Original Sin and the Great Depression

53 Pages Posted: 28 Apr 2020 Last revised: 17 Jun 2021

See all articles by Michael D. Bordo

Michael D. Bordo

Rutgers University, New Brunswick - Department of Economics; National Bureau of Economic Research (NBER)

Christopher M. Meissner

University of California, Davis

Date Written: April 2020

Abstract

Was foreign currency denominated debt a determinant of exchange rate and monetary policy during the Great Depression? Policy makers of the day thought so. High-frequency bond price data show depreciation was associated with elevated risk premia on public debt. We also show that foreign currency debt was a determinant of exchange rate policy during the Great Depression. The gold standard heightened exposure to global shocks and prolonged the Great Depression. Why then did countries hesitate to jettison the monetary technology? Multiple factors have been identified in the literature ranging from economic and political considerations to social preferences for monetary stability. We find that foreign currency debt and trade patterns, both shaped by history and geography, had a significant impact on these choices and hence on economic stability. The effect is likely to be about half as large as the output gap in determining exchange rate policy.

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Suggested Citation

Bordo, Michael D. and Meissner, Christopher M., Original Sin and the Great Depression (April 2020). NBER Working Paper No. w27067, Available at SSRN: https://ssrn.com/abstract=3586199

Michael D. Bordo (Contact Author)

Rutgers University, New Brunswick - Department of Economics ( email )

New Brunswick, NJ
United States

National Bureau of Economic Research (NBER) ( email )

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

Christopher M. Meissner

University of California, Davis ( email )

One Shields Avenue
Apt 153
Davis, CA 95616
United States

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