September 20, 2010

YET WE KEEP TIGHTENING MONEY INTO THE TEETH OF DEFLATION:

Did France cause the Great Depression? (Douglas Irwin, 20 September 2010, Vox)

To explain the disaster, economic historians have pointed to the policies followed by central banks. The standard explanation for the onset of the Great Depression is the tightening of US monetary policy in early 1928 (Friedman and Schwartz 1963, Hamilton 1987). The increase in US interest rates attracted gold from the rest of the world, but the gold inflows were sterilised by the Federal Reserve so that they did not affect the monetary base. This forced other countries to tighten their monetary policies as well, without the benefit of a monetary expansion in the US. From this initial deflationary impulse came currency crises and banking panics that merely reinforced the downward spiral of prices.
… and the not-so-standard

Yet what is often overlooked is the fact that France was doing almost exactly the same thing. In fact, France was accumulating and sterilising gold reserves at a much more rapid rate than the US (see Johnson 1997 and Mouré 2002).

Posted by Orrin Judd at September 20, 2010 8:14 PM
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