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A Lesson from the Great Depression that the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing

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  • Michael Bordo
  • Arunima Sinha
Abstract
We examine the first QE program through the lens of an open-market operation under taken by the Federal Reserve in 1932, at the height of the Great Depression. This program entailed large purchases of medium- and long-term securities over a four-month period. There were no prior announcements about the size or composition of the operation, how long it would be put in place, and the program ended abruptly. We use the narrative record to conduct an event study analysis of the operation using the weekly-level Treasury holdings of the Federal Reserve in 1932, and the daily term structure of yields obtained from newspaper quotes. The event study indicates that the 1932 program dramatically lowered medium- and long-term Treasury yields; the declines in Treasury Notes and Bonds around the start of the operation were as large as 114 and 42 basis points respectively. We then use a segmented markets model to analyze the channel through which the open-market purchases affected the economy, namely the portfolio composition and signaling effects. Quarterly data from 1920-32 is used to estimate the model with Bayesian methods. We find that the significant degree of financial market segmentation in this period made the historical open market purchase operation more effective than QE in stimulating output growth. Had the Federal Reserve continued its operations and used the announcement strategy of the QE operation, the Great Contraction could have been attenuated earlier.

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  • Michael Bordo & Arunima Sinha, 2016. "A Lesson from the Great Depression that the Fed Might have Learned: A Comparison of the 1932 Open Market Purchases with Quantitative Easing," NBER Working Papers 22581, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:22581
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    2. Gary Gorton & Tyler Muir, 2016. "Mobile Collateral versus Immobile Collateral," NBER Working Papers 22619, National Bureau of Economic Research, Inc.
    3. Jaremski, Matthew & Mathy, Gabriel, 2018. "How was the quantitative easing program of the 1930s Unwound?," Explorations in Economic History, Elsevier, vol. 69(C), pages 27-49.
    4. Etienne Farvaque & Antoine Parent & Piotr Stanek, 2018. "Debates and dissident inside the FOMC during WW2," Post-Print hal-03567133, HAL.
    5. repec:spo:wpmain:info:hdl:2441/2cuu3uj58199fphtovctj05ish is not listed on IDEAS
    6. repec:hal:spmain:info:hdl:2441/2cuu3uj58199fphtovctj05ish is not listed on IDEAS
    7. Francesco Giuseppe Cordoni & Luca Di Persio & Yilun Jiang, 2020. "A Bank Salvage Model by Impulse Stochastic Controls," Risks, MDPI, vol. 8(2), pages 1-31, June.
    8. Francesco Cordoni & Luca Di Persio & Yilun Jiang, 2019. "A bank salvage model by impulse stochastic controls," Papers 1910.03056, arXiv.org.
    9. Pooyan Amir-Ahmadi & Gustavo S. Cortes & Marc D. Weidenmier, 2020. "Regional Monetary Policies and the Great Depression," NBER Working Papers 26695, National Bureau of Economic Research, Inc.
    10. Jalil, Andrew J. & Rua, Gisela, 2016. "Inflation expectations and recovery in spring 1933," Explorations in Economic History, Elsevier, vol. 62(C), pages 26-50.
    11. Anne-Marie Rieu-Foucault, 2018. "Les interventions de crise de la FED et de la BCE diffèrent-elles ?," Working Papers hal-04141702, HAL.
    12. Mark A. Carlson & Burcu Duygan-Bump, 2018. "“Unconventional” Monetary Policy as Conventional Monetary Policy : A Perspective from the U.S. in the 1920s," Finance and Economics Discussion Series 2018-019, Board of Governors of the Federal Reserve System (U.S.).
    13. Mark Carlson & Burcu Duygan-Bump, 2021. ""Unconventional" Monetary Policy as Conventional Monetary Policy: A Perspective from the United States in the 1920s," International Journal of Central Banking, International Journal of Central Banking, vol. 17(2), pages 207-253, June.
    14. Sebastian Edwards, 2017. "Keynes and the Dollar in 1933," NBER Working Papers 23141, National Bureau of Economic Research, Inc.
    15. Breitenlechner, Max & Mathy, Gabriel P. & Scharler, Johann, 2021. "Decomposing the U.S. Great Depression: How important were loan supply shocks?," Explorations in Economic History, Elsevier, vol. 79(C).

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    JEL classification:

    • E5 - Macroeconomics and Monetary Economics - - Monetary Policy, Central Banking, and the Supply of Money and Credit
    • N1 - Economic History - - Macroeconomics and Monetary Economics; Industrial Structure; Growth; Fluctuations

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