BPEA | Fall 2009

When the North Last Headed South: Revisiting the 1930s

Carmen M. Reinhart and
Carmen Reinhart
Carmen M. Reinhart Minos A. Zombanakis Professor of the International Financial System - Harvard Kennedy School
Vincent R. Reinhart
Vincent R. Reinhart American Enterprise Institute
discussants: Chang-Tai Hsieh
Chang-Tai Hsieh
Chang-Tai Hsieh Phyllis and Irwin Winkelried Professor of Economics - University of Chicago

Fall 2009

The U.S. recession of 2007–09 is unique in the post–World
War II experience in the broad company it kept. Activity contracted around
the world, with the advanced economies of the North experiencing declines
in spending more typical of the developing economies of the South for the
first time since the 1930s. This paper examines the role of policy in fostering
recovery in that earlier decade. With nominal short-term interest rates already
near zero, monetary policy in most countries took the unconventional step of
delinking currencies from the gold standard. However, analysis of a sample that
includes developing countries shows that this was not as universally effective
as often claimed, perhaps because the exit from gold was uncoordinated in time,
scale, and scope and, in many countries, failed to bring about a substantial
depreciation against the dollar. Fiscal policy was also active—most countries
sharply increased government spending—but was prone to reversals that may
have undermined confidence. Countries that more consistently kept spending
high tended to recover more quickly.