Here's Why You Should Blame The Great Depression On France

It’s pretty clear that America caused the financial crisis, but we can feel a bit better about the Great Depression.

NBER’s Doug Irwin says France set of a wave of worldwide deflation by hoarding gold:

This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously, if the historical relationship between world gold reserves and world prices had continued.

Other theories have blamed the depression on tightening of US monetary policy in 1928.

While global gold reserves were growing, France grabbed all of the gains

Source: NBER

US tightening from 1928-1930 reduced the flow of gold -- but not NEARLY as much as French gold hoarding

Source: NBER

France did not monetise its gold bounty, choosing instead to raise its cover ratio

Source: NBER

France's monetary supply (M2) did not increase, despite surging reserves

Source: NBER

Assuming a normal relation between gold supply and commodity prices (not counting WW1), prices would have kept INCREASING if not for gold hoarding

Source: NBER

Instead, prices crashed -- DEFLATION

Source: NBER

Based on standard cover ratios, France was holding excess gold equivalent to 14% of global supply by 1932

Source: NBER

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