Did France cause The Great Depression?

November 1, 2010

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.

All this runs counter to the traditional finger-pointing for The Great Depression, which has it that the U.S Federal Reserve tipped the world into the economic abyss by tightening monetary policy.

Irwin does not let the Fed totally off the hook, however. He concludes that France was “somewhat more” to blame than the United States for the worldwide deflation of 1929-33 and that the deflation could have been avoided if central banks had simply maintained things as they were in 1928.

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