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EggertssonCommodity Prices and the Mistake of 1937

Vaughan / Economics 639 / Fall 2012

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Mistake of 1937

• Decision by Fed to double reserve requirements in three stages from August 1936 to May 1937.

• Rationale:– Excess reserves could lead to lending explosion and

(i) inflation and (ii) another asset bubble. • Result: Serious recession (May 1937 to June 1938)– Industrial production fell 31.8%– Unemployment rose to 19%

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Commodity Prices MisleadingIncreases Driven by Supply Factors, Not Inflation

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Inflation not a Problem

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Fallout from “Mistake of 1937”