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He French Gold Sink and the Great Deflation of 1929-32 Douglas...

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he French Gold Sink and the Great
Deflation of 1929-32
Douglas A. Irwin
ABSTRACT
The gold standard was a key factor behind the Great Depression, but why did it pro
duce such an intense worldwide deflation and associated economic contraction?

While
the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the
downturn, France increased its share of world gold reserves from 7 percent to 27 per
cent between 1927 and 1932, and failed to monetize most of this accumulation.

This
created an artificial shortage of gold reserves and put other countries under significant
deflationary pressure.

A simple calculation indicates that the United States and France
shared the blame (in a 60/40 split) for the withdrawal of gold from the rest of the
world and the onset of worldwide deflation in 1929. Counterfactual simulations indi
cate that world prices would have been stable during this period, instead of declining
calamitously, if the historical relationship between gold reserves and world prices
had continued.

The deflation could have been avoided if central banks had simply
maintained their 1928 cover ratios.

Douglas A. Irwin is the John Sloan Dickey Third Century Professor of Arts and
Sciences and professor of economics at Dartmouth College.

He is a research associate
of the National Bureau of Economic Research.

The author thanks Michael Bordo, Barry Eichengreen, James Feyrer, Marc Flandreau, David
Friedman, Clark Johnson, Nancy Marion, Allan Meltzer, Michael Mussa, Martha Olney,
Randall Parker, Hugh Rockoff, Christina Romer, Marjorie Rose, Scott Sumner, and Peter,.

Posted June 23 2024 at 1:04 PM

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