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Did France Cause the Great Depression?

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  • Douglas A. Irwin

Abstract

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.

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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 16350.

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Date of creation: Sep 2010
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Publication status: published as “ Le France a-t- elle Causé la Grande Dép ression? ” Revue Française d’économ ie 25 (April 2 01 1) : 3-10 .
Handle: RePEc:nbr:nberwo:16350

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  1. Choudhri, Ehsan U & Kochin, Levis A, 1980. "The Exchange Rate and the International Transmission of Business Cycle Disturbances: Some Evidence from the Great Depression," Journal of Money, Credit and Banking, Blackwell Publishing, Blackwell Publishing, vol. 12(4), pages 565-74, November.
  2. Hugh Rockoff, 1984. "Some Evidence on the Real Price of Gold, Its Costs of Production, and Commodity Prices," NBER Chapters, National Bureau of Economic Research, Inc, in: A Retrospective on the Classical Gold Standard, 1821-1931, pages 613-650 National Bureau of Economic Research, Inc.
  3. Michael D. Bordo & Anna J. Schwartz, 1984. "A Retrospective on the Classical Gold Standard, 1821-1931," NBER Books, National Bureau of Economic Research, Inc, National Bureau of Economic Research, Inc, number bord84-1.
  4. Martin Evans & Paul Wachtel, 1992. "Were Price Changes during the Great Depression Anticipated? Evidence from Nominal Interest Rates," Working Papers, New York University, Leonard N. Stern School of Business, Department of Economics 92-12, New York University, Leonard N. Stern School of Business, Department of Economics.
  5. Sumner, Scott, 1991. "The Equilibrium Approach to Discretionary Monetary Policy under an International Gold Standard, 1926-1932," The Manchester School of Economic & Social Studies, University of Manchester, University of Manchester, vol. 59(4), pages 378-94, December.
  6. Peter Temin, 1991. "Lessons from the Great Depression," MIT Press Books, The MIT Press, The MIT Press, edition 1, volume 1, number 0262700441, December.
  7. Sicsic, Pierre, 1992. "Was the franc poincare deliberately undervalued?," Explorations in Economic History, Elsevier, Elsevier, vol. 29(1), pages 69-92, January.
  8. Mundell, Robert A., 1999. "A Reconsideration of the Twentieth Century," Nobel Prize in Economics documents, Nobel Prize Committee 1999-5, Nobel Prize Committee.
  9. Accominotti, Olivier, 2009. "The sterling trap: foreign reserves management at the Bank of France, 1928–1936," European Review of Economic History, Cambridge University Press, Cambridge University Press, vol. 13(03), pages 349-376, December.
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Cited by:
  1. Crafts, Nicholas, 2013. "What Does the 1930s’ Experience Tell Us about the Future of the Eurozone?," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 142, Competitive Advantage in the Global Economy (CAGE).
  2. Crafts, Nicholas; Fearon, Peter, 2010. "Lessons from the 1930s' Great Depression," CAGE Online Working Paper Series, Competitive Advantage in the Global Economy (CAGE) 23, Competitive Advantage in the Global Economy (CAGE).
  3. Bordo, Michael D., 2012. "Could the United States have had a better central bank? An historical counterfactual speculation," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 597-607.
  4. Richhild Moessner & William A. Allen, 2011. "Las crisis bancarias y el sistema monetario internacional en la Gran Depresión y en la actualidad," Revista de Economía Institucional, Universidad Externado de Colombia - Facultad de Economía, Universidad Externado de Colombia - Facultad de Economía, vol. 13(25), pages 43-87, July-Dece.
  5. Nicholas Crafts, 2013. "Long-Term Growth in Europe: What Difference does the Crisis Make?," National Institute Economic Review, National Institute of Economic and Social Research, National Institute of Economic and Social Research, vol. 224(1), pages R14-R28, May.
  6. Selgin, George & Lastrapes, William D. & White, Lawrence H., 2012. "Has the Fed been a failure?," Journal of Macroeconomics, Elsevier, Elsevier, vol. 34(3), pages 569-596.

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