Quantitative Easing in the 1930s

During the 1934–39 recovery from the U.S. Great Depression, overnight interest rates were usually at a lower bound. Meanwhile, American monetary authorities followed policies related to today's debates on quantitative easing: they tried to stabilize yields on Treasury bonds with open market operations; they created rapid growth in high-powered money; and they allowed transitory factors to affect high-powered money. Effects of these policies on bond yields reveal a portfolio effect of short-duration asset supply on term premiums. This portfolio effect helps explain why high-powered money growth was associated with recovery of real activity over 1934–39.