Working paper of the day – Straumann et al on Switzerland, the Great Depression and the gold standard

A couple of weeks ago I came across a great paper by Peter Rosenkranz, Tobias Straumann and Ulrich Woitek – “A Small Open Economy in the Great Depression: the Case of Switzerland”. It is great paper. Here is the abstract:

Estimating a New Keynesian small open economy model for the period 1926-1938, we investigate the causes of the slow recovery of the Swiss economy of the Great Depression in the 1930s. Our results show that the decision to participate in the gold bloc after 1933 at an overvalued currency can be identified as the main reason for the unusual long lasting recession. Even the recovery of the world econ- omy starting in 1931/1932, and thus a boost of foreign demand could not offset the negative effects of disadvantageous terms of trade. A counterfactual experiment demonstrates that in case of leaving gold earlier (e.g. together with the UK in 1931), the Swiss economy would have recovered much faster, almost immediately reaching the pre-crisis output level.

My Skåne vacation and what I am reading

It is vacation time for the Christensen family so I might not be blogging too much in the next couple of weeks, but we will see. I would however, like to share what books I have brought with me on our vacation in our vacation home in Southern Sweden (Skåne).

Here is my list of vacation books:

1) “Two lucky people”  is Milton and Rose Friedman’s autobiography. I have read it before, but it is such a nice book about a world class economist and his loving wife. They remained an incredible team throughout their long lives. Did I mention that my copy of Two Happy People is signed by Uncle Milty?

2) Two books – or rather pamphlets – by Gustav Cassel: “The World’s Monetary Problems; Two Memoranda” and “On Quantitative Thinking in Economics”. I have only read a little of both books. Cassel was an amazing writer and I look forward to digging into the books.

3) Of course Bob Hetzel’s “The Great Recession” is in my bag – also on this vacation. I have already long ago read the entire book, however I bring Bob’s book everywhere I go.

4) “The Gold Standard in Theory and History” – edited by Eichengreen and Flandreau back in 1985 is a collection of articles on the gold standard.

5) Tobias Straumann’s “Fixed Ideas of Money” about why small European nations have tended to opt for fixed exchange rate regimes. I have read most of the book. It is an extremely well researched and well written book. I find the book particularly interesting because it describes the monetary history of small countries like Belgium and Denmark. This monetary history of these countries is generally under-researched compared to for example the monetary history of the US or the UK.

6) Larry White’s new book “The Clash of Economic Ideas” about “The Great Policy Debates and Experiments of the Last Hundred Years”. Have read a couple of the chapters in the book even before I got the book, but the latest chapter I read was about the formation of the Mont Pelerin Society (Chapter 8) – it’s a great chapter. The book is a very easy read and very enjoyable. I suspect that this will be the book I will spend the most time with on this vacation. See Larry’s presentation on his book here.

Finally, I must admit I have never been able to read fictional books. Economics, history, philosophy and books about gastronomy, but never fiction (sorry Ayn Rand…)

Liaquat Ahamed should write a book about Trichet, Draghi, Weidmann & Co.

The author of the great book  ‘Lords of Finance: The Bankers Who Broke the World’ Liaquat Ahamed has a comment on on the euro crisis and the parallels of the behavior of today’s European central bankers with that of the central bankers of the 1930s. I have been making the argument many times that we are in the process of making the same mistakes as we did in the 1930s – particularly in Europe. Ahamed agrees.

Here is Ahamed:

“The situation in Europe today bears an eerie similarity to that of Europe in the 1930s. Ironically, Germany was then in the position of the peripheral European countries today. It was weighed down with government debt because of reparations imposed at Versailles; its banking system was severely undercapitalised, the result of the hyperinflation of the early 1920s; and it had become dependent on foreign borrowing. It was locked into a rigid fixed exchange rate system, the gold standard, which it dared not tamper with for fear of provoking a gigantic crisis of confidence. And so when the Depression hit and international capital markets essentially closed down, Germany had no choice but to impose brutal austerity. Eventually, unemployment rose to 35 per cent.

Like today, in the 1930s there was one major economy in Europe doing well. It was France. While the rest of Europe was suffering, unemployment in France, as in Germany today, was in the low single figures. And France, again like Germany today, had large current-account surpluses and was in a financial position to act as the locomotive for the rest of Europe. But the French authorities of the 1930s, refusing to accept responsibility for what was happening elsewhere in Europe, would not adopt expansionary policies. Nor would they lend directly to Germany, fearing that they would be throwing good money after bad. The effect of French policy eventually brought down the whole financial system of western Europe”

I completely agree. The PIIGS are the Germany of the 1930s and Germany of today is France of the 1930s. In that regard it should be noted that despite France initially avoided being hard hit by the Great Depression, but the crisis eventually caught up with the French economy in 1931-32. Let that be a lesson for Merkel and Weidmann. Unfortunately today’s policy makers seem completely unaware of the parallels to the mistakes of the 1930s.

Maybe it is time for  Liaquat Ahamed to write a book on today’s Lords of Finance – the central bankers who are in the process of killing the European economy.


For an overview of some of my posts on the 1930s see here.

Book recommendation of the week: I just received in the mail what seems to be a very interesting book on Exchange Rate Regimes of small states in twenties-century Europe. The book “Fixed Ideas of Money” by Tobias Straumann tells the story of why European small economies such as the Scandinavian countries, Belgium, the Netherlands and Switzerland have been so attracted to pegged exchange rate regimes. From what of the book I have read so far I must say it is very interesting and the book is full of interesting anecdotes from European monetary history. The book is extremely well-researched and it is clear that Straumann has had access to local sources for information about monetary policy in for example Denmark or Belgium in the 1930s.

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