LONDON (Reuters) - As if France didn’t have enough problems at the moment with mass protests against pension reforms, now it stands accused of causing The Great Depression.
An academic paper published by the National Bureau of Economic Research suggests it may have been gold hoarding by France in the late 1920s that tipped the world into the economic abyss and not the oft-blamed tightening of U.S. monetary policy.
According to the paper, written by economist Douglas Irwin of Dartmouth College, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively “sterilized” it so as not to have a negative impact domestically.
Major currencies at the time were backed by gold under the Gold Standard system, so the move had the effect of creating an artificial shortage of reserves, putting other countries under enormous deflationary pressure.
Irwin tested his theory by looking to see what would have happened without the French move.
“Counterfactual simulations indicate that world prices would have increased slightly between 1929 and 1933, instead of declining calamitously,” he wrote.
He concludes that France was “somewhat more” to blame than the United States for the worldwide deflation of 1929-33 and that the deflation could have been avoided if central banks had simply maintained things as they were in 1928.
The research is available at www.nber.org