French gold-hoarding may deserve a large part of the blame for the Great Depression even more so than U.S. monetary policy in 1929, according to a recent paper by economics professor Douglas Irwin that challenges much of the previous research performed on the Great Depression. The paper was published in September by the National Bureau of Economic Research.
"France's contribution was equal if not greater than the [United States']," Irwin said. "So I'm not blaming France completely, but I'm saying they're jointly to blame. We've ignored France's role, and it should be recognized."
The traditional view among economists is that the Depression began when the Federal Reserve tightened U.S. monetary policy in 1929, resulting in worldwide deflation, according to Irwin.
"Essentially, the entire literature on the Great Depression blames the United States and the Federal Reserve," he said. "This paper doesn't exonerate the [United States,] but it says, Well, it wasn't just the U.S. France was doing it, too.'"
France imposed deflation on the entire world by keeping gold instead of dispersing it into the market, according to Irwin.
"Under the gold standard, the country's central banks are supposed to adjust their monetary policy based on how much gold they have in their vaults," Irwin explained. "If you have gold coming into your country, you're supposed to increase your money supply."
France failed to create more money to reflect its increasing gold reserves, Irwin said.
"That's a big problem, because there's only so much gold in the world, and if France takes a large portion of it, they're imposing deflation because prices will fall."
Irwin's paper, "Did France Cause the Great Depression?" has received international attention for its alternate claim. Reuters and the French news agency L'Express have already written articles about the paper, and the Library of Economics and Liberty's "EconTalk" podcast also discussed Irwin's findings.
Professor Ronald Edsforth, who teaches economic history, said the paper is receiving attention mainly because of its timing.
"We have had a global financial crisis, there's still a global slowdown and now fears of deflation the paper helps us see why it's happening," he said. "Also, because the paper focuses on monetary policy, there's great interest in it because policy makers are looking to see what they should do right now to ensure the whole world economy grows and we avoid the trap of deflation."
Irwin said that the paper has been enormously popular on his website, as economics blogs picked it up quickly and increased public interest.
"A lot of people find it interesting, and there are almost no criticisms of it," Irwin said. "I think everyone sort of knew that France may have played a role, and this has really pinned it down. So while it may sound controversial the title especially almost everyone accepts it because the evidence is really strong."
Irwin pointed to two charts in his paper one presenting France's increasing share of global gold reserves and the other of the ratios of reserves to liabilities from major central banks from 1928 to 1932 as official evidence to show that "what France was doing was way off the charts."
"One you've looked at the evidence it's so dramatic you really can't argue with it," he said.
Economics professor Meir Kohn, who specializes in the financial system, called Irwin's paper "a big deal."
"It sort of shocked me, because most of the attention that the economists have paid to the Great Depression is really about government policy during the depression, whether government policy slowed or helped the economy," Kohn said. "People haven't paid as much attention to what actually caused the Great Depression. I think [Irwin's] paper is enormously important because it really addresses that question and puts a different perspective on the work of [economists John Maynard] Keynes, Milton Friedman and others."
Edsforth noted that Irwin's paper highlighted data that has not received much attention since World War II.
"The paper doesn't give us many ideas about why the Depression turned into a prolonged period of stagnation and high unemployment, but I don't think that's what Irwin's up to," Edsforth said. "He's bringing into focus a development beginning in late '20s and going into '30s that people recognized, but historians haven't paid much attention to in the years since World War II. Irwin's a very good historian."
Two books have already been written on the subject H. Clark Johnson's "Gold, France, and the Great Depression, 1919-1932" and Kenneth Moure's "The Gold Standard Illusion: France, the Bank of France, and the International Gold Standard, 1914-1939" but they did not catch on as Irwin's paper has.
"These books haven't penetrated the consciousness of most economists," Irwin said. "And so having all this in 20 pages, where I just lay out the data, I regret to say to those authors, that this is going to be more effective. I'm not claiming originality for what I've done my paper's just building on those two books and doing a few added calculations."
Irwin has already presented his paper in lectures at Rutgers University and Northwestern University and will travel to the University of California, Berkeley; Stanford University; UC, San Diego; UC, Davis and Duke University in the following weeks to present the findings.
