>>943 Economic Recovery from the Argentine Great Depression: Institutions, Expectations, and the Change of Macroeconomic Regime
In monetary policy we find evidence of a change of regime. Many commentators see the creation of the Banco Central (Central Bank) in 1935 as the main monetary policy event of the 1930s. We instead emphasize the remarkable decision of the Caja de Conversi?n (Conversion Office, a currency board) to begin rediscounting in April 1931 and so forge an independent monetary policy. In essence, the Central Bank merely rubber-stamped this new macroeconomic policy regime and continued its operations after 1935. The Argentine recovery was complete by 1935; and the only pre-1935 change in regime that could be assigned a role in ending the Argentine Great Depression was the action of the Conversion Office. Yet, did it make a difference? We argue that the change of monetary regime was essential to Argentina’s recovery in that it helped avert a devastating collapse of prices, and, potentially The channel through which the change in monetary regime had real effects was via the destruction of deflationary expectations, the “Mundell” effect. Hence we think that the institutional change heralded by the rejection of an old orthodoxy was just as essential to recovery from the Great Depression in the periphery as in the core. http://www.stanford.edu/group/sshi/Conferences/1998-1999/LACSC_Papers/gdpamt.pdf
>>943 The most widely accepted cause of the Great Depression--a cause that Bernanke confirms--is that monetary authorities across the globe allowed their money supplies (as measured by the currency/gold ratio) to decline in the face of a slowing economy. This would be like the Federal Reserve today raising interest rates in the face of our current economic crisis. The monetary contraction across countries was somewhat a result of the international gold standard exchange rate regime in place at the time, which put constraints on how central banks could implement monetary policy. One contribution of Bernanke's in this area is his finding that countries that left the international gold standard began to recover faster than those that remained in the system because they had greater freedom to initiate expansionary monetary policies. The likelihood today of any central bank allowing its money supply to contract in a time of crisis is almost zero. This is a lesson that has been learned and will not be repeated. http://www.econosseur.com/2008/10/the-great-depression-ben-bernanke-and-the-financial-crisis.html