Working Paper: NBER ID: w16350
Authors: Douglas A. Irwin
Abstract: The gold standard was a key factor behind the Great Depression, but why did it produce 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 percent between 1927 and 1932 and effectively sterilized most of this accumulation. 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. The results indicate that France was somewhat more to blame than the United States for the worldwide deflation of 1929-33. The deflation could have been avoided if central banks had simply maintained their 1928 cover ratios.
Keywords: Great Depression; Gold Standard; Monetary Policy
JEL Codes: E31; E42; E5; N14
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| France's accumulation and sterilization of gold reserves (F32) | global deflation (F69) |
| France's accumulation and sterilization of gold reserves (F32) | artificial shortage of reserves (E44) |
| artificial shortage of reserves (E44) | deflationary pressures on other countries (E31) |
| France's policies (F55) | contraction in global money supply (E51) |
| France's policies (F55) | significant deflationary impact (E31) |
| France's policies (F55) | hoarding gold instead of monetizing it (E42) |
| maintaining 1928 cover ratios (G32) | rise of world prices (P22) |
| France and the United States' policies (F52) | world prices falling by 42 percent (P22) |