Tuesday, September 14, 2010

"Did France Cause the Great Depression?"

They were buying a lot of U.S. gold 1930-1933, bidding above the then official Treasury price of $20.67. Nice score when President Roosevelt confiscated American's holdings (Executive Order 6102, April 5, 1933) and devalued the dollar to $35.00 per ounce in 1934 (Gold Reserve Act).

In fact, as the revaluation approached in January 1934 the bids in Paris were in the low $30's.
France resisted devaluation until September, 1936.
From the National Bureau of Economic Research:
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.
HT: Economix
For a slightly different view see "The Politics of the Gold Standard in France, 1914-1939" in the July 17, 2010 Monthly Review.