Krugman v. Friedman

Regular readers of this blog will not be surprised to learn that I am not one of Milton Friedman’s greatest fans. He was really, really smart, and a brilliant debater; he had a great intuitive grasp of price theory (aka microeconomics), which helped him derive interesting, and often testable, implications from his analysis, a skill he put to effective use in his empirical work in many areas especially in monetary economics. But he was intolerant of views he didn’t agree with and, when it suited him, he could, despite his libertarianism, be a bit of a bully. Of course, there are lots of academics like that, including Karl Popper, the quintessential anti-totalitarian, whose most famous book The Open Society and Its Enemies was retitled “The Open Society and its Enemy Karl Popper” by one of Popper’s abused and exasperated students. Friedman was also sloppy in his scholarship, completely mischaracterizing the state of pre-Keynesian monetary economics, more or less inventing a non-existent Chicago oral tradition as carrier of the torch of non-Keynesian monetary economics during the dark days of the Keynesian Revolution, while re-packaging a diluted version of the Keynesian IS-LM model as a restatement of that oral tradition. Invoking a largely invented monetary tradition to provide a respectable non-Keynesian pedigree for the ideas that he was promoting, Friedman simply ignored, largely I think out of ignorance, the important work of non-Keynesian monetary theorists like R. G. Hawtrey and Gustav Cassel, making no mention of their monetary explanation of the Great Depression in any of works, especially in the epochal Monetary History of the United States.

It would be one thing if Friedman had provided a better explanation for the Great Depression than Hawtrey and Cassel did, but in every important respect his explanation was inferior to that of Hawtrey and Cassel (see my paper with Ron Batchelder on Hawtrey and Cassel). Friedman’s explanation was partial, providing little if any insight into the causes of the 1929 downturn, treating it as a severe, but otherwise typical, business-cycle downturn. It was also misleading, because Friedman almost entirely ignored the international dimensions and causes of the downturn, causes that directly followed from the manner in which the international community attempted to recreate the international gold standard after its collapse during World War I. Instead, Friedman, argued that the source, whatever it was, of the Great Depression lay in the US, the trigger for its degeneration into a worldwide catastrophe being the failure of the Federal Reserve Board to prevent the collapse of the unfortunately named Bank of United States in early 1931, thereby setting off a contagion of bank failures and a contraction of the US money supply. In doing so, Friedman mistook a symptom for the cause. As Hawtrey and Cassel understood, the contraction of the US money supply was the result of a deflation associated with a rising value of gold, an appreciation resulting mainly from the policy of the insane Bank of France in 1928-29 and an incompetent Fed stupidly trying to curb stock-market speculation by raising interest rates. Bank failures exacerbated this deflationary dynamic, but were not its cause. Once it started, the increase in the monetary demand for gold became self-reinforcing, fueling a downward deflationary spiral; bank failures were merely one of the ways in which increase in the monetary demand for gold fed on itself.

So if Paul Krugman had asked me (an obviously fanciful hypothesis) whether to criticize Friedman’s work on the Great Depression, I certainly would not have discouraged him from doing so. But his criticism of Friedman on his blog yesterday was misguided, largely accepting the historical validity of Friedman’s account of the Great Depression, and criticizing Friedman for tendentiously drawing political conclusions that did not follow from his analysis.

When wearing his professional economist hat, what Friedman really argued was that the Fed could easily have prevented the Great Depression with policy activism; if only it had acted to prevent a big fall in broad monetary aggregates all would have been well. Since the big decline in M2 took place despite rising monetary base, however, this would have required that the Fed “print” lots of money.

This claim now looks wrong. Even big expansions in the monetary base, whether in Japan after 2000 or here after 2008, do little if the economy is up against the zero lower bound. The Fed could and should do more — but it’s a much harder job than Friedman and Schwartz suggested.

Krugman is mischaracterizing Friedman’s argument. Friedman said that the money supply contracted because the Fed didn’t act as a lender of last resort to save the Bank of United States from insolvency setting off a contagion of bank runs. So Friedman would have said that the Fed could have prevented M2 from falling in the first place if it had acted aggressively as a lender of last resort, precisely what the Fed was created to do in the wake of the panic of 1907. The problem with Friedman’s argument is that he ignored the worldwide deflationary spiral that, independently of the bank failures, was already under way. The bank failures added to the increase in demand for gold, but were not its source. To have stopped the Depression the Fed would have had to flood the rest of the world with gold out of the massive hoards that had been accumulated in World War I and which, perversely, were still growing in 1928-31. Moreover, leaving the gold standard or devaluation was clearly effective in stopping deflation and promoting recovery, so monetary policy even at the zero lower bound was certainly not ineffective when the right instrument was chosen.

Krugman then makes a further charge against Friedman:

Beyond that, however, Friedman in his role as political advocate committed a serious sin; he consistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression.

Not so fast. Friedman claimed that the Fed converted a serious recession in 1929-30 into the Great Depression by not faithfully discharging its lender of last resort responsibility. I don’t say that Friedman never applied any spin to the results of his positive analysis when engaging in political advocacy. But in Friedman’s discussions of the Great Depression, the real problem was not the political spin that he put on his historical analysis; it was that his historical analysis was faulty on some basic issues. The correct historical analysis of the Great Depression – the one provided by Hawtrey and Cassel – would have been at least as supportive of Friedman’s political views as the partial and inadequate account presented in the Monetary History.

PS  Judging from some of the reactions that I have seen to this post, I suspect that my comments about Friedman came across somewhat more harshly than I intended.  My feelings about Friedman are indeed ambivalent, so I now want to emphasize that there is a great deal to admire in his work.  And even though he may have been intolerant of opposing views when he encountered them from those he regarded as his inferiors, he was often willing to rethink his ideas in the face of criticism.  My main criticism of his work on monetary theory in general and the Great Depression in particular is that he was not well enough versed in the history of thought on the subject, and, as a result, did not properly characterize earlier work that he referred to or simply ignored earlier work that was relevant.   I am very critical of Friedman for having completely ignored the work of Hawtrey and Cassel on the Great Depression, work that I regard as superior to Friedman’s on the Great Depression, but that doesn’t mean that what Friedman had to say on the subject is invalid.


53 Responses to “Krugman v. Friedman”

  1. 1 W. Peden May 2, 2012 at 12:00 pm

    I’m never sure why you get quite so aggressive on the topic of Hawtrey and Cassell, especially when Friedman is involved. It’s particularly puzzling in the case of Friedman, since your position (as I understand it) is more that his (and Anna Schwarz’s) account is incomplete rather than flat-out wrong. Yet there are popular accounts of the Great Depression which contradict your position and which you are uninterested in; is this due to the popularity of the Friedman/Schwarz account?

    Anyway, usually (except as regards the Insane Bank of France) you’re quite willing to let the logic of your arguments do the work.

    As for Krugman-

    “Beyond that, however, Friedman in his role as political advocate committed a serious sin; he consistently misrepresented his own economic work. What he had really shown, or thought he had shown, was that the Fed could have prevented the Depression; but he transmuted this into a claim that the Fed caused the Depression.”

    If a car’s breaks don’t work and there is a car crash, what is the answer to the disjunction-

    “Did the failure of the breaks cause the car to crash or was it simply that they failed to prevent the motions of the car from leading to a crash?”

    – ? I am inclined to say “Yes.” Or, put let pithly, “That’s a false disjunction.” When there is a system such that a part is (a) capable of preventing X and (b) assigned with the job of preventing X, then the failure of the part to prevent X can reasonably be said to be the main cause of X. It’s obviously not the ONLY condition for X, but Friedman never said anything so ridiculous as “The Fed was one and only causal factor in the Great Depression”.

    There’s no transmutation involved in moving from (1) “X can prevent Y and usually would, but didn’t” to (2) “X caused Y”. (1) is one possible type of (2). “Cause”, like a surprising number of verbs, can be satisfied by inaction as well as action.


  2. 2 Bill Woolsey May 2, 2012 at 12:03 pm

    Do you believe that it is Friedman’s position that by allowing the Bank of the United States to fail, there was nothing more to be done?

    I believe, (perhaps with no good reason,) that even if the Bank of the United States failed, then Friedman would argue that sufficient open market operations would have offset the decrease in the money multiplier (due to increased reserve ratios and currency deposit ratios,) kept M2 on its growth path from the twenties, and so kept nominal GDP on its growth path of the twenties.

    Of course, in reality, M2 velocity fell a good bit, but Friedman’s view, I think, is that this was a symptom of the drop in nominal GDP. Friedman’s view, I think is that keeping M2 on a stable growth path does require the Fed to change base money enough to offset any change in the money multiplier. The Fed “caused” the Great Depression, but failing to do its job, which is to keep the quantity of money on a stable growth path by adjusting the quantity of base money however much is needed.

    I would diagree with this view because I think changes in velocity are quite possible even if the quantity of money stays stable. As for the deflationary impact of gold, it may be true that keeping M2 on a stable growth path (or raising it to offset decreases in velocity ) might cause a gold outflow (reflecting growing gold demand in the rest of the world. If the Fed ran out of gold reserves, then it would have been forced by the requirement of gold redeemability to let the M2 money supply fall (or spending on output.)

    But, as you explain, there was no gold outflow at all, but rather a gold inflow. The potential constraint was never in fact binding on the Fed.

    By the way, the “Fed caused the Depression,” is the theory that it restricted money growth to stop the speculative bubble. But the reason why a Great Depression developed was the failure to expand the quantity of base money enough to offset the decrease in the M2 money multiplier.


  3. 3 Mike Sproul May 2, 2012 at 3:25 pm

    Do you have examples of Friedman being intolerant and a bully? It seems out of character. I just remember Armen Alchian saying to our class “He’s a nice guy and I like him.”


  4. 4 David Glasner May 2, 2012 at 8:29 pm

    W. Peden, You are right that I don’t say that Friedman and Schwartz are wrong in attributing the Great Depression to monetary causes, but I think that they were wrong on some basic issues, and that it was inexcusable for them not to have paid attention to the writings about the causes of earlier monetary theorists. They also did not properly understand how the gold standard was operating and the mechanism that was causing deflation. So I am very dissatisfied with their theoretical understanding of the causes of the Great Depression and their failure to take into consideration the analytically superior work of Hawtrey and Cassel, who were not by any stretch of the imagination, obscure writers that nobody had ever heard of or paid attention to. And their argument in the Monetary History for why the source of the Depression was in the US was really quite pathetic. I don’t understand what you are asking me in reference to (unnamed) popular accounts of the Great Depression.

    I think that we are in agreement about Krugman’s criticism of Friedman.

    Bill, Just a quick correction, The Bank of the United States was the bank founded by Alexander Hamilton. The bank that failed in the Great Depression was the Bank of United States.

    I agree that sufficient open market operations were an alternative, but without directly intervening to save the Bank of United States, the Fed might not have been able to prevent the bank run that caused the Bank of United States to fail. Friedman and Schwartz argued that that failure started the contagion, which made it much more difficult to control the situation with just open market operations.

    Friedman was critical of the Fed’s increase of interest rates before the crash, but he did not regard that as the Fed’s most serious error. He felt that it was only in the aftermath of the crash starting in 1931 that things got out of hand. There is something in that, but I think it was a process that was unfolding rather than a new crisis which is how Friedman seemed to view it.

    Mike, Well, obviously Friedman was too smart to try to bully Alchian, with whom he probably had no serious disagreements in any case. That was not the case in Friedman’s treatment of Fischer Black, who didn’t believe money matters and admired John Fullarton. See the very powerful description of Black’s unhappy sojourn in Chicago in Perry Mehrling’s excellent biography of Black.


  5. 5 LUIS H Arroyo May 3, 2012 at 12:37 am

    Obviously I don’t know withprecision the history of te Great Depression except by the Friedman’s works. I don’t see any incompatability between both explanations. Obviusly, I can be wrong. In any case, to substituye a well articulated and tested theory for another one that is no so opposed… I don’t understand.


  6. 6 W. Peden May 3, 2012 at 2:17 am

    David Glasner,

    I can see your position and I’m even inclined to say that it’s superior to Friedman and Schwharz’s. It’s the fact that you are VERY dissatisfied- rather than that you are dissatisfied- with their theory which surprises me.

    The point of the other popular accounts of the Great Depression (the Rothbardian account, the Hayekian intertemporal disequilibrium account, the income inequality account, the Marxist overproduction account, the Post-Keynesian account, Galbraith’s account, and any number of New Classical/Old Keynesian accounts that I’m too young and too ignorant to know) is that all of these seem much further away from the Hawtrey/Cassel account than F&S, but you reserve your fury (which I understand is in good humour) for F&S.

    The main reason for this, I assume (but perhaps wrongly) is that the F&S account has become very popular, especially among economists, and you want a more complete, satisfying account which Hawtrey and Cassel provide e.g. one that fully includes the role of the Gold Standard and the Bank of France.


  7. 7 denim (@wrylyfox) May 3, 2012 at 4:26 am

    So why is Marnier Eccles not included in the discussion of the causes of the Great Depression?
    “But by taking purchasing power out of the hands of mass consumers, the savers denied to themselves the kind of effective demand for their products that would justify a reinvestment of their capital accumulations in new plants. In consequence, as in a poker game where the chips were concentrated in fewer and fewer hands, the other fellows could stay in the game only by borrowing. When their credit ran out, the game stopped.”


  8. 8 Tas von Gleichen May 3, 2012 at 5:06 am

    I’m still a big fan of Friedman. He makes so much sense when watching his clips.


  9. 9 JP Koning May 3, 2012 at 5:28 am

    David, putting yourself in their shoes, do you think Hawtrey/Cassel and Friedman would also have had different explanations for the 2008 – 201x downturn?


  10. 10 Dee May 3, 2012 at 7:26 am

    David Glasner,

    I have read that biography of Black and I don’t see anything in it that would suggest Friedman was a bully. Friedman wasn’t afraid to tell Black that he thought he was wrong. But is that all it takes to make someone a bully? If so, this post of yours seems to tread close to “bullying” Friedman and Kruman!


  11. 11 David Glasner May 3, 2012 at 8:04 am

    Luis, They are not entirely incompatible, but my claim is that Friedman’s was inferior, incomplete, and misleading, and that he bears responsibility as a scholar for having neglected or ignored earlier work by well-known economists that was relevant to the topic that he was writing about.

    W. Peden, Well, the truth is that I am not that well-versed in most of the theories that you are mentioning. I think that my remarks about various versions of Austrian theory have been pretty harsh, softened only slightly by my affection for and veneration of F. A. Hayek. I regard Rothbard’s version of the Austrian theory as being far worse than Friedman’s and I don’t think that anyone could who has been reading this blog regularly could be surprised by that. But as I said to Luis, I am irked by Friedman because he substituted his own inferior explanation for a better one of the same species that had already been put forward, and he should have known better, and in the process, wittingly or unwittingly, helped suppress the memory of the better explanation.

    denim, Marriner Eccles did not become Fed Chairman till 1933 or 1934, so he was not really relevant to the historical period under discussion.

    Tas, I think that my criticism of Friedman may have gone too far, and I did try to include something positive about his abilities as an economist, which was meant sincerely. We all have our faults, so I am not condemning him as a human being or saying that we cannot still gain a lot by reading or listening to him. But we shouldn’t ignore his faults either.

    JP, Interesting question. I think that it is likely that they would all have agreed that the current downturn is the result of a monetary shock and that monetary expansion is the primary means for bringing about recovery.

    Dee, Fair point. There is a difference. Friedman and Krugman have no reason to think that any negative opinion of them that I might express would have the slightest repercussion on their career prospects. I think the relationship between Friedman and Black when Black was at Chicago was very different. Obviously, Black felt ill-treated, and that is why he left Chicago for MIT, which was not obviously a more congenial academic venue for him. By the way, I also regard Keynes’s 1931 or 1932 response to Hayek’s negative review of the Treatise on Money in the journal Economica in which Keynes launched into an unprovoked attack on Hayek’s just published Prices and Production to have been a form of bullying. And so did Keynes’s loyal disciple Roy Harrod in Harrod’s authorized biography The Life of Keynes.


  12. 12 W. Peden May 3, 2012 at 9:06 am


    One of the problems with the “inequality causes financial crises” line is that it was traditionally based on a correlation coefficient of 1… Of 1. Was Britain a more egalitarian society than America at the time? If not, why were there no bank failures in Britain?

    Since then, of course, the evidence for the claim has doubled: two financial crises in 80 years.

    Galbraith’s point about fluctuating investment is interesting, but it raises the question: if truly awful stock market news can cause as big a fluctuation in investment as occured in the Great Depression, then why was Black Monday followed by a year of strong growth?

    However, in spite of its weak theoretical and empirical basis, the income inequality hypothesis (just like the “It’s all due to big government” explanation) has survived and will always survive, because it tells a certain group of people what they want to hear. It’s like the income stagnation pseudo-research one sees, particularly on the internet: there’s little motivation to go into detailed statistical tests when superficial and partial statistics tell one what one what is convenient to believe.


  13. 13 JoeMac May 3, 2012 at 2:08 pm


    Was it the case that Friedman had not read and was unaware of the Hautrey/Cassel views on the Depression, or had he simply never heard of them? Or, did he hear about them but then decide not to read further?

    Also, I would love to hear you views on Irving Fisher, especially pertaining to his views on the Depression.

    Best wishes, love your blog.



  14. 14 teageegeepea May 3, 2012 at 5:49 pm

    You can see on this page Friedman saying that if the Federal Reserve system had never been established, recovery would have begun in early 1931.


  15. 15 Benjamin Cole May 3, 2012 at 6:27 pm

    I forgive Milton Friedman all sins for two reasons:

    1) He told Japan to print a lot of money, and just keep printing it, until growth and then inflation occurred. It was the right policy prescription, even if he may have muddled some Great Depression commentary. He thus advanced himself head and shoulders above the inflation-hysterics who characterize nearly the entire American right-wing.

    2) He advocated a progressive consumption tax to finance military outlays—a brilliant idea.


  16. 16 David Glasner May 3, 2012 at 7:06 pm

    Joe, I can’t say why Friedman did not cite the views of Hawtrey and Cassel. He obviously knew who they were, because they were too famous for any economist of Friedman’s vintage not to have been aware of them. There are a handful of places in which he cites Hawtrey, but none have to do with his explantion of the Great Depression. I think that I have seen Cassel cited someplace in Friedman’s writings, I’m guessing in connection with purchasing power parity, one of Cassel’s important contributions to international monetary economics. Beyond that I cannot venture any guess about his knowledge of them or their explanations of the Great Depression. Every good economist admires Irving Fisher. I think that he generally had views on the Great Depression that were compatible with those of Hawtrey and Cassel. Many people ridicule his statements about the stock market having hit bottom in 1930 and predicting that a recovery would start. I think that he could not imagine that policy would be as bad as it turned out to be. Thanks for your kind words.

    teageegeepea, That view illustrates the narrowness of Friedman’s understanding of the Great Depression. The US could not have recovered from the Great Depression in 1931 while remaining on the gold standard unless the Fed were willing to dump all of its gold on the world market by way of an all-out monetary expansion. Such a monetary expansion would only be possible with a central bank, able to act as a lender of last resort.

    Benjamin, I agree that he gave the right policy advice to Japan. Where did he advocate a progressive consumption tax to finance military outlays? I don’t think I ever heard of that one.


  17. 17 Benjamin Cole May 3, 2012 at 10:08 pm

    In the face of huge budget deficits, is such a program affordable? In an article in 1943, “The Spendings Tax as a Wartime Fiscal Measure,” Mr. Friedman proposed a progressive consumption tax as the best source of revenue to meet critical national objectives. In addition to reporting their incomes to the I.R.S., people would also report their savings, as they do now for 401(k) plans. The difference between income and savings is annual consumption. That amount, less a standard deduction, would be taxed at progressive rates. High tax rates on consumption by the wealthy, Mr. Friedman argued, would generate additional revenue with only minimal sacrifice. So if providing greater economic security for low- and middle-income families is an important national objective, as many voters seem to feel, there are ways to pay the bill.


  18. 18 Olivier Braun May 4, 2012 at 1:22 am

    Dr. Glasner,

    You wrote somewhere about William H. Hutt, « the admirable human being, and unjustly underrated, unfortunately now all but forgotten, economist ». Having read some of his books, I can say that you really can feel he was an admirable human being, the way he took pain to make his case, his care of the suffering of people thrown in unemployment.

    Hutt also tried to explain the state of the pre-Keynesian thinking (he didn’t quote much Hawtrey but loved Cannan and approved of Lavington) and if I dare put his case in a nutshell, I would say : the source of the duration of the crisis lies in the discoordination of the economy, the price system not beeing allowed to function, due to private use of force or threat (labour unions). The task of a government schould be to face the real problem and restore institutions permetting the price system to do it’s work. He saw the keynesian remedy, (unexpected) inflation, as an easy, crude and immoral, way to offset the discoordination, but as unable to correct the sources of the crisis. And bringing other grave problems as well.

    He was certainly not, as you said of Mises, an extremist anti-inflation, for in his The Keynesian Episode he proposed a « dangerous » plan where a government could expand credit and apply an income policy (for a short time).

    I would like to know what do you thing of Hutt’s view, or if you have written about him. It’s a pity there is no biography of him (as far as I know).

    By the way, I am French (and not an economist), and your strong accusation of the « insane » Banque de France will prompt me to look for more about that. I remember that Lionel Robbins, in his book about the great depression (french edition with an elogious preface from our Jacques Rueff), absolved the Banque de france in the same way as Hayek did.

    By the way, who is (or was) the best french economist in your view ?

    Best regards.


  19. 19 Dhruv Sharma May 4, 2012 at 1:45 am

    So your actual beef is with the history of economic thought as opposed to economic history of the Great Depression.

    To address the latter; there are at least three main reasons for the Great Depression captured by the following strands: Financial Accelerator( Bernanke 83, Bernanke Gertler 89,95, Mishkin 91); Monetary hypothesis (Friedman Schwartz 63, Bordo Lane 2010); and the Gold Standard (Eichengreen 92, Irwin 2010).

    Cassel and Hawtrey were somewhat right with the Gold Standard, but missed the first two; and Friedman got the second but not the first and the third, right. In terms of the evolution of writings on the subject as you would know much progress has been made since then!

    Each of the three reasons deserves some claim towards the direction of causality running through the failures of the US Unit Banking system. Nearly 10000 Banks failed over 1930-33 in a series of four waves. All three also put some blame on Debt-Deflation (Fischer 1933).

    The Gold Standard caused much of the damage through the Fed. As you observe supply of Gold actually rose over 1926-32 but much of it was hoarded by the Fed and the Bank of France. The actual aggravation of the Banks started with an illiquidity run especially for the first two waves in the autumn of 1930 and 31. However that turned into an insolvency run by early 1933 (Bordo and Lane 2010).

    All in all my summary above is just to observe that Friedman and Schwartz was somewhat correct in their hypothesis; the actual trigger mechanism for the Depression lay within the financial crisis starting in Germany, which was caused by the Reparations arrangements that had been in place for a decade or so; that kicked Britain out of the Gold Standard resulting in Fed inaction by late 31.

    The actual evolution of the causes to the Great Depression are captured partly by both Friedman, and Cassel and Hawtrey. But only in the last three decades have we got a more wholesome picture!


  20. 20 David Glasner May 4, 2012 at 11:48 am

    Benjamin, How did you find that one? I wonder if he ever made mention of it in later life.

    Olivier, Among his other virtues, Hutt was also an outspoken opponent of Apartheid while he lived in Sourth Africa, for which he was subjected to various forms of harassment by the Nationalist government. He also wrote a little book A Rehabilitation of Say Law that demonstrated to me at least, though he might not have accepted my interpretation, the conceptual equivalence of Say’s Law and the Keynesian multiplier analysis. Clower and Leijonhufvud independently made a similar argument, but they distinguished, in my view unnecessarily, between Say’s Law and what they called Say’s Principle. Perhaps, I’ll do a post on him in the future. I have only mentioned him a few times in passing on the blog, as you seem to have noticed.

    About the Bank of France, I hope that any French readers are not offended by my unkind references to that institution, but in this case I believe that it is necessary to engage in a bit of good-natured hyperbole to drive home the point that the source of the Great Depression was a deflationary increase in the international monetary demand for gold, and it was the Bank of France that was the principal source of that increase in demand. I think that Rueff was a great economist; I have great admiration for his 1948 paper in the Economic Journal on The Economic Fallacies of Lord Keynes, but he was a dogmatic supporter of the gold standard, like most other French economists of his day, so I am not surprised that he defended the Bank of France. I did not know that there was a French Edition of Robbins’s Great Depression. Robbins refused to allow the book to be reprinted in his lifetime, because he disavowed the analysis and regretted that he had supported continued deflationary policies. Rueff died before Robbins, so I am not sure how it was that a French edition of the book could have been published while Rueff was alive. I believe that Maurice Allais, a Nobel Prize winner, was one French economist that was not a supporter of the gold standard and deflation, but that is just a vague impression that I have. I don’t know enough about French economists to rank them, but of course, Leon Walras would be at or near the top of any list of economists, though his nationality may have been Swiss rather than French, having spent most of his career at Lausanne.

    Dhruv, I am not sure what you mean about my “actual beef.” I think the history of both the Great Depression and the history of economic thought are relevant to this discussion. I am not sure what you see as the distinction between a “monetary hypothesis” and a “gold standard.” Since the monetary regime under analysis was a gold standard, the gold standard provides the essential backdrop for a monetary analysis, so I don’t accept that Hawtrey and Cassel missed anything. There were financial repercussions and they are worth considering, but that is a subsidiary analysis, and I agree that German reparations as well as allied war debts played an important role in how events played out. I agree that we have learned a lot in the last three decades, but a lot of what has been learned had already been worked out by Hawtrey and Cassel while it was all happening.


  21. 21 JP Koning May 4, 2012 at 12:36 pm

    “He also wrote a little book A Rehabilitation of Say Law that demonstrated to me at least, though he might not have accepted my interpretation, the conceptual equivalence of Say’s Law and the Keynesian multiplier analysis. Clower and Leijonhufvud independently made a similar argument, but they distinguished, in my view unnecessarily, between Say’s Law and what they called Say’s Principle. Perhaps, I’ll do a post on him in the future.”

    I for one would very much like to read that post if you write it. I’ve gone through Hutt’s book on Say’s Law twice now, but there’s no one around to chat about it.


  22. 22 Olivier Braun May 4, 2012 at 12:49 pm

    Dr. Glasner,

    Thank you for the care you took answering me. I am not a follower of your blog, but each time I read it I was surprised by the care with witch you answered the commentators (actually, your friend Scott Sumner does that also).

    About the french edition of Robbins work, it was published in France in 1935.

    I would definitively like a (long) post on William Hutt. As it happens, I am French but I live in South Africa since last year. I had read his book on Say’s law in a pdf format on my reader and liked it so that I ordered it via abebooks, and I am the happy owner of that book. But I only read it once, witch is certainly not sufficient.

    If you allow me a comment witch could appear unkind, but it is not, you said that Rueff was a « dogmatic » proponent of the gold standard. He surely was for the gold standard (and against the gold-exchange standard), but why dogmatic ? Having read a little from him, I believe (after all, he was an engineer, a scientist-minded) he was attached to the gold standard because he saw in it the only realist check to the public spending and deficit-debt cum inflation (with the armada of price controls he saw enacted to mask the effects – he hated inflation) favored by the governments. You favor for example NGDP targeting, but it is certainly a policy position you took after careful analysis, but an opponent could as well say it is a dogmatic position.

    For Maurice Allais, I don’t know his thinking but it seems he favored a 100% (fiat) money and since the 1990’s he is the favored economist for the far-right protectionists because of his opposition to complete free-trade.

    Best regards.

    Ps : by the way, I love the Hawtrey picture.


  23. 23 Benjamin Cole May 4, 2012 at 1:19 pm

    David G–Yes, he affirmed that view later in life, in fact not so far from the end of his days.

    It is because Friedman had fundamental principles. He was honest—he know that military spending may be necessary, but economically speaking, it is almost entirely parasitic. Taxes must be levied to pay for the military–and sin and consumption taxes are the least damaging of all.


  24. 24 archn May 4, 2012 at 2:52 pm

    @JP Koning
    >I for one would very much like to read that post if you write it. I’ve gone through Hutt’s book on Say’s Law twice now, but there’s no one around to chat about it.

    My good friend Rafe Champion has written quite a bit about Hutt on his occasional site The Rathouse.. If you want someone to chat to about Hutt, I would highly recommend him. He blogs more regularly here.


  25. 25 PrestoPundit May 4, 2012 at 4:57 pm

    Your point about Friedman not being versed in the theoretical work of the major European economists is entirely valid.

    The aspect I’ve studied closely, Friedman’s competence in the economics of Hayek, is a scholarly embarrassment for Friedman.

    Bur his incompetence in this area didn’t stop Friedman from spouting off on the topic or from sharing strong opinions, which usually were completely ungrounded and off target.


  26. 26 Dhruv Sharma May 5, 2012 at 12:43 am

    Dr. Glasner, in Reply:

    i) The difference between the Monetary Hypothesis and the Gold Standard: was the results Great Depression ,as suggested originally by Friedman and Schwartz (63), of a US banking collapse, leading to a fall in deposit-currency ratios and a rise in the money multiplier. Leading to a collapse in Money supply (M2) and Nominal GDP.

    The Gold Standard may have been a contributing cause to the original deflation but explains little in variance decomposition and factor analysis studies conducted in papers in the past decade; whereas the monetary hypothesis singles out the banking collapses in the US. The US had nearly a third of World GDP at the time. Cassel and Hawtrey fall short in explaining this in situ in the 30s and that is why, with all due respect, Friedman and Schwartz are held in a higher regard in the literature.

    ii) From reading you paper on Cassel and Hawtrey and various past posts on the Gold Standard, I feel your arguments are against the history of economic thought as opposed to the econometric causes of the Great Depression; where much of the economic literature now belongs. You must understand though Cassel and Hawtrey were somewhat on the mark with their intuition, they were also somewhat wrong.

    iii) I would hesitate to label the Emile Moreau’s Bank of France as ”insane”. Its policy response was rational given its experience in the 20s (Accominotti 2009). Liquidation of its foreign exchange dollar and sterling reserves was a rational strategy in the circumstances. Despite what Irwin(2010) suggests, the Bank of France cannot be held responsible for Gold Hoarding in 31-32; it was under a binding policy constraint.


  27. 27 Dhruv Sharma May 5, 2012 at 12:49 am

    Additionally, as with the evolution of all things. In the evolution of Economic thought especially, the literature has become a lot more substantive and conclusive. Cassel and Hawtrey like their Austrian contemporaries should be read with a grain of salt!

    I have written about the interpretation of the fallacious arguments of the Austrian school here:


  28. 28 W. Peden May 5, 2012 at 2:58 am

    Dhruv Sharma,

    “leading to a fall in deposit-currency ratios and a rise in the money multiplier”

    A fall in the money multiplier, I assume i.e. it took a much greater increase in base money to produce a given amount of broad money than before.


  29. 29 Dhruv Sharma May 5, 2012 at 4:22 am

    Yes, W. Peden,

    the money multiplier (MM) collapsed, eventhough monetary base was stable during 1930-33. The MM collapsed due to rising Currency/Deposit and Reseves/Deposit ratios: MM=(1+c/d)/(c/d+r/d)


  30. 30 W. Peden May 5, 2012 at 5:05 am

    Dhruv Sharma,

    Sorry to continue to be pedantic, but since MM=(1+c/d)/(c/d+r/d) is an identity, a change in the right hand of the equation can’t be due to a change in the left hand of the equation. An event cannot be due to itself.

    Instead, an explanation of the collapse of the MM has to look at factors


  31. 31 W. Peden May 5, 2012 at 5:11 am

    (Pressed enter accidentally.)

    that can cause commercial banks to reduce the amount of new credit in proportion to the amount of new base money. For instance, if a bank expects a rise in customer defaults and expects new base money to be hard to affordably obtain from the interbank market or the central bank, then that bank will keep a larger proportion of its assets in the form of base money as opposed to loans and bonds.

    As you say, this major fall in the MM combined with flat base money growth entailed a huge contraction in M2 and therefore in NGDP.

    I’m not contradicting you, but just giving a pedantic elaboration of what you’re saying. An increase in the MM cannot be explained by a fall proportion of reserves to deposits, anymore than World War II can be explained by the outbreak of the Second World War.


  32. 32 JP Koning May 5, 2012 at 5:26 am

    archn, thanks. I will check it out.


  33. 33 Olivier Braun May 5, 2012 at 7:22 am

    Dr. Glaser,

    It may be that Jacques Rueff was (partly) ultimately responsible for the great depression, if your analysis is correct, for he was instrumental in choosing the new parity of the franc, for the 1926 stabilization. He recalls in his autobiography that it was important no to go back to the gold standard with the pre-war parity, because it would have imposed a huge deflation. If I remember well, Rueff said that the principle he applied was to fix a new parity such as not to render necessary a fall in money wages rates. And the new franc was then undervalued, witch boosted french export and the inflow of gold.

    Douglas A. Irwin in “Did France Cause the Great Depression ?” has a note about Friedman :

    After re-reading the memoirs of the Emile Moreau, the governor of the Bank of France, Friedman (1991, xii-xiii) said that he “would have assessed responsibility for the international character of the Great Depression somewhat differently” than he did originally in his Monetary History with Anna Schwartz, namely by laying blame on France as well. Both the Federal Reserve and the Bank of France “were determined to prevent inflation and accordingly both sterilized the gold inflows, preventing them from providing the required increase in the quantity of money. . . . France’s contribution to this process was, I now realize, much greater than we treated it as being in our [Monetary] History.”

    Friedman, Milton. 1991. “Forward” to Émile Moreau, The Golden Franc: Memoirs of a Governor of the Bank of France: The Stabilization of the Franc (1926-1928), trans. Stephen D. Stoller and Trevor C. Roberts. Boulder, CO: Westview Press.

    But as Dhruv Sharma wrote, the Banque de France accumulated a huge balance of sterling that, in the gold-exchange standard would serve as a base for money creation and be inflationary. Rueff advocated similarely in the mid 1960’s that the Banque de France cease to accumulate the dollars the USA were printing, and to ask for their redeeming in gold. (The french domestic troubles in may 1968 and the huge rises in wages rates that were negociated with the trade-unions (accords de Grenelle) prevented the application of that Rueff-de Gaulle plan. It would have ended sooner the Bretton Wood system.)

    My question : considering the troubles in UK in the 20’s (William H. Hutt harsh words for the trade-unions leaders, “pigs, pigs, pigs” (he quoted Sidney Web) and the “sabotage of the industry” (quote from Beatrice Webb), was the British monetary policy not inflationary, like the US in the 1960’s, such as to endanger the convertibility of the pound ? And then the Banque de France policy rational to prevent imported inflation, and to protect its capital ?

    Best regards.


  34. 34 Dhruv Sharma May 5, 2012 at 7:24 am


    Yes I agree.

    The illiquid Bank run waves in 30 and 31 led to rise in currency holdings by solvent consumers. Banks responded to insolvent consumers by raising their reserve-deposit ratios, as you point out. And the resulting effect on the money multiplier led to M2 collapse.

    I will try and be more elaborative next time around!


  35. 35 Dhruv Sharma May 5, 2012 at 8:25 am

    Olivier Braun,

    If anything Norman Montagu’s Bank of England was stringently trying to defend the sterling against a run by the 1930. Britain’s problems came from an inflexible Labour market and collective wage bargaining.

    Prior to which the British economy was mired in deflation. Montagu asked New York Fed’s Benjamin Strong to help him out in 1928. Leading to rise in the discount from 3 to 4 per cent. When Strong passed away harrison, his successor, was incompetent in his foresight and cooperation.

    The Bank of France had her hands tied by the Monetary Law of 26. Binding her to a narrow line. Remember it too was coming out of a long decade of stagnation when Poincare signed the fiscal stabilisation pact.

    You must also remember all these central banks were essentially private institutions trying to stay afloat.


  36. 36 W. Peden May 5, 2012 at 12:32 pm

    Dhruv Sharma,

    “The illiquid Bank run waves in 30 and 31 led to rise in currency holdings by solvent consumers. Banks responded to insolvent consumers by raising their reserve-deposit ratios, as you point out. And the resulting effect on the money multiplier led to M2 collapse.”

    Good point. I had forgotten the importance of non-bank preferences for currency.


  37. 37 Julian Janssen May 5, 2012 at 2:07 pm

    My latest exploration of Keynes’ General Theory: “Are workers employed for nominal or real wages?

    Criticism is appreciated.


  38. 38 Frank Restly May 5, 2012 at 6:21 pm

    “As Hawtrey and Cassel understood, the contraction of the US money supply was the result of a deflation associated with a rising value of gold, an appreciation resulting mainly from the policy of the insane Bank of France in 1928-29 and an incompetent Fed stupidly trying to curb stock-market speculation by raising interest rates.”

    Totally wrong on the fed. From:

    Click to access 0693lead.pdf

    Page 574

    “In practice, however, reserve requirements were of little help in containing the rapid credit growth that occurred in the late 1920s. During this period, the primary tool used by the Federal Reserve to influence credit conditions was the discount rate. Because this rate was generally kept below market rates and only marginal administrative pressure was used to dissuade banks from availing them- selves of the discount window, banks had an incen- tive to borrow the reserves they needed to finance their rapidly expanding assets from the Federal Reserve, and they responded vigorously to this incentive.”

    “During the Great Depression, as market interest rates plunged and loan demand all but dried up, reserve requirements were obviously not needed to curtail credit growth. In fact, through much of this period, banks held large quantities of reserves in excess of their reserve requirements, suggesting that reserve requirements were not in any way constraining credit expansion. The Federal Reserve was concerned that these large excess reserves could eventually be used to support an overly rapid buildup of deposits and loans that could ultimately prove inflationary. Therefore, it excercised its newly acquired powers under the Banking Act of 1935 and doubled the required reserve ratios on both demand and time deposits, thereby effectively absorbing much of extant excess reserves.”

    Here are market interest rates during the Great Depression:,BAA,CPIAUCNS&transformation=lin,lin,pc1&scale=Left,Left,Left&range=Custom,Custom,Custom&cosd=1925-01-01,1925-01-01,1925-01-01&coed=1935-01-01,1935-01-01,1935-01-01&line_color=%230000ff,%23ff0000,%23006600&link_values=,,&mark_type=NONE,NONE,NONE&mw=4,4,4&line_style=Solid,Solid,Solid&lw=1,1,1&vintage_date=2012-05-05,2012-05-05,2012-05-05&revision_date=2012-05-05,2012-05-05,2012-05-05&mma=0,0,0&nd=,,&ost=,,&oet=,,&fml=a,a,a&fq=Monthly,Monthly,Monthly&fam=avg,avg,avg&fgst=lin,lin,lin

    Notice the large disparity between Aaa credit and Baa credit. This was not the federal reserve’s making. Notice also that the mild deflation that the U. S. had experienced from 1926 to 1929 morphed into severe deflation mid 1930. Again not the federal reserve’s making. So what prevented market interest rates from plunging during the Great Depression?

    As for the gold standard, it was more a limitation on the federal government than it was on private sector credit markets. Here is the U. S. federal budget deficit from 1910 to 1940:

    Notice the World War I federal deficit that increased the stock of U. S. government bonds. This quickly morphed into a federal surplus beginning in mid 1920. That surplus was abandoned in 1931.

    What Friedman (and Hawtrey) fail to recognize is that the composition of the U. S. debt (public versus private) changed significantly from 1910-1920 (public debt increasing, private debt stable / falling), 1920-1930 (public debt decreasing, private debt rising), and 1931-1940 (public debt increasing again).

    We are seeing the same thing today only the transfer is from the financial sector to the federal government sector:

    Click to access z1.pdf

    2008 (Financial Sector Debt) – $17.1 trillion
    2008 (Federal Debt) – $6.36 trillion

    2011 4th Quarter (Financial Sector Debt) – $13.6 trillion
    2011 4th Quarter (Federal Debt) – $10.5 trillion

    As for getting out of the Great Depression and restarting the private lending markets, the two reforms that had the greatest effect were the Glass Steagall Act of 1933 (which effectively put an end to the bank runs) and the establishment of Fannie Mae in 1938.


  39. 39 Olivier Braun May 6, 2012 at 8:40 am

    Dr. Glasner,

    Actually, and according to Jacques Rueff, it may well be that Ralph Hawtrey was responsible for the Great Depression ! (Rueff doesn’t mention him, but indicted directly the gold-exchange standard and the Genoa conference of 1922 ; Hawtrey, fearing a lack of gold, was instrumental in the establishment of that ill-fated monetary system). Here is the argument Rueff gave in his lecture “défense et illustration de l’étalon-or” (in L’âge de l’inflation, Payot 1963). I summarize.

    Among the Genoa conference’s resolution there were :
    – Resolution 11 : abnormal fluctuation of gold’s purchasing power was to be avoided. That was partly responsible for the sterilization of gold inflow in the USA and prevented the normal play of the automatic stabilizers witch would have stopped the gold accumulation in the USA
    – Resolution 9 : gold was to be economized by the maintenance of foreign balances, that is, dollars and sterling. The USA and UK could export capital to gold-exchange standard countries without outflow of gold, and those balances were immediately reinvested in the country of origin, witch enabled a doubling of the demand. It helped especially the UK to mask her true situation, and created a extreme prosperity based on inflation, the link between gold and credit being broken. When in 1927/28 confidence returned in the now stabilized economy of Europe, capital could return to those country, without really leaving the USA.
    – Resolution 3 : constant cooperation between central banks to coordinate credit policies was urged. That lead to loans from central banks to central banks and delayed the taking of discount rates that were necessary. It was particularly nefarious when to help the Bank of England, the Federal Reserve of New York agreed to maintain the artificially low rate, particularly in 1927. And that was a main cause of excess credit during the ascend phase of the cycle, and witch lead to a huge speculation witch ended in 1929.

    That page (65-67) is worth quoting (Rueff, Défense et illustration de l’étalon-or, lecture given in march 1932) , (Google’s translation, modified) :
    “In the British case, the implementation of the Genoese recommendations was even clearer.
    Since the war, by all sorts of processes, but essentially by tying wages during a downturn of the general price level, Britain has pursued a policy of high cost prices. The consequence was the loss of a large number of foreign markets, which flocked annually in return for British exports, foreign resources witch the city lent to the world, and from which she drew prestige and profit.
    This is a clear example of abrupt change in conditions of economic equilibrium. The gold standard, left alone, would have established a new balance and saved the British currency. Indeed, the account balance, amputated of part of the receipts from exports, would have been in deficit. Gold would have left England – thus reducing the money supply in the idomectic market, and other conditions being equal, leading to an upward trend in the rates in the London market, relatively to to rates in the foreign markets.1
    This rate increase would have discouraged loan demands from London, and would have causes a higher demand of loans in foreign markets. It would have undermined the prosperity of the City, but it would have restored the balance of the English balance of payement, and thus stopped the outflow of gold, and thereby ensured the defense of the gold holdings of the Bank of England.
    But, in times of planned economy, we no longer accept to submit to the facts. The inevitable consequences for England of the wage policy she had freely adopted, were considered as “abnormal”. Following the recommendations of the conference of Genoa, we can avoid them by an appropriate credit policy.
    This policy, in broad terms, has led to neutralize, systematically, the effect of the outflow of gold. Whenever metal went out of England, the Bank of England replaced through purchases of government bonds, the money. That was what we called his policy of “open market”.
    The result was one that could be anticipated: England avoided the tension in the rates that would have greatly undermined the prosperity of the City. In 1930, the amount of foreign loans made by the London market was almost as high as 1928, although, according to statistics from the “Board of Trade”, the amount of resources available for foreign investments have declined by about 100 millions pounds. But by avoiding the reduction of its loans, the Bank of England has also removed the only influence that might have been a remedy for the outflow of gold. She made sure that it could continue indefinitely, and has consistently maintained the current witch tended to render meaningless the metallic reserve of the English currency.
    So, again, the policy of directed credit has eliminated the influence which tended to sustain the monetary system. It would provoque catastrophs, and the event proved that those had actually been caused.”

    Original for those who read french :

    « Dans le cas anglais, l’application des recommandations génoises a été plus nette encore.
    Depuis la guerre, par toute sortes de procédés, mais surtout en immobilisant ses salaires en période de baisse du niveau général des prix, l’Angleterre a pratiqué une politique de prix de revient élevés. La conséquence en a été la perte d’un grand nombre de marchés étrangers, d’où affluaient chaque année, en contrepartie des exportations britanniques, les ressources étrangères que la Cité prêtait au monde et d’où elle tirait prestige et profit.
    C’est là un exemple très net de modification brusques des conditions d’un équilibre économique. L’étalon-or, si on l’avait laissé jouer, aurait établi un équilibre nouveau et sauvegardé la monnaie anglaise. En effet, la balance des comptes, amputée d’une partie des devises tirées de l’exportation, se serait trouvée en déficit. L’or serait sorti d’Angleterre – d’où une diminution des disponibilités du marché intérieur et, toutes conditions égales, une tendance à la hausse des taux du marché de Londres relativement aux taux des marchés étrangers.
    Cette hausse des taux aurait découragé les demandes d’emprunt à Londres et les aurait repoussées sur les marchés étrangers. Elle aurait porté atteinte à la prospérité de la Cité, mais elle aurait rétabli l’équilibre de la balance des comptes anglaise, donc mis un terme aux sorties d’or et, par là, assuré la défense de l’encaisse-or de la Banque d’Angleterre.
    Mais, en période d’économie dirigée, on n’accepte plus de se soumettre aux faits. On tenait pour « anormales » les conséquences qui devaient inéluctablement résulter, pour l’Angleterre, de la politique salariale qu’elle avait librement adoptée. Conformément aux recommandations de la conférence de Gènes, on saurait les éviter par une politique de crédit appropriée.
    Cette politique, dans ses grandes lignes, a conduit à neutraliser, systématiquement, l’effet des sorties d’or. Toutes les fois que du métal sortait d’Angleterre, la Banque d’Angleterre remplaçait sur le marché, par des achats d’obligations d’Etat, les disponibilités ainsi résorbées. C’était là ce que l’on appelait sa politique d’ « open market ».
    Le résultat a été celui que l’on pouvait prévoir : l’Angleterre a évité la tension des taux qui eût grandement porté atteinte à la prospérité de la Cité. En 1930, le montant des prêts étrangers consentis par la place de Londres a été presque aussi élevé qu’en 1928, bien que, d’après les statistiques du « Board of Trade », le montant des ressources disponibles pour des placements extérieurs ai diminué d’environ 100 millions de livres sterling. Mais en évitant la diminution de ses prêts, la Banque d’Angleterre a aussi fait disparaître la seule influence qui eût pu porter remède aux sorties d’or. Elle a fait en sorte que celles-ci puisse continuer indéfiniment et a ainsi systématiquement entretenu le courant qui tendait à vider de sa substance la réserve métallique de la monnaie anglaise.
    Ainsi, là encore, la politique de crédit dirigé a fait disparaître l’influence qui tendait à assurer la pérennité du système monétaire. Elle devait provoquer des catastrophes et l’événement a prouvé que celles-ci avaient été effectivement provoquées. »


  40. 40 Dhruv Sharma May 6, 2012 at 12:33 pm

    Frank Restly,

    Your analysis is mostly incorrect. Just to address three points:

    i) The Fed discount rate was raised to 6% by 1929; over two years when the US was recovering from a recession trough in nov. 1927. Perception of a bubble was exaggerated.

    ii) Volatile Market Rates reflected credit disintermediation. As Banks were cutting back from lending due to the contractionary monetary environment.

    iii)Glass steagall act did little. The problem was not the conflict of interest between investment and commercial banking in the 1930-20s; rather it was prevalence of unit banking. The glass steagall act in fact had a negative effect by preventing diversification and bank recovery.


  41. 41 David Glasner May 6, 2012 at 2:18 pm

    PrestoPundit, Well, we agree that there were serious gaps in Friedman’s knowledge of what other economists had written. You make it sound as if he was consistently wrong in his statements, which goes well beyond what I was saying, so, pending an exhaustive study of his writings, I would not necessarily agree with your conclusion.

    Dhruv, My position is that the banking collapse in the US was induced by the appreciation of gold which inevitably would have led to a sharp reduction in GDP and M2. The banking collapse may have accelerated the fall in real GDP for reasons discussed by Bernanke in his early work on the Great Depression. So I don’t entirely discount Friedman’s work, I rather claim that it was an added factor that worsened a Depression that was taking place for reasons that had nothing to do with the banking collapse.

    I don’t understand what you mean by the following comment:

    “I feel your arguments are against the history of economic thought as opposed to the econometric causes of the Great Depression.”

    My reference to the Bank of France as insane is meant as rhetorical hyperbole. However, the defense of the policies of the Bank of France on the grounds that the Bank was only doing what it was required to do by legislation passed by the French Parliament does not excuse the Bank of France, because the legislation was itself drafted with the full cooperation and agreement of the Bank of France. I realize that the rapid inflation of the early 1920s made the French very wary of allowing the central to increase the quantity of banknotes without gold “backing,” but whatever the motivation, the French policy caused a drastic appreciation in the value of gold and caused other countries to increase their demands to hold gold reserves.

    Olivier, The franc/dollar parity was deliberately chosen to undervalue the franc relative to the dollar, thereby allowing French prices and wages to rise, while France ran substantial balance of payment surpluses accumulating large holdings of foreign exchange, eventually redeemed for gold after 1928. The 1926 franc parity added to the deflationary pressure on sterling. The pressure could have been eased if French monetary policy had been eased allowing spending to increase faster, but the French policy produced continuous large increases in French holdings of foreign reserves.

    Thanks for the quotation from Friedman. Again, this is a point that had been made long before publication of the Monetary History, so it wasn’t as if Friedman had to wait till 1991 to find out what the monetary policy of the Bank of France had been.

    The accumulation by the Bank of France of huge accumulations of sterling was the result of an undervalued franc and an effective policy of sterilizing the inflows to prevent or slow down the equilibrating adjustment of French wages and prices to the deliberately undervalued exchange rate. If the French did not want inflation they should not have undervalued the franc. If they undervalued the franc, and refused to allow inflation they had to accept an unlimited accumulation of foreign reserves. Under Rueff’s influence, France in the 1960s was accumulating foreign exchange and attempting to convert the reserves into gold, something that no other country was willing to do. The Germans in the same situation agreed to revalue the D-mark upwards, but de Gaulle and Rueff had more grandiose objectives.

    The English policy was definitely not inflationary. The British price level after 1925 fell by about 1% a year and was slowly approaching equilibrium even as unemployment was slowly trending downwards. It was the French that were accumulating huge reserves of foreign exchange as a result of an undervalued franc and a persistently tight monetary policy. If France did not want to import inflation, the franc should not have been pegged at an undervalued parity against the dollar.

    Frank, I don’t see why you think there is any contradiction between what I said and the article you quote. In 1928-29, Fed deliberately raised the discount rate above market levels and market rates followed. Market rates did not plunge until 1930 when the economy was already in a sharp downturn.

    Olivier, Thanks for the lengthy quote (translation and original) from Rueff.

    I see no basis in fact for Rueff’s criticism of the Fed’s policy of sterilization is not exactly clear to me. After the 1920-21 recession,when the US accumulated additional gold owing to a 7% discount rate meant to stop inflation, US gold holdings were pretty stable for most of the decade until they started to increase again in 1928-29. This criticism is especially misplaced inasmuch as the main sterilizer was the Bank of France which accumulated huge foreign exchange reserves after 1926 through a combination of an undervalued franc and a tight monetary policy. Then, after criticizing the Fed for sterilizing gold inflows, he switches to an attack on the Fed for its 1927-28 easing. I am sorry, but Rueff’s discussion makes no sense to me.


  42. 42 JP Koning May 7, 2012 at 6:16 am

    David: “The accumulation by the Bank of France of huge accumulations of sterling was the result of an undervalued franc and an effective policy of sterilizing the inflows to prevent or slow down the equilibrating adjustment of French wages and prices to the deliberately undervalued exchange rate.”

    David, you mention sterilization here. There are two theories to explain the workings of the historical gold standard – the price-specie flow mechanism (PSFM) vs the classical explanation. Does sterilization work the same way when talking in the language of PSFM as it does using the language of the classical monetary theory?


  43. 43 Olivier Braun May 8, 2012 at 12:00 am

    Dr. Glasner,

    I know you are now with James Tobin and Jens Weidmann, so that will be my last comment. Actually not really a comment, just a sharing of some information, which you maybe already have.

    In the first or your answer, about William Hutt, you mentioned that you interpret his Say’s Law as being the equivalent of Keynes’ multiplier, but wouldn’t be sure it would have been Hutt’s.

    I came across that passage Sunday, from his The Keynesian Episode, the chapter on Keynes’ notion on true inflation (LibertyPress, 1979, p. 228) :

    « In that case [a « purposeless deflation », i.e. « one wich is not rectifying a previous inflation »], but in that case only, is the term « reflation » admissible. It has to be stressed, however, that each release of capacity induced by increased expenditure is contruibuting to increased uninflated demand for whatever noncompeting things (services or assets) it is destined to be exchanged for. Here we have the dynamic factor toward wich Keynes seems to have being groping – what I shall call « the true multiplier », but which is actually nothing more than Say’s law – the law wich Keynes had summarily rejected without stating it or quoting Say. »

    Concerning Rueff and the parity chosen in 1926 (an undervalued franc) I think you are completely right. That is surprising from Rueff, for he was perfectly aware of the solidarity of the economy in a gold standard. He wrote in the conclusion of his l’ordre social « Cependant, en régime de monnaie métallique, la gestion financière de chaque Etat à monnaie-or affecte le sort de tous les autres » and proposed the establishment of an International Court of Accounts ( ? Cour des comptes) to judge the national budgets. (The EU didn’t go that far in the new fiscal pact.)

    Regarding the establishment of the new parity for the stabilization of the franc, though the law of the 7th august 1926 gave authority to the Banque de France to buy gold and foreign exchange to stop the depreciation of foreign currency vis à vis the franc, the conservatives in the Banque the France (Rothschild and Wendel) and some politicians (Herriot and Louis Marin) were against such buying to prevent an appreciation of the franc. But those favouring stabilization (Moreau and Rist) won and convinced (to the surprise of the observers) the french premier, Poincaré. The latter told Rueff that at the time he had frequent visits from Léon Jouhaux, the general secretary of the CGT trade-union (general confederation of labour. It was before the union became communist). Jouhaux pointed out to Poincaré the risk of increasing unemployment if the franc appreciated to much.

    Thank you for your patience, and thanks to Dhruv Sharma for his answer.


  44. 45 David Glasner June 2, 2012 at 8:21 pm

    Greg, Thanks. It’s a good post, but I am afraid that you have confused Gustav Cassel with Silvio Gessel. It was the latter, mentioned by Keynes as a forerunner, who proposed a system of stamped money to counter hoarding. For some reason, I want to say that Irving Fisher had a similar idea as well.


  45. 46 greghill1000 June 2, 2012 at 9:19 pm

    David, You’re quite right on both points. Not only did Fisher have a similar idea; he actually wrote legislation for a stamped money program. Thanks for your post and your correction of my error.


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About Me

David Glasner
Washington, DC

I am an economist in the Washington DC area. My research and writing has been mostly on monetary economics and policy and the history of economics. In my book Free Banking and Monetary Reform, I argued for a non-Monetarist non-Keynesian approach to monetary policy, based on a theory of a competitive supply of money. Over the years, I have become increasingly impressed by the similarities between my approach and that of R. G. Hawtrey and hope to bring Hawtrey’s unduly neglected contributions to the attention of a wider audience.

My new book Studies in the History of Monetary Theory: Controversies and Clarifications has been published by Palgrave Macmillan

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