Rates

(Source: GFDatabase).

https://www.globalfinancialdata.com/Databases/GFDatabase.html

1.4 Events related to Gold and London Conference

The New York Times, The Wall Street Journal, The Chicago Tribune, Times of London.

1.5 Gold Prices

Taken from Warren and Pearson (1935), P. 168–169.

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Edwards, S. The London Monetary and Economic Conference of 1933 and the End of the Great Depression. Open Econ Rev 28, 431–459 (2017). https://doi.org/10.1007/s11079-017-9435-2

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