Eureka! Paul Krugman Discovers the Bank of France

Trying hard, but not entirely successfully, to contain his astonishment, Paul Krugman has a very good post (“France 1930, Germany 2013) inspired by Doug Irwin’s “very good” paper (see also this shorter version) “Did France Cause the Great Depression?” Here’s Krugman take away from Irwin’s paper.

[Irwin] points out that France, with its undervalued currency, soaked up a huge proportion of the world’s gold reserves in 1930-31, and suggests that France was responsible for about half the global deflation that took place over that period.

The thing is, France itself didn’t do that badly in the early stages of the Great Depression — again thanks to that undervalued currency. In fact, it was less affected than most other advanced countries (pdf) in 1929-31:

Krugman is on the right track here — certainly a hopeful sign — but he misses the distinction between an undervalued French franc, which, despite temporary adverse effects on other countries, would normally be self-correcting under the gold standard, and the explosive increase in demand for gold by the insane Bank of France after the franc was pegged at an undervalued parity against the dollar. Undervaluation of the franc began in December 1926 when Premier Raymond Poincare stabilized its value at about 25 francs to the dollar, the franc having fallen to 50 francs to the dollar in July when Poincare, a former prime minister, had been returned to office to deal with a worsening currency crisis. Undervaluation of the franc would have done no permanent damage to the world economy if the Bank of France had not used the resulting inflow of foreign exchange to accumulate gold, cashing in sterling- and dollar-denominated financial assets for gold. This was a step beyond classic exchange-rate protection (currency manipulation) whereby a country uses a combination of an undervalued exchange rate and a tight monetary policy to keep accumulating foreign-exchange reserves as a way of favoring its export and import-competing industries. Exchange-rate protection may have been one motivation for the French policy, but that objective did not require gold accumulation; it could have been achieved by accumulating foreign exchange reserves without demanding redemption of those reserves in terms of gold, as the Bank of France began doing aggressively in 1927. A more likely motivation for gold accumulation policy of the Bank of France seems to have been French resentment against a monetary system that, from the French perspective, granted a privileged status to the dollar and to sterling, allowing central banks to treat dollar- and sterling-denominated financial assets as official exchange reserves, thereby enabling issuers of dollar and sterling-denominated assets the ability to obtain funds on more favorable terms than issuers of instruments denominated in other currencies.

The world economy was able to withstand the French gold-accumulation policy in 1927-28, because the Federal Reserve was tolerating an outflow of gold, thereby accommodating to some degree the French demand for gold. But after the Fed raised its discount rate to 5% in 1928 and 6% in February 1929, gold began flowing into the US as well, causing gold to start appreciating (in other words, prices to start falling) in world markets by the summer of 1929. But rather than reverse course, the Bank of France and the Fed, despite reductions in their official lending rates, continued pursuing policies that caused huge amounts of gold to flow into the French and US vaults in 1930 and 1931. Hawtrey and Cassel, of course, had warned against such a scenario as early as 1919, and proposed measures to prevent or reverse the looming catastrophe before it took place and after it started, but with little success. For a more complete account of this sad story, and the failure of the economics profession, with a very few notable exceptions, to figure out what happened, see my paper with Ron Batchelder “Pre-Keynesian Monetary Theories of the Great Depression: Whatever Happened to Hawtrey and Cassel?”

As Krugman observes, the French economy did not do so badly in 1929-31, because it was viewed as the most stable, thrifty, and dynamic economy in Europe. But France looked good only because Britain and Germany were in even worse shape. Because France was better off the Britain and Germany, and because its currency was understood to be undervalued, the French franc was considered to be stable, and, thus, unlikely to be devalued. So, unlike sterling, the reichsmark, and the dollar, the franc was not subjected to speculative attacks, becoming instead a haven for capital seeking safety.

Interestingly, Krugman even shows some sympathetic understanding for the plight of the French:

Notice, by the way, that the French weren’t evil or malicious here — they were just adhering to their hard-money ideology in an environment where that had terrible adverse effects on other countries.

Just wondering, would Krugman ever invoke adherence to a hard-money ideology as a mitigating factor in passing judgment on a Republican?

Krugman concludes by comparing Germany today with France in 1930.

Obviously the details are different, but I would argue that Germany is playing a somewhat similar role today — not as drastic, but with less excuse. For Germany is an economic hegemon in a way France never was; it has responsibilities, which it isn’t meeting.

Indeed, there are similarities, but there is a crucial difference in the mechanism by which damage is being inflicted: the world price level in 1930, under the gold standard, was determined by the value of gold. An increase in the demand for gold by central banks necessarily raised the value of gold, causing deflation for all countries either on the gold standard or maintaining a fixed exchange rate against a gold-standard currency. By accumulating gold, nearly quadrupling its gold reserves between 1926 and 1932, the Bank of France was a mighty deflationary force, inflicting immense damage on the international economy. Today, the Eurozone price level does not depend on the independent policy actions of any national central bank, including that of Germany. The Eurozone price level is rather determined by the policy choices of a nominally independent European Central Bank. But the ECB is clearly unable to any adopt policy not approved by the German government and its leader Mrs. Merkel, and Mrs. Merkel has rejected any policy that would raise prices in the Eurozone to a level consistent with full employment. Though the mechanism by which Mrs. Merkel and her government are now inflicting damage on the Eurozone is different from the mechanism by which the insane Bank of France inflicted damage during the Great Depression, the damage is just as pointless and just as inexcusable. But as the damage caused by Mrs. Merkel, in relative terms at any rate, seems somewhat smaller in magnitude than that caused by the insane Bank of France, I would not judge her more harshly than I would the Bank of France — insanity being, in matters of monetary policy, no defense.

HT: ChargerCarl


17 Responses to “Eureka! Paul Krugman Discovers the Bank of France”

  1. 1 Jim Caton November 3, 2013 at 6:24 pm

    I’m glad to see that you took time to break down the comparison between France in 1929 and Germany under Merkel. Merkel can’t affect international prices in the same way France did because 1) Merkel’s influence over the Euro is smaller than Poincaire’s influence over the value of gold and 2) the Euro is the common currency of a limited number of countries, the adherence to the gold standard was of greater breadth.

    Great post.


  2. 2 Martin November 4, 2013 at 2:38 am


    “A more likely motivation for gold accumulation policy of the Bank of France seems to have been French resentment against a monetary system that, from the French perspective, granted a privileged status to the dollar and to sterling, allowing central banks to treat dollar- and sterling-denominated financial assets as official exchange reserves, thereby enabling issuers of dollar and sterling-denominated assets the ability to obtain funds on more favorable terms than issuers of instruments denominated in other currencies.”

    A quick question regarding this, but I am reminded by this passage that under a free banking system banks who issue money as a liability can keep each other in check by redeeming those liabilities. Wasn’t France simply keeping the UK and the US in check who had issued out too many dollars and sterlings as a consequence of this privileged status?

    To put it differently: had the UK and the US issued fewer sterlings and dollars, could the behavior of the bank of France have had less severe consequence?


  3. 3 Jacques René Giguère. November 4, 2013 at 10:50 am

    France always had a “strong franc gold bug lobby”. Just look at the influence and prestige of Jacques Rueff…


  4. 4 David Glasner November 5, 2013 at 1:42 pm

    Jim, Thanks. Actually I am not sure that Merkel’s influence today over the value of the Euro is smaller than that of France over the value of gold between 1928 and 1932. She has not in fact exercised as much influence over the value of the euro as France did over the value of gold, but there is no reason to think that the value of the euro is not exactly what she wants it to be. I of course agree with your second point, but that is small comfort for all millions of workers in the eurozone who are unemployed as a result of her influence on the ECB.


  5. 5 David Glasner November 5, 2013 at 2:09 pm

    Martin, Good question. France may have been acting as a competitive bank would in a free banking system competing with other currency issuers for market share. However, in my book Free Banking and Monetary Reform, I argued that a free banking system based on a gold standard would be unstable, because, under free banking, competitive banks have insufficient incentive to stabilize the price level. The private incentive of money issuers to demand gold causes gold to appreciate, producing deflation, and unemployment. The costs of deflation and unemployment are shifted to the rest of society in the form of idle resources and unemployment. It would have been socially optimal for the US and Britain to issue more currency than they did, thereby reducing unemployment, so the behavior of the insane Bank of France was socially destructive even if it was, in some sense, privately rational.


  6. 6 David Glasner November 5, 2013 at 2:20 pm

    Jacques, I think that Rueff was a fine economist, though I have only limited knowledge of his work. However, on the gold standard of which he was a dedicated supporter, I disagree with him entirely. He was very influential with de Gaulle in the 1960s, advising him to redeem US financial assets in the possession of the Bank of France for gold, advice that de Gaulle happily followed. I am not aware that he is still influential. A minor figure in American right-wing circles, who is perhaps best known for his advocacy of the gold standard, Louis Lehrman, is a fervent admirer of Rueff’s. At one time, he was reputed to be working on an English translation of Rueff’s magnum opus, l’Ordre Sociale, but it has never appeared.


  7. 7 Jacques René Giguère. November 6, 2013 at 8:57 am

    As Keynes said about the influence of long dead economists. .. Rueff had influence because he was in sync with the general thinking of the french ruling classes Or in a french context see Ledru-Rollin famous phrase “I had to follow, I was their leader…” A lot of french supporters of the euro were wishing for a new “franc fort”,backed not by gold but by Germany’s weltanschauung. It is not a bug, it’s a feature. Many supporters of the euro, such as Robert Mundell, were right wing conservatives who understood that the euro ewas a new gold standard where any adjustment had to be borne by the working classes. Mundell knew that his whole career on optimal zones proved that Europe was not ready for a common currency but nevertheless went on because it was in accord with his political views.

    Merkel might not be able to get the value of the euro she wants but has enough influence to make the euro a deadly weapon. How long before the european population associcate euro with Europe and Europe with misery and macro mismanagement and get rid of the whole noble experiment of common prosperity and peace? The people of Europe are internationalized and are now taking their wrath on their national governments. How long will these government continue to resist their constituents before finally revolting against the unelected Commission?
    It will not end with armies marching to reconquer ancestral lands but we will get the dislocation of the 1920’s.


  8. 8 B. Park November 7, 2013 at 7:34 am


    I have also on occasion asked how long, but looking at Greece I’m forced to conclude it can go on for a very long time indeed. Not only is the political center willing to inflict huge hardship, but despite the grueling punishment a clear majority of the populace still supports the Euro. This is the country with the most disillusioned electorate, the most radical politicians and still they think the Euro is just fine and dandy.

    It seems ordinary people have developed quite an attachment to the Euro, and as such I don’t see anybody abolishing it anytime soon. Therefore we need to enact the necessary reforms that will make the Euro work properly, rather than be the great misery machine it is today. Unfortunately Europe’s politicians are extremely reluctant to enact any reforms, much less rewrite the relevant treaties, so they only do the minimum necessary to avert the latest crisis. Baby steps, baby steps.

    Not exactly a hopeless situation, but definitely not fun. Not fun at all.


  9. 9 Jacques René Giguère. November 7, 2013 at 9:28 am

    But remember Rudiger Dornbusch dictum that “A crisis arrives later than we thought but happens faster than we feared.” At some point, something will break and it will be much uglier than it could have been. And it won’t even be a solution…


  10. 10 David Glasner November 7, 2013 at 1:47 pm

    Jacques, My knowledge of French political and intellectual history is too meager for me to comment about Rueff’s influence, so I will set that point aside. I will observe, however, that it was Jacques Delors, a socialist politician, who was the architect of the European Monetary System. And certainly there are many examples of right wing economists and politicians who have opposed the euro, so I am not sure that it is fair to attribute Mundell’s support for the euro to a right-wing agenda. The problems with the euro today could be handled if the ECB were willing to adopt a higher inflation target and do whatever was necessary to meet the target. The other problem with the euro is that it was constructed in a way that made it almost impossible for a country to replace it with its own currency.


  11. 11 David Glasner November 7, 2013 at 1:50 pm

    B. Park, I agree that almost no one is thinking about enacting reforms that would make the euro and the ECB operate in a less destructive manner.


  12. 12 Jacques René Giguère. November 7, 2013 at 1:58 pm

    There are two things that Socialists ( as opposed to Communists) agreed with the right wing : that a “franc fort ” and a neo-mercantilist obsession with “obtenir des devises” ( (obtaining foreign exchange) are a “good thing” in and by themselves. Plus the need for the left to appear serious.( as in Very Serious People) And the real fear of the “mur d’argent.” It was reinforced by the ” ’50’s “dollar shortage.”
    Yes, the euro wwas to be eternal, just in case the people would revolt. We can’t let them debase everything, can’t we? The leadership of the french left is very much a “gauche caviar ” ( “whiskyerda”), very elitist, fearful of the nationalist identity of the working and peasant classes.A real contrast to the British left who kept a strong Labour component ( something with no counterpart in French political toponimy), at least until Tony Blair.


  13. 13 Jacques René Giguère. November 7, 2013 at 2:02 pm

    As a Québécois who studied in the ’70’s, my teachers were a mixture of young U.S. trained mathematically inclined ones and older french raised classical guys. I particularly recall one gentleman, colleague of the young Debreu and student under Maurice Allais. Students sometimes quipped that the dear old, of which we were very fond, still used gold coins.


  14. 14 David Glasner November 9, 2013 at 6:18 pm

    I won’t argue with you about French socialists, but my impression was that they were further to the left than the British Labour party of Harold Wilson. As for elitism, Hugh Gaitskell, Anthony Crosland and Roy Jenkins, among others, were, justly or unjustly, charged with that offense.


  15. 15 Jacques René Giguère. November 9, 2013 at 9:04 pm

    They were charged with that precisely because the shift away from the traditional working class based Labour to an intellectuals ( in the french sense of the word) base has begun and the trade union leaders saw something they didn’t like.
    This included contempt for traditional patriotism as “nationalism” that would turn into a fetish for “globalization” and finally turn the left into the maidservant of large corporations, The elevation of immigration from a crass right wing project of importing foreign workers destined to lower wages into a crass left wing project where immigrants are there to “cure” the working class of its “narrow closed minded nationalistic tendencies”. Nothing illustrates that better than a socialist minister some 20 years ago declaring :”En-dessous de FF 100K par mois, il n’y a que des imbéciles.” “Below FF100K per month, there are only imbeciles.”
    One has only to follow what is happening in Northern Europe and Québec about Islamist extremists, where the intellectual left and right are applauding the imposition of the veil upon women as “respect for religion” while working class stiffs (and moderate muslims such as those in my family) are derided as racists.
    We’re not straying that far from the subject. The abandonment of the working class by completely brushing aside concerns for full-employment is now almost complete. The extreme left is still discredited by the soviet experiment but the fascist one is now 3-4 generations away. The NYT had an article Friday on the rise of the right wing in Denmark and, as usual for an american journalist, the author just can’t comprehend that a right-wing movement would insist on better social protections. After all,Mussolini and He-Who-Must-Not-Be-Named rose to power on the back of deteriorating economic conditions for the working class.
    It’s disheartening to see the “European government”(the Commission” )oblivious to the consequences of their Brüning-like actions. And if they are, then it is truly frightening (and it would break Hawtrey’s gentle heart).


  16. 16 Blue Aurora November 10, 2013 at 12:03 am

    Although I’m late to this discussion and as much as I like Paul Krugman…wouldn’t he have had a better knowledge of this issue had he paid better attention to the bibliography in Lords of Finance by Liaquat Ahamed?


  17. 17 David Glasner November 16, 2013 at 5:31 pm

    Jacques, I only mentioned Gaitskell and Jenkins to counter your statement that the French left was less solidly identified with working-class values than the the British, which only moved in that direction under Tony Blair. I was pointing out that there had been earlier prominent Labourites who were out of step with the working class. My impression is that an anti-immigration and pro-immigration stances have always been distributed more or less
    randomly across the left-right spectrum. But I absolutely agree with your point that indifference to chronic unemployment is going to have very dangerous political repercussions, just as was the case in the 1930s.

    Blue Aurora, Yes, among others. It’s been almost 3 years since I read Lords of Finance, so I can’t recall how much attention he paid to the accumulation of gold by the Bank of France. But certainly Emile Morreau, governor of the Bank of France, was one of the four central bankers at the center of his story.


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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

Follow me on Twitter @david_glasner


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