(BEING CONTINUED FROM 19/06/12)
A)The Gold Standard, Deflation, and Financial Crisis in the Great Depression:
With its accumulation of gold. France should have been expected to inflate;
For our purposes here it does not matter much to what extent central bank
If monetary contraction propagated by the gold standard was the source of
there were a significant number of countries in each category) for all gold
In summary, data from our sample of twenty-four countries support the
in the 1930s, although the evidence in this case is a bit less clear-cut.
Author: Ben Bemanke, Harold JamesConference Date: March 22-24,1990
Ben Bemanke is professor of economics and public affairs at Princeton University and a research
The authors thank
8. In constructing the grand averages taken over gold and non-gold countries, if a
and thus often gained deposits during panic periods.
SOURCE The National U.S.A. Bureau of Economic Research,chapter parts from the book
Financial Markets and Financial Crises
B)Why the U.S. Has Launched a New Financial World War -- and How the Rest of the World Will Fight Back
A)The Gold Standard, Deflation, and Financial Crisis in the Great Depression:
An International Comparison
With its accumulation of gold. France should have been expected to inflate;
but in part because of the restrictions on open market operations discussed
above and in part because of deliberate policy choices, the impact of the gold
inflow on French prices was minimal. The French monetary base did increase
with the inflow of reserves, but because economic growth led the demand for
francs to expand even more quickly, the country actually experienced a wholesale price
deflation of almost 11% between January 1929 and January 1930.
Hamilton (1987) also documents the monetary tightening in the United
States in 1928, a contraction motivated in part by the desire to avoid losing
gold to the French but perhaps even more by the Federal Reserve's determination
to slow down stock market speculation. The U.S. price level fell about
4% over the course of 1929. A business cycle peak was reached in the United
States in August 1929, and the stock market crashed in October.
The initial contractions in the United States and France were largely selfinflicted
wounds; no binding external constraint forced the United States to
deflate in 1929, and it would certainly have been possible for the French government
to grant the Bank of France the power to conduct expansionary open
market operations. However, Temin (1989) argues that, once these destabilizing
policy measures had been taken, little could be done to avert deflation and
depression, given the commitment of central banks to maintenance of the gold
standard. Once the deflationary process had begun, central banks engaged in
competitive deflation and a scramble for gold, hoping by raising cover ratios
to protect their currencies against speculative attack. Attempts by any individual
central bank to reflate were met by immediate gold outflows, which forced
the central bank to raise its discount rate and deflate once again. According to
Temin, even the United States, with its large gold reserves, faced this constraint.
Thus Temin disagrees with the suggestion of Friedman and Schwartz
(1963) that the Federal Reserve's failure to protect the U.S. money supply was
due to misunderstanding of the problem or a lack of leadership; instead, he
claims, given the commitment to the gold standard (and, presumably, the absence
of effective central bank cooperation), the Fed had little choice but to
let the banks fail and the money supply fall.
For our purposes here it does not matter much to what extent central bank
choices could have been other than what they were. For the positive question
of what caused the Depression, we need only note that a monetary contraction
began in the United States and France, and was propagated throughout the
world by the international monetary standard.4
the worldwide deflation and depression, then countries abandoning the gold
standard (or never adopting it) should have avoided much of the deflationary
pressure. This seems to have been the case. In an important paper, Choudhri
and Kochin (1980) documented that Spain, which never restored the gold
standard and allowed its exchange rate to float, avoided the declines in prices
and output that affected other European countries. Choudhri and Kochin also
showed that the Scandinavian countries, which left gold along with the United
Kingdom in 1931, recovered from the Depression much more quickly than
other small European countries that remained longer on the gold standard.
Much of this had been anticipated in an insightful essay by Haberler (1976).
Eichengreen and Sachs (1985) similarly focused on the beneficial effects of
currency depreciation (i.e., abandonment of the gold standard or devaluation).
For a sample of ten European countries, they showed that depreciating
countries enjoyed faster growth of exports and industrial production than
countries which did not depreciate. Depreciating countries also experienced
lower real wages and greater profitability, which presumably helped to increase
production. Eichengreen and Sachs argued that depreciation, in this
context, should not necessarily be thought of as a "beggar thy neighbor" policy;
because depreciations reduced constraints on the growth of world money
supplies, they may have conferred benefits abroad as well as at home (although
a coordinated depreciation presumably would have been better than
the uncoordinated sequence of depreciations that in fact took place).5
Some additional evidence of the effects of maintaining or leaving the gold
standard, much in the spirit of Eichengreen and Sachs but using data from a
larger set of countries, is given in our tables 2.2 through 2.4. These tables
summarize the relationships between the decision to adhere to the gold standard
and some key macroeconomic variables, including wholesale price inflation
(table 2.2), some indicators of national monetary policies (table 2.3), and
industrial production growth (table 2.4). To construct these tables, we divided
our sample of twenty-four countries into four categories6:
1) countries not on
the gold standard at all (Spain) or leaving prior to 1931 (Australia and New Zealand);
2) countries abandoning the full gold standard in 1931 (14 countries);
3) countries abandoning the gold standard between 1932 and 1935 (Rumania
in 1932, the United States in 1933, Italy in 1934, and Belgium in 1935); and 4) countries still on the full gold standard as of 1936 (France, Netherlands, Poland).7
Tables 2.2 and 2.4 give the data for each country, as
well as averages for the large cohort of countries abandoning gold in 1931,
for the remnant of the gold bloc still on gold in 1936, and (for 1932-35, when
there were a significant number of countries in each category) for all gold
standard and non-gold standard countries. Since table 2.3 reports data on four
different variables, in order to save space only the averages are shown.8
The link between deflation and adherence to the gold standard, shown in
table 2.2, seems quite clear. As noted by Choudhri and Kochin (1980),
Spain's abstention from the gold standard insulated that country from the general
deflation; New Zealand and Australia, presumably because they retained
links to sterling despite early abandonment of the strict gold standard, did
however experience some deflation. Among countries on the gold standard as
of 1931, there is a rather uniform experience of about a 13% deflation in both
1930 and 1931. But after 1931 there is a sharp divergence between those
countries on and those off the gold standard. Price levels in countries off the
gold standard have stabilized by 1933 (with one or two exceptions), and these
countries experience mild inflations in 1934-36. In contrast, the gold standard
countries continue to deflate, although at a slower rate, until the gold standard's
dissolution in 1936.
With such clearly divergent price behavior between countries on and off
gold, one would expect to see similarly divergent behavior in monetary policy.
Table 2.3 compares the average behavior of the growth rates of three monetary
aggregates, called for short MO, Ml, and M2, and of changes in the
central bank discount rate. MO corresponds to money and notes in circulation,
Ml is the sum of MO and commercial bank deposits, and M2 is the sum of
Ml and savings bank deposits.9
The expected differences in the monetary polices
of the gold and non-gold countries seem to be in the data, although somewhat
less clearly than we had anticipated. In particular, despite the twelve
percentage point difference in rates of deflation between gold and non-gold
countries in 1932, the differences in average money growth in that year between
the two classes of countries are minor; possibly, higher inflation expectations
in the countries abandoning gold reduced money demand and thus
became self-confirming. From 1933 through 1935, however, the various monetary
indicators are more consistent with the conclusion stressed by Eichengreen
and Sachs (1985), that leaving the gold standard afforded countries
more latitude to expand their money supplies and thus to escape deflation.
The basic proposition of the gold standard-based explanation of the
Depression is that, because of its deflationary impact, adherence to the gold
standard had very adverse consequences for real activity. The validity of this
proposition is shown rather clearly by table 2.4, which gives growth rates of
industrial production for the countries in our sample. While the countries
which were to abandon the gold standard in 1931 did slightly worse in 1930
and 1931 than the nations of the Gold Bloc, subsequent to leaving gold these
countries performed much better. Between 1932 and 1935, growth of industrial
production in countries not on gold averaged about seven percentage
points a year better than countries remaining on gold, a very substantial effect.
In summary, data from our sample of twenty-four countries support the
view that there was a strong link between adherence to the gold standard and
the severity of both deflation and depression. The data are also consistent with
the hypothesis that increased freedom to engage in monetary expansion was a
reason for the better performance of countries leaving the gold standard early
in the 1930s, although the evidence in this case is a bit less clear-cut.
Author: Ben Bemanke, Harold JamesConference Date: March 22-24,1990
Ben Bemanke is professor of economics and public affairs at Princeton University and a research
associate of the National Bureau of Economic Research. Harold James is assistant professor
of history at Princeton University.
The authors thank
David Fernandez, Mark Griffiths, and Holger Wolf for invaluable research
assistance. Support was provided by the National Bureau of Economic Research and the National
Science Foundation.
Notes
4. Temin (1989) suggests that German monetary policy provided yet another contractionary
impetus.
5. There remains the issue of whether the differences in timing of nations' departure
from the gold standard can be treated as exogenous. Eichengreen and Sachs (1985)
argue that exogeneity is a reasonable assumption, given the importance of individual
national experiences, institutions, and fortuitous events in the timing of each country's
decision to go off gold. Strong national differences in attitudes toward the gold standard
(e.g., between the Gold Bloc and the Sterling Bloc) were remarkably persistent
in their influence on policy.
6. The countries in our sample are listed in table 2.1. We included countries for
which the League of Nations collected reasonably complete data on industrial production,
price levels, and money supplies (League of Nations' Monthly Bulletin of Statistics
and Yearbooks, various issues; see also League of Nations, Industrialization and 1945).
Foreign Trade,Latin America, however, was excluded because of concerns
about the data and our expectation that factors such as commodity prices would play a
more important role for these countries. However, see Campa (forthcoming) for evidence
that the gold standard transmitted deflation and depression to Latin America in a
manner very similar to that observed elsewhere.
7. We define abandonment of the gold standard broadly as occurring at the first date
in which a country imposes exchange controls, devalues, or suspends gold payments;
see table 2.1 for a list of dates. An objection to this definition is that some countries
continued to try to target their exchange rates at levels prescribed by the gold standard
even after "leaving" the gold standard by our criteria; Canada and Germany are two
examples. We made no attempt to account for this, on the grounds that defining adherence
to the gold standard by looking at variables such as exchange rates, money
growth, or prices risks assuming the propositions to be shown.
8. In constructing the grand averages taken over gold and non-gold countries, if a
country abandoned the gold standard in the middle of a year, it is included in both the
gold and non-gold categories with weights equal to the fraction of the year spent in
each category. We use simple rather than weighted averages in the tables, and similarly
give all countries equal weight in regression results presented below. This was done
because, for the purpose of testing hypotheses (e.g., about the relationship between
deflation and depression) it seems most reasonable to treat each country (with its own
currency, legal system, financial system, etc.) as the basic unit of observation and to
afford each observation equal weight. If we were instead trying to measure the overall
economic significance of, for example, an individual country's policy decisions,
weighted averages would be more appropriate.
9. The use of the terms Ml and M2 should not be taken too literally here, as the
transactions characteristics of the assets included in each category vary considerably
among countries. The key distinction between the two aggregates is that commercial
banks, which were heavily involved in commercial lending, were much more vulnerable
to banking panics. Savings banks, in contrast, held mostly government securities,
and thus often gained deposits during panic periods.
SOURCE The National U.S.A. Bureau of Economic Research,chapter parts from the book
Financial Markets and Financial Crises
B)Why the U.S. Has Launched a New Financial World War -- and How the Rest of the World Will Fight Back
(TO BE CONTINUED)
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