Gold, France, and the Great Depression, 1919-1932

Gold, France, and the Great Depression, 1919-1932

H. CLARK JOHNSON
Copyright Date: 1997
Published by: Yale University Press
Pages: 288
https://www.jstor.org/stable/j.ctt32bnsg
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    Gold, France, and the Great Depression, 1919-1932
    Book Description:

    H. Clark Johnson develops a convincing and original narrative of the events that led to the major economic catastrophe of the twentieth century. He identifies the undervaluation and consequent shortage of world gold reserves after World War I as the underlying cause of a sustained international price deflation that brought the Great Depression. And, he argues, the reserve-hoarding policies of central banks-particularly the Bank of France-were its proximate cause.The book presents a detailed history of the events that culminated in the depression, highlighting the role of specific economic incidents, national decisions, and individuals. Johnson's analysis of how French domestic politics, diplomacy, economic ideology, and monetary policy contributed to the international deflation is new in the literature. He reaches provocative conclusions about the functioning of the pre-1914 gold standard, the spectacular postwar movement of gold to India, the return of sterling to prewar parity in 1925, the German reparations controversy, the stock market crash of 1929, the Smoot-Hawley tariff of 1930, the central European banking crisis of 1931, and the end of sterling convertibility in 1931. The book also provides a nuanced picture of Keynes during the years before hisGeneral Theoryand deals at length with the history of economic thought in order to explain the failure of recent scholarship to adequately account for the Great Depression.

    eISBN: 978-0-300-14653-0
    Subjects: Economics

Table of Contents

  1. Front Matter
    (pp. i-vi)
  2. Table of Contents
    (pp. vii-viii)
  3. Acknowledgments
    (pp. ix-xii)
  4. Introduction
    (pp. 1-10)

    A great deal has been written about the origins of the Great Depression of 1929–32. This book makes extensive use of insights developed elsewhere but may nevertheless be controversial. It advances the view that essential portions of the history of these years have seldom been incorporated into a coherent account.

    Why does this matter? The Great Depression marked the sharpest international business contraction of modern times. Worldwide manufacturing production (excluding the USSR) dropped by almost 40 percent in a span of three years.¹ Unemployment rose to nearly a quarter of the total workforce in the United States and Germany...

  5. 1 Deflation and Depression
    (pp. 11-26)

    This book joins a growing consensus that the Great Depression had predominately monetary causes.¹ Implicit in this view is the argument that the international price deflation that began in 1929 had real effects on employment and output. This convergence of opinion nevertheless masks puzzlement over the source of the monetary disruption. Further, the theoretical underpinnings of this argument are seldom identified.

    Neoclassical economists have often argued the case for monetary neutrality, which asserts that price inflation or deflation does not bring a sustained change in economic performance. They posit that markets clear rapidly, hence that supply and demand will not...

  6. 2 The Prewar Gold Standard
    (pp. 27-43)

    In a common view, the pre-1914 gold standard succeeded because it functioned automatically, in contrast to the managed interwar standard. This argument usually assumes one of two somewhat contradictory forms. In one version the price-specie-flow mechanism automatically raised prices (and then output) in surplus countries and lowered them in deficit countries.¹ A second version stresses the role of central banks operating according to rules. Through this mechanism central banks adjusted their discount rates in response to changes in their gold reserves, which in turn kept price and output changes roughly uniform with systemic averages. Parallel to the arguments stressing automaticity...

  7. 3 The Postwar Undervaluation of Gold
    (pp. 44-62)

    The roots of the world deflation of the 1930s lie in the international liquidity crisis induced by the price inflation during and after World War I. The issue of uncovered notes to finance wartime spending in European countries gave rise to systemic monetary expansion (and to an expansive Thornton effect), hence to price inflation. United States exports grew to fill both the commercial demands of neutral countries—whose markets had been vacated by Europe’s traditional exporters—and the war-related demands of the belligerents. The U.S. gold stock grew from $1.8 billion in 1914 to $3.2 billion in mid-1917.¹ This represented...

  8. 4 The Postwar Gold Exchange Standard
    (pp. 63-72)

    The Genoa Conference of 1922 called for cooperative central bank action to maintain the value of gold at its current purchasing power level. It proposed that gold centers, then understood as London and New York, should hold some gold reserves and maintain convertibility of their currencies into gold. Other participating countries might hold a large portion or all of their reserves in the form of foreign exchange. Resolution 9 was vague about the extent to which gold center countries, too, should hold reserves in foreign exchange.¹ Hawtrey, the dominant British economist at Genoa, indicated subsequently that he had in mind...

  9. 5 The French Inflation, 1921–26
    (pp. 73-89)

    Price inflation often eased economic recovery and postwar reconstruction in the early 1920s. In a cross-country study, Eichengreen finds this connection especially pronounced when market participants, if anything, expected deflation as part of a return to prewar price levels.¹ He tests price shifts against the obvious alternative explanation, that high aggregate demand associated with reconstruction efforts (and independent of price changes) was the vital variable. He concludes that during 1921–27 “different price-level trends account for approximately twice as much of the [change in output] differential as differing reconstruction requirements.”²

    Eichengreen’s study stops short of answering the more difficult question...

  10. 6 German and French Capital Inflows, 1924–31
    (pp. 90-110)

    Keynes distinguished between “spontaneous” and “induced” capital movements.¹ A spontaneous capital flow occurs because the marginal efficiency of capital is perceived as being higher in the receiving country. An induced capital flow, by contrast, is propelled by differential interest rates, independent of changes in the marginal efficiency of capital. (A third variant, not mentioned in theTreatise on Money— but which Keynes surely would have recognized — is a capital flow driven by concern for safety, for example, fear of principal loss through bankruptcies or confiscation. Such fears would drive capital flows at times during the 1920s and 1930s.) In an...

  11. 7 The British and German Deflations, 1924–27
    (pp. 111-119)

    Keynes and others have focused attention on the British return to prewar parity in 1925 at the cost of sustained deflation. In the early 1920s, Keynes’s emphasis was that a particular country — Britain — not be constrained in its internal banking policy by the vicissitudes of another country’s monetary situation. In hisTract on Monetary Reformof 1923, he set maintaining of the stability of sterling prices as the primary goal of British monetary policy, while proposing that cooperation with the U.S. Federal Reserve be a secondary objective. He suggested that the Bank of England regulate, rather than peg, the price...

  12. 8 The French Stabilization, 1926–28
    (pp. 120-134)

    During the years of a declining franc, from 1922, to July 1926, French capital was exported in bulk; capital holders sought relief from both inflation-sensitive French financial assets and French taxes.¹ Capital export took form in the purchase of non-French securities, loans of francs against foreign exchange, deposits in banks abroad, and investments of all varieties in Europe’s financial centers. Much of this capital settled in London, almost without condition as to date of repayment or interest rates. This foreign demand for sterling eased otherwise tight British credit conditions and buoyed the pound. Leffingwell noted that because of the flight...

  13. 9 The French Deflation, 1928–32
    (pp. 135-158)

    French action during 1926–28, the period of de facto stabilization, had already damaged the Genoa framework. The F35 billion increase in gold and foreign exchange in the two years up to June 1928 was used to increase currency by only F3½ billion and to increase M1 by only F24 billion.¹ Reserves are normally assumed to support money expansion by some multiple of their growth rate. (For example, a 33 percent reserve requirement would support an increase of three units of currency and deposits for each unit increase in reserves.) The amount of sterilization of foreign exchange reserves from 1926...

  14. 10 The American Deflation, 1928–32
    (pp. 159-176)

    The movement of gold to France played an essential role in ending the interwar gold standard and in wrecking international prosperity, but events elsewhere were not unimportant, and other monetary authorities did more than a little damage. Developments in the United States merit detailed attention, both for their contemporary impact and for the prominence they receive in most accounts of the period.

    Heretofore I have treated the level of profit inflation or deflation as responsive to government fiscal and, especially, monetary actions. Where governments were unable to act, I have often identified external constraints, chiefly related to the workings of...

  15. 11 Why Did the Great Depression Happen?
    (pp. 177-189)

    It has become almost a commonplace that the deflation of 1929–32 was a consequence of a malfunction of the interwar gold standard. But this essential agreement breaks down as soon as one shifts to details. Hawtrey, Cassel, and Keynes proposed that the gold standard be “managed” to avoid the monetary contraction that would otherwise result from inadequate reserves. Friedman and Schwartz argued that no international deflation would have occurred had exchange rates been allowed to float. Temin and Eichengreen more recently have linked the gold standard to deflationary policies adopted by various central banks, while either neglecting or denying...

  16. Appendix: Gold in Central Banks and Treasuries, December 1926–June 1932 (millions of dollars)
    (pp. 190-194)
  17. Notes
    (pp. 195-238)
  18. Glossary
    (pp. 239-244)
  19. Bibliography
    (pp. 245-260)
  20. Index
    (pp. 261-272)