France caused the Great Depression – who caused the Great Recession?

One of my absolute favourite Working Papers is Douglas Irwin’s brilliant paper “Did France cause the Great Depression?”.

Here is the 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.”

I find Dr. Irwin’s explanation of the Great Depression quite convincing and I think that his paper is helpful in understanding not only the Great Depression, but also the Great Recession.

Interestingly enough Douglas Irwin’s explanation is not entire new. In fact the Godfather of Market Monetarism Scott Sumner back in 1991 had a similar explanation in his paper “The Equilibrium Approach to Discretionary Monetary Policy under an International Gold Standard, 1926-1932”. (To David Glasner: Yes, Hawtrey and Cassel knew it all long ago).

Scott Sumner and other Market Monetarists argue that a tightening of US monetary conditions caused the Great Recession. However, what caused monetary conditions to be tightened?

I think we need an Irwinian-Sumnerian explanation for the tightening of US monetary conditions in 2008/9. My hypothesis is that a spike in European dollar demand in 2008/9 was the key trigger for the passive tightening of US monetary conditions. Said in another way while gold hoarding caused the Great Depression dollar hoarding likely caused the Great Recession.

My dollar hoarding-hypothesis is exactly that and I haven’t done any empirical work on it, but I think that Irwin’s and Sumner’s research should inspire new research on the causes of the Great Recession. Who is up for the challenge?


Update: Both Scott and Doug have reminded me of Clark Johnson’s book on the Great Depression and Frence gold hoarding: Gold, France, and the Great Depression 1919-1932.

Leave a comment


  1. Scott Sumner

     /  October 4, 2011

    Lars, Thanks for mentioning my work. A couple comments:

    1. Don’t forget than in the first 6 months of the recession the problem was a flat supply of dollars, not an increase in demand. The Fed held the base constant, and this led to a sharp slowdown in NGDP growth. Once expectations turned very bearish, rates fell to low levels and the demand for liquidity soared. Thus the big problem in the severe phase of the recession was more demand for dollars, as you say. But the initial problem (in the US) was on the supply of money side.

    2. Clark Johnson published a book in 1997 that has the most complete coverage of the role of France in the Great Depression, so his name should also be mentioned. I’m glad Doug as revived this issue, because international ilinkages are probably an underreported aspect of the current crisis.

  2. Scott, thanks.

    1. I completely agree that the Federal Reserve did not act initially and the parallel in terms of dollar demand is maybe more similar to what happened in 1931 when the crisis intensified and spread to Europe. My argument is just that the story about the Great Recession is incomplete without telling the European story and particularly the story of European dollar demand. As with the Great Depression one can not leave out the European part of the story.

    2. Doug, also reminded me of Clark Johnson’s book. I have not read it myself, but it surely should be mentioned.

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