International Economics

Great Depression: A Fistful of Francs

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You never spent a better three dollars and change.

Did France cause the Great Depression? Dartmouth economist Douglas A. Irwin asks about French gold hoarding and the breakdown of the gold standard:

While France's role is sometimes acknowledged (usually briefly, if at all, however), the impact of French policies is often believed to have been much smaller than the United States because of the country's smaller size. Yet these findings suggest that the French role deserves much greater prominence than it has thus far received for having transmitted a tightening of monetary policy to other countries and thus beginning the worldwide deflationary spiral…

Over the entire period from 1928 to 1932, France had a greater deflationary impact than the United States: it could have released 13.7 percent of the world's gold stock, while the United States could have released 11.7 percent, and still have maintained their 1928 cover ratios.

Irwin's study [pdf] argues that the Bank of France spent the late twenties acquiring gold at such a rate that it caused a perceived global gold shortage, forcing other countries' central banks to tighten their own monetary policies and turning a deep recession into one of the formative tragedies of the 20th Century. Warning: This is a lengthy argument fortified by equations with Greek letters, and to follow it you've got to posit that Ben Bernanke's reading of the Great Depression – that leaving the gold standard and allowing rampant inflation was the ticket to prosperity in the thirties – is correct.

Go away or I shall taunt you some more.

Both the Bank of France and our own Federal Reserve were guilty not only of building up gold reserves but of "sterilizing" gold: i.e., leaving it in a vault and not monetizing it (by creating francs or dollars at an appropriate ratio). As it happened, Franklin Roosevelt would do something similar later in the thirties, but by that point the international gold standard had broken down. The crucial period came during the late twenties and early thirties:

By 1932, France held nearly as much gold as the United States, though its economy was only about a fourth of the size of the United States. Together, the United States and France held more than sixty percent of the world's monetary gold stock in 1932…

The fact that the two countries kept such a large proportion of the world's gold stock inert and withdrawn from world circulation in 1929 and 1930 explains most of the massive worldwide deflation in 1930 and 1931 and may be indirectly responsible for some of the remainder.

Extreme goldbugs can only look with envy at the ratio of gold to money France eventually built up:

By 1932, the cover ratio had risen to the amazing level of nearly 80 percent! France was well on its way to having 100 percent base money, in which all of the central bank liabilities were backed one-for-one with gold in its vault.

There are some interesting questions here. If the United States and France had monetized instead of sterilizing, would we have seen price inflation, or just a slower decline in prices?

And why are we still assuming that deflation is a disease rather than a symptom? I'm just a simple caveman, but it seems to me Bernanke's catastrophic mismanagement of the Federal Reserve in our own time should make us cautious about assuming inflating the monetary base can bring about a recovery. We are seeing instead continuing deflation of those items Americans think of as assets expected to appreciate (real estate above all) while the actual cost of living (i.e., everything that's not counted by the phony-baloney CPI and PCE indexes) goes up and unemployment stays up.

As it happens, Irwin ends on just this question:

An important question that has been left unanswered here is the reason for the non-neutrality of money; that is, why this deflation was associated with declining output. While falling prices need not imply contracting output and higher unemployment, recent research has shown that the Great Depression of the 1930s is somewhat unique in linking the two (Atkeson and Kehoe 2004, Bordo, Lane, and Redish 2004).

One thing that never loses value: MGM's vintage inflation propaganda:

NEXT: Steven Seagal: Lawless Lawman

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  1. “Go away, or I shall taunt you a SECOND TIME…”

    1. “Of course we are French. Why do you think I have this outRAgeous accent?”

      1. “Um…is there someone else we can talk to?”

    2. Thank zod the first comment on the thread corrected the atrocious alt text fuck up. Priorities, people…

  2. That newsreel was something else, the Goofus to Henry Hazlitt’s Gallant.

  3. I have a GIF of the French. Feel free to steal it like I did.

  4. So we should go to a gold standard because… nobody will act like France this time?

    1. No, we should go to a free market for money where the privately issued money is backed by something real — gold, silver, mutual fund stocks — that the money can be redeemed for, instead of fiat money that can be inflated at will and inevitably trend toward worthlessness.

      Also, the Great Depression was caused by utterly foolish economic polices — the New Deal, the Smoot-Hawley tariffs, every other idiot thing FDR did that froze up investments — and not by what some French gold bugs did.

      1. BLASPHEMER!!!!

      2. “Also, the Great Depression was caused by utterly foolish economic polices — the New Deal, the Smoot-Hawley tariffs, every other idiot thing FDR did that froze up investments — and not by what some French gold bugs did.”

        What’s lacking in every claim of the cause is a *definition* of the “great depression”; hard to tell what caused “it” without defining what “it” is.
        I’ll agree that FDR managed to bludgeon at least two recoveries with his simple-minded policies, and S-H was at least equally at fault prolonging what might well have been the “average depression”.
        But the initial cause is commonly presumed to be in the US and that ignores a lot of jiggery-pokery that was going on in Europe at the time; Germany’s fraudulent attempts at manipulating its reparations, Austria’s bank failures, the resultant run on sterling, etc. And, perhaps, France’s mercantilism.

        1. The reparations against Germany were a big mistake that destabilized Europe economically and politically. Other European countries were made unstable by social democracy and the US was hurt by social democratic policies to a lesser but significant extent.

      3. The whole reason fiat money is good is because it can be inflated at will. What, exactly, is so special about an arbitrary metal that we should base our currency on it and the scarceness it happens to have on this planet?

        Sorry, FDR did not cause the Great Depression, unless in addition to fighting a world war, he acquired a time machine and started the same depression he had a large role in ending. Which is certainly an inventive way to become a great president.

        1. And with his first paragraph/question, Tony transcends imbecility.

          1. It’s a kind of meta-imbecility — if stated eloquently and often enough, other people get sucked into the lies and start believing them.

            FDR did not cause the start of the recession that later turned into the Great Depression due to FDR’s idiotic policies, but that doesn’t change the fact that without FDR’s interventions, ordinary citizens would have fixed things long before the actual end of the Great Depression.

            Shorter: FDR caused the Great Depression.

            1. Similar to today. Obama didn’t create the recession, but his policies have prolonged it. Of course, then as now, Congress gets less blame than it should.

              1. The recession that ended in the second half of 2009?

                Sure unemployment is high (comparable to other post-WWII recessions), and growth is slow, but it’s still growth. How would you have ended the recession more quickly and with a stronger rebound? Cutting government budgets? Local governments are in the process of completely offsetting the stimulus with cuts, so we’ll see how that works out. I’m sure you’ll manage to blame Obama, of course.

                1. The recession that ended in the second half of 2009?

                  Nothing to see here, move along.

        2. The whole reason fiat money is good is because it can be inflated at will. What, exactly, is so special about an arbitrary metal that we should base our currency on it and the scarceness it happens to have on this planet?

          Sorry, FDR did not cause the Great Depression, unless in addition to fighting a world war, he acquired a time machine and started the same depression he had a large role in ending. Which is certainly an inventive way to become a great president.

          In other words, stop reading because Tony’s theory is utter bullshit.

          Wow, this phrase just keeps on working for this thread.

        3. Tony|3.23.11 @ 11:04PM|#
          “The whole reason fiat money is good is because it can be inflated at will.”

          At *whose* will, you idiot?

          1. The Fed. Now, fiat money has risks, for the same reason it has benefits: its flexibility. You have to make sure the Right People are in charge. But that’s better than deflating the entire world economy by going to a shiny metal standard.

            1. The amazing part about this is that liberals really think they are the ones who care about the poor and underclassed people.

              Inflation fucks the poor, its not some magic pixie dust that makes us all richer, its a tax on everyone who doesnt have inflation adjusted assets or income.

              Do you think banks or rich CEOs just ignore inflation because they have so much money? If you think that then you dont understand anything about being rich. Do you really think when someone invests in a stock or bond or property or anything, that they dont take inflation into account?

              Now have you ever noticed that minimum wage isnt inflation adjusted? Have you ever known a poor person who owned an inflation adjusted asset like stock or property?

              Whats more, poor people have to spend a greater portion of their wealth on the items that are the most inflation sensitive, i.e. food and fuel.

              It never ceases to amaze me how willing people like you are to hand the bill off to the people who are least able to pay it and yet still preen yourselves for being the only ones who care about the poor. I guess ignorance really is bliss.

              1. Deflation, generally, is bad for the poor too. We are not in danger of runaway inflation in this country. Though I’d be happy to entertain an inflation-adjusted minimum wage.

                1. Why do you think deflation is bad for the poor? And inflation adjusting minimum wage is only a band-aid, in countries without a minimum wage poor people still get fucked by inflation for all the other reasons i stated, and more.

                  1. Deflation is bad for economies, which is bad for the poor because they usually do the worst in bad economies.

                    I think we’re getting a little into paranoia here–steady, managed inflation is called “growth.” We’re not in danger of having to get out the wheelbarrows to fill with $100 bills quite yet.

                    1. No, its not called “growth”, its called a tax on everything that is not inflation adjusted. Go ask any poor or lower middle class person when the last time they got a raise. Ill bet 99% of them will tell you that they’ve gotten at best a 2-5% raise over the last 5 years or more. That means they are losing money. All of those people are taking a pay cut so you can think you are promoting “growth”.

                      And this has nothing to do with wheelbarrows full of hundreds either, in a hyperinflationary environment, everyone realizes the need to increase their income, if they dont, they starve. Inflation “works” because most people dont recognize its happening to them.

                      Deflation is bad for economies only because everyone who is in power has made it abundantly clear that under no circumstances will they allow deflation. Unsupprisingly, our whole financial system is built under the assumption that there will never be deflation and so because of that, our financial system would suffer if there ever was deflation. But that is not the same as deflation always being bad for economies, if we allowed for deflation as a possibility, our financial institutions would have to structure themselves in such a way as to deal with that possibility and then the outcome would not be bad for our economy. This has actually happened in the past and in other countries and it wasent devastating.

                    2. Please define “steady, managed inflation.”

        4. Tony|3.23.11 @ 11:04PM|#
          “Sorry, FDR did not cause the Great Depression,…”

          And you too haven’t yet defined what you posting about.

        5. FDR neither started or ended the depression, but his policies prolonged it. World war two didn’t even end the depression. The repeal of new deal policies a significant amount of time after the war did end the depression.

        6. FDR didn’t cause the depression, he just made it great.

        7. “The whole reason fiat money is good is because it can be inflated at will.”

          The whole reason that fiat money is bad is because it can be inflated at will.

        8. The whole reason fiat money is good is because it can be inflated at will.

          Definitely the dumbest thing I’ve ever read here.

          1. Give him time, give him time.

        9. The whole reason fiat money is good is because it can be inflated at will.

          “Yeah, look how much value a dollar has today versus 80 years ago!”

          /end Tony-nomics 101

        10. The whole reason fiat money is good is because it can be inflated at will

          That’s why it’s good, huh? Wow.

    2. If there were no central banking, nobody would be able to artificially contract credit either.

  5. I’m just a simple caveman

    Don’t you ever forget that.

  6. Warning: This is a lengthy argument fortified by equations with Greek letters, and to follow it you’ve got to posit that Ben Bernanke’s reading of the Great Depression ? that leaving the gold standard and allowing rampant inflation was the ticket to prosperity in the thirties ? is correct.

    In other words, stop reading because this theory is utter bullshit.

    1. In other words, stop reading because this theory is utter bullshit.

      Keynesianism in a nutshell.

  7. The problem was not the gold, but the fact that France was keeping foreign exchange reserves in US dollars in New York Banks during the 1920s, thereby breaking down the gold monetary conduit.

  8. You can’t blame France for acting completely rationally.

    1. ?|3.23.11 @ 10:27PM|#
      “You can’t blame France for acting completely rationally.”

      Pretty sure Adam Smith pointed out that mercantilism wasn’t “rational” along about 1776.
      Of course individuals may have personal reasons to hoard value, but if you’re a government agent, you should have some knowledge that it can be harmful. And, yes, the French took it in the shorts like everyone else.

      1. Both the Bank of France and our own Federal Reserve were guilty not only of building up gold reserves but of “sterilizing” gold: i.e., leaving it in a vault and not monetizing it (by creating francs or dollars at an appropriate ratio).

        When I read that, I assumed it had tons of gold in excess of Francs issues. Like if everyone turned in their Francs for gold, they would still have tons of gold left.

        But no,

        By 1932, the cover ratio had risen to the amazing level of nearly 80 percent! France was well on its way to having 100 percent base money, in which all of the central bank liabilities were backed one-for-one with gold in its vault.

        So, in reality, if everyone turned in their Francs for gold, 20% of the people would be SOL.

        1. “So, in reality, if everyone turned in their Francs for gold, 20% of the people would be SOL.”

          And I’ll bet you think that means ‘something’.

  9. I’ve been thinking about this theory since discussed on Russ Roberts’s EconTalk podcast.

    The behavior of the French bank occurred in the context of the half-restored gold system, post-World War I, at a time when the Brits had also deflated their pound, to return to pre-war par. It had some international deflationary effect, surely. But it’s worth remembering that the deflationary pressures abroad were being offset by Fed inflation during the 20s, and the halt to that bubble helped initiate the Wall Street Collapse.

    And after the halt to the Fed’s inflation and the collapse of Wall Street’s stock boom, wages and prices needed to fall. But Hoover conspired to keep wages high – an echo of British union-wage policy, which prevented the Brits’ adjustment to deflation, causing their massive unemployment. The resulting unemployment in America, combined with financial pressure first on rural (farm-supporting) banks and then on the steel-industry-areas banks (falling one by one, and in huge clumps) turned financial panic to complete regime uncertainty, which FDR’s many goofy policies exacerbated.

    The reason for the banking collapse, however, was far out of kilter to the bursting of the ’20s bubble. The cause was almost certainly the passage of Smoot-Hawley protectionism. That’s why the bank failures hit rural areas first, steel-industry areas second.

    And the susceptibility to bank insolvency was part and parcel of America’s goofy bank system, a system prohibiting branch banking and a free trade zone, putting banking policy hostage to the several states.

    So, as I see it, the deflations abroad and our own inflationary collapse would have been comparatively minor had it not been for

    1. Republican protectionism
    2. The long-standing prohibition on branch banking in the U.S.
    3. Hoover administration interventions (wage-price props, increased gov’t spending)
    4. FDR’s desperate, incoherent, and ill-thought-out swings of intervention.

    And the French and British deflations could have been prevented had the world returned to a true international gold standard and not the gimcrack compromise system that the central bankers settled upon.

    Gold in a free banking setting (no central banks) would have been a lot more stable.

    1. Excellent short summary. Monetarist and Keynesians tend to concentrate on the monetary dislocations and forget that employment wasn’t really hit until the fiscal policy actions taken by congress and the Hoover administration had their negative and quite measurable effects.

  10. The whole reason fiat money is good is because it can be inflated at will.

    Tony’s been providing some gems lately, hasn’t he?

    1. The whole reason fiat money is good is because it can be inflated at will.

      The whole reason hot checks are good is because I can write as many as I wish at will.

    2. If you ever needed more proof that Tony is a sockpuppet, well, there you are.

      1. Amazing enough, people still fall for it. Leftist are bad enough without some Republican coming around pretending to be a more naive and dumb version of a leftist. His handler in another blog back in ’08 claimed to be a Hillary supporter. Funny thing, there is an actual Republican who rooted for Hillary in ’08 I can recall. Coincidence?

      2. General familiarity with the guy tells me he likely couldn’t pull off a puppet for three years running. I’ve seen him stumble on one in just an afternoon. But someone is doing it, and ‘Hillary supporter’ is the most tangible grain of truth to build the Tonybot we have to hang on as a possible link.

    3. The whole reason fiat money is good is because it can be inflated at will.

      Well said, Tony!

  11. Tout l’or qui est sous ou sur la terre ne suffit pas ? donner en ?change pour la vertu.

  12. Apparently, the argument that the central banks mismanaged the gold-backed currency is somehow an argument for removing the discipline of a gold standard and giving the central banks even greater control over the resulting fiat currency.

    Am I missing something here, or is that pretty much like arguing that someone who got pulled over for speeding should be given a bottle of booze before being sent on their merry way?

    1. Alternatively, we could say that evidence of mismanagement of fiat money AND gold-backed currency pretty much proves that central banks are a bad idea, right?

    2. Am I missing something here, or is that pretty much like arguing that someone who got pulled over for speeding should be given a bottle of booze before being sent on their merry way?

      As long as they’re not given an app of where the sobriety checkpoints are, I’m OK with it.

      1. I sent this to Sullum last night. I’m hoping he posts something on it. It’s fucking wall-to-wall win.

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