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Economist Douglas Irwin of Dartmouth College has stirred up a bit of a fuss by concluding in some academic research that it was France, not the United States, that was most to blame for The Great Depression.
Irwin's theory, in a paper posted here by the National Bureau of Economic Research, is that France created an artificial shortage of gold reserves when it increased its share from 7 percent to 27 percent between 1927 and 1932. Because major currencies at the time were backed by gold under the Gold Standard, this put other countries under enormous deflationary pressure.
To prove his point, Irwin ran a model looking at what would have happened without the French move. The results:
Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously.
For Federal Reserve Chairman Ben Bernanke, 2009 may be a tough year as political battles pile on top of tough economic challenges.
Bernanke must juggle a host of problems as he tries to revive the economy. With the U.S. unemployment rate at 9.4 percent and still climbing, he faces the challenge of recovering from an 18-month-old recession with unconventional policies that some worry will ignite inflation.
There’s lots of money sloshing around the financial system these days. The Federal Reserve has established a target range of 0-0.25 percent for its key rate, bringing it closer to unconventional action to lift the economy out of a year-long recession.
From Washington, the first package aimed at rescuing the credit crisis-hit banking sector amounted to $700 billion. Treasury can use only half of that amount and it has already pledged all but $15 billion of it. The Senate has refused to pass a $14 billion rescue package for Detroit’s three major car companies last week, leaving it in the hands of the Bush administration to work out a deal.