Did France cause the Great Depression?

Here is Doug Irwin, I remember once hearing a related argument from David Glasner (was his piece on that ever published?):

The gold standard was a key factor behind the Great Depression, but why did it produce such an intense worldwide deflation and associated economic contraction? While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.

The non-gated copy is here.


or central banks could be privatized and we could let the money supply self-adjust....

Isn't the whole "gold standard" debate usually a semantic bait and switch. What if there was no gold "standard," just gold. The gold standard is a price control, no? That the "gold standard" reflects poorly on gold seems silly.

So, without the "standard" part, the price of gold goes up, people use silver, platinum, Ameros, whatever for money. Make sure your contracts state that your debts are payable in more than one form of money and we are back in business.

Everybody knows that Prohibition & The Dust Bowl was responsible for the Great Depression. Totally depressing.

[sorry, just had to say it, feel free to delete, as always]

Splendid quote, Justin!

Liaquat Ahamed also notes that Chéron sent his seconds to demand satisfaction from Snowden -- "the French were only just weaning themselves off the practice of dueling."

The paper starts with the assertion that the gold standard was a "key factor" in the Great Depression, but goes on to say, "The standard explanation for the onset of the Great Depression is the tightening of U.S. monetary policy in early 1928. The increase in U.S. interest rates attracted gold from the rest of the world, but the gold inflows were sterilized by the Federal Reserve so that they did not affect the monetary base. This forced other countries to tighten their monetary policies as well, without the benefit of a monetary expansion in the United States."

So an admittedly naive question: if the US and France had not tightened their monetary policies, would the Great Depression have been avoided? If so, how key is the gold standard, really? This seems to make the case that if we weren't on the gold standard, the shift in monetary policy would have had a lesser effect -- but it seems to implicitly make the case that if gold reserves weren't being "sterilized" (I gather this is a polite way to say "hoarded," at least in this case) we wouldn't have had the problem in the first place.

(The internet is full of gold bugs, and it's extremely easy to find people railing to get us back on the gold standard, but I confess it's been difficult for me to find good explanations of "the other side" even though it's clearly the mainstream one. There's a lot of one page articles which say, "It causes deflation and that's bad, QED," but layman though I am, I'd like to get a bit more detail sometime...)

I highly doubt it. To acquire more gold, France would have had to sell other things. Those things would have become cheaper and gold more expensive, causing others to buy those things and sell gold. And certainly no one forced the US to sell their gold and buy whatever France sold.

Most of the time, a nation's economic problems are its own fault. The US can blame China and Cuba can blame the US, but their fate is in their own hands.

This goes hand in hand with the Mundell argument that the depression was caused by an inadequate and poorly distributed gold supply.

Tyler, I'm not sure which piece of mine you are referring to, probably one of the two that I wrote with Ron Batchelder, one of which ("Debt, Deflation, the Gold Standard and the Great Depression") was published in a volume in the early 1990s I think it was called Money and Banking: The American Experience. The other was "PreKeynesian Monetary Theories of the Great Depression: What Ever Happened to Hawtrey and Cassel?" and it has not been published, but we are hoping to send it off somewhere in the very near future. But I has already outlined the main points of the explanation in my 1987 book Free Banking and Monetary Reform (Cambridge U. P.)

As the title of the second paper suggests, there is really very little new in the explanation that I gave, Gustav Cassel and Ralph Hawtrey had already provided the main points in the early 1920s, years before the Great Depression started. Keynes added nothing useful to an explanation of the Great Depression that he could very well have adopted, but, misled by chronically high unemployment in Britain since the early 1920s, felt was inadequate. Friedman's monetary theory was a huge step backward from what Hawtrey, whose work Friedman should have known well but ignored either on purpose or through negligence or misunderstanding. The Austrians flatter themselves because Mises and Hayek predicted in 1927 (at least 5 years after Hawtrey and Cassel identified the deflationary implications of restoring the gold standard) that a downturn would occur, but they could never provide any reason for the depth of the deflation that occurred after the downturn. That almost no one (including almost all economists) has any idea of the contributions of Hawtrey and Cassel is itself a scholarly scandal of the first order.

The basic thesis here isn't new: as Irwin acknowledges, it is essentially the same as that of Clark Johnson's 1997 book, "Gold, France,, and the Great Depression," which I just happened to finish re-reading yesterday. What's nice about the paper is that, unlike Johnson's book, it includes many helpful figures and tables: while reading Johnson I often found myself wondering why he didn't make use of them in telling what's otherwise a very compelling story.

I was going to recommend Johnson's Gold, France & The Great Depression, but see that George just did. Will definitely read David's paper.

David, the point re Hawtrey and Cassell is spot on. Mundell mentioned them in his Nobel speech (which also covers similar ground). Cassell's views were obviously shaped by the Stockholm school -- which means he would have been looking at this in Wicksell's framework, right? Or something close to it (even if he was a lousy attributor, as alleged by some :)). For example:

Real financial rate - driven higher as a function of FRB and BOF actions forcing world economy sharply and suddenly towards 1914 gold parity of ~$20, when gold's real value was ~$30 to 40 (Roy Jastram's Golden Constant, for example).

Marginal return on capital - driven lower by rising tariffs, taxes, pessimism, and possibly demographic shifts (see below)

The resulting 'gap' in Wicksell's framework would lead to massive deflation. Unchecked, equilibrium entailed significantly lower price level and employment levels - with systemic leverage (Geanakoplos's 'fragility') amplifying those adjustments.

Great topic, thanks for posting it Tyler.

[An interesting wrinkle to the GD is to incorporate the Easterlin hypothesis, or shifts in the relative size of age cohorts between the 1920s and 30s; perhaps a higher rate of lumpy durable purchases in the 1920s (helped by easy credit thanks to institutional behavior of the world's monetary system?), and lower than expected durable purchases as the relative size of household formation cohort fell during the 1930s? See http://ftp.iza.org/dp4436.pdf, http://cowles.econ.yale.edu/~gean/art/p1099.pdf, http://symmetrycapital.net/index.php/blog/2010/07/new-idle-speculator-an-interview-with-diane-macunovich/]

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