Milton Friedman and How not to Think about the Gold Standard, France, Sterilization and the Great Depression

Last week I listened to David Beckworth on his excellent podcast Macro Musings, interviewing Douglas Irwin. I don’t think I’ve ever met Doug, but we’ve been in touch a number of times via email. Doug is one of our leading economic historians, perhaps the foremost expert on the history of US foreign-trade policy, and he has just published a new book on the history of US trade policy, Clashing over Commerce. As you would expect, most of the podcast is devoted to providing an overview of the history of US trade policy, but toward the end of the podcast, David shifts gears and asks Doug about his work on the Great Depression, questioning Doug about two of his papers, one on the origins of the Great Depression (“Did France Cause the Great Depression?”), the other on the 1937-38 relapse into depression, (“Gold Sterlization and the Recession of 1937-1938“) just as it seemed that the US was finally going to recover fully  from the catastrophic 1929-33 downturn.

Regular readers of this blog probably know that I hold the Bank of France – and its insane gold accumulation policy after rejoining the gold standard in 1928 – primarily responsible for the deflation that inevitably led to the Great Depression. In his paper on France and the Great Depression, Doug makes essentially the same argument pointing out that the gold reserves of the Bank of France increased from about 7% of the world stock of gold reserves to about 27% of the world total in 1932. So on the substance, Doug and I are in nearly complete agreement that the Bank of France was the chief culprit in this sad story. Of course, the Federal Reserve in late 1928 and 1929 also played a key supporting role, attempting to dampen what it regarded as reckless stock-market speculation by raising interest rates, and, as a result, accumulating gold even as the Bank of France was rapidly accumulating gold, thereby dangerously amplifying the deflationary pressure created by the insane gold-accumulation policy of the Bank of France.

Now I would not have taken the time to write about this podcast just to say that I agreed with what Doug and David were saying about the Bank of France and the Great Depression. What prompted me to comment about the podcast were two specific remarks that Doug made. The first was that his explanation of how France caused the Great Depression was not original, but had already been provided by Milton Friedman, Clark Johnson, and Scott Sumner.  I agree completely that Clark Johnson and Scott Sumner wrote very valuable and important books on the Great Depression and provided important new empirical findings confirming that the Bank of France played a very malign role in creating the deflationary downward spiral that was the chief characteristic of the Great Depression. But I was very disappointed in Doug’s remark that Friedman had been the first to identify the malign role played by the Bank of France in precipitating the Great Depression. Doug refers to the foreward that Friedman wrote for the English translation of the memoirs of Emile Moreau the Governor of the Bank of France from 1926 to 1930 (The Golden Franc: Memoirs of a Governor of the Bank of France: The Stabilization of the Franc (1926-1928). Moreau was a key figure in the stabilization of the French franc in 1926 after its exchange rate had fallen by about 80% against the dollar between 1923 and 1926, particularly in determining the legal exchange rate at which the franc would be pegged to gold and the dollar, when France officially rejoined the gold standard in 1928.

That Doug credits Friedman for having – albeit belatedly — grasped the role of the Bank of France in causing the Great Depression, almost 30 years after attributing the Depression in his Monetary History of the United States, almost entirely to policy mistakes mistakes by the Federal Reserve in late 1930 and early 1931 is problematic for two reasons. First, Doug knows very well that both Gustave Cassel and Ralph Hawtrey correctly diagnosed the causes of the Great Depression and the role of the Bank of France during – and even before – the Great Depression. I know that Doug knows this well, because he wrote this paper about Gustav Cassel’s diagnosis of the Great Depression in which he notes that Hawtrey made essentially the same diagnosis of the Depression as Cassel did. So, not only did Friedman’s supposed discovery of the role of the Bank of France come almost 30 years after publication of the Monetary History, it was over 60 years after Hawtrey and Cassel had provided a far more coherent account of what happened in the Great Depression and of the role of the Bank of France than Friedman provided either in the Monetary History or in his brief foreward to the translation of Moreau’s memoirs.

That would have been bad enough, but a close reading of Friedman’s foreward shows that even though, by 1991 when he wrote that foreward, he had gained some insight into the disruptive and deflationary influence displayed exerted by the Bank of France, he had an imperfect and confused understanding of the transmission mechanism by which the actions of the Bank of France affected the rest of the world, especially the countries on the gold standard. I have previously discussed in a 2015 post, what I called Friedman’s cluelessness about the insane policy of the Bank of France. So I will now quote extensively from my earlier post and supplement with some further comments:

Friedman’s foreward to Moreau’s memoir is sometimes cited as evidence that he backtracked from his denial in the Monetary History that the Great Depression had been caused by international forces, Friedman insisting that there was actually nothing special about the initial 1929 downturn and that the situation only got out of hand in December 1930 when the Fed foolishly (or maliciously) allowed the Bank of United States to fail, triggering a wave of bank runs and bank failures that caused a sharp decline in the US money stock. According to Friedman it was only at that point that what had been a typical business-cycle downturn degenerated into what he liked to call the Great Contraction. Let me now quote Friedman’s 1991 acknowledgment that the Bank of France played some role in causing the Great Depression.

Rereading the memoirs of this splendid translation . . . has impressed me with important subtleties that I missed when I read the memoirs in a language not my own and in which I am far from completely fluent. Had I fully appreciated those subtleties when Anna Schwartz and I were writing our A Monetary History of the United States, we would likely have assessed responsibility for the international character of the Great Depression somewhat differently. We attributed responsibility for the initiation of a worldwide contraction to the United States and I would not alter that judgment now. However, we also remarked, “The international effects were severe and the transmission rapid, not only because the gold-exchange standard had rendered the international financial system more vulnerable to disturbances, but also because the United States did not follow gold-standard rules.” Were I writing that sentence today, I would say “because the United States and France did not follow gold-standard rules.”

I find this minimal adjustment by Friedman of his earlier position in the Monetary History totally unsatisfactory. Why do I find it unsatisfactory? To begin with, Friedman makes vague references to unnamed but “important subtleties” in Moreau’s memoir that he was unable to appreciate before reading the 1991 translation. There was nothing subtle about the gold accumulation being undertaken by the Bank of France; it was massive and relentless. The table below is constructed from data on official holdings of monetary gold reserves from December 1926 to June 1932 provided by Clark Johnson in his important book Gold, France, and the Great Depression, pp. 190-93. In December 1926 France held $711 million in gold or 7.7% of the world total of official gold reserves; in June 1932, French gold holdings were $3.218 billion or 28.4% of the world total. [I omit a table of world monetary gold reserves from December 1926 to June 1932 included in my earlier post.]

What was it about that policy that Friedman didn’t get? He doesn’t say. What he does say is that he would not alter his previous judgment that the US was responsible “for the initiation of a worldwide contraction.” The only change he would make would be to say that France, as well as the US, contributed to the vulnerability of the international financial system to unspecified disturbances, because of a failure to follow “gold-standard rules.” I will just note that, as I have mentioned many times on this blog, references to alleged “gold standard rules” are generally not only unhelpful, but confusing, because there were never any rules as such to the gold standard, and what are termed “gold-standard rules” are largely based on a misconception, derived from the price-specie-flow fallacy, of how the gold standard actually worked.

New Comment. And I would further add that references to the supposed gold-standard rules are confusing, because, in the misguided tradition of the money multiplier, the idea of gold-standard rules of the game mistakenly assumes that the direction of causality between monetary reserves and bank money (either banknotes or bank deposits) created either by central banks or commercial banks goes from reserves to money. But bank reserves are held, because banks have created liabilities (banknotes and deposits) which, under the gold standard, could be redeemed either directly or indirectly for “base money,” e.g., gold under the gold standard. For prudential reasons, or because of legal reserve requirements, national monetary authorities operating under a gold standard held gold reserves in amounts related — in some more or less systematic fashion, but also depending on various legal, psychological and economic considerations — to the quantity of liabilities (in the form of banknotes and bank deposits) that the national banking systems had created. I will come back to, and elaborate on, this point below. So the causality runs from money to reserves, not, as the price-specie-flow mechanism and the rules-of-the-game idea presume, from reserves to money. Back to my earlier post:

So let’s examine another passage from Friedman’s forward, and see where that takes us.

Another feature of Moreau’s book that is most fascinating . . . is the story it tells of the changing relations between the French and British central banks. At the beginning, with France in desperate straits seeking to stabilize its currency, [Montagu] Norman [Governor of the Bank of England] was contemptuous of France and regarded it as very much of a junior partner. Through the accident that the French currency was revalued at a level that stimulated gold imports, France started to accumulate gold reserves and sterling reserves and gradually came into the position where at any time Moreau could have forced the British off gold by withdrawing the funds he had on deposit at the Bank of England. The result was that Norman changed from being a proud boss and very much the senior partner to being almost a supplicant at the mercy of Moreau.

What’s wrong with this passage? Well, Friedman was correct about the change in the relative positions of Norman and Moreau from 1926 to 1928, but to say that it was an accident that the French currency was revalued at a level that stimulated gold imports is completely — and in this case embarrassingly — wrong, and wrong in two different senses: one strictly factual, and the other theoretical. First, and most obviously, the level at which the French franc was stabilized — 125 francs per pound — was hardly an accident. Indeed, it was precisely the choice of the rate at which to stabilize the franc that was a central point of Moreau’s narrative in his memoir . . . , the struggle between Moreau and his boss, the French Premier, Raymond Poincaré, over whether the franc would be stabilized at that rate, the rate insisted upon by Moreau, or the prewar parity of 25 francs per pound. So inquiring minds can’t help but wonder what exactly did Friedman think he was reading?

The second sense in which Friedman’s statement was wrong is that the amount of gold that France was importing depended on a lot more than just its exchange rate; it was also a function of a) the monetary policy chosen by the Bank of France, which determined the total foreign-exchange holdings held by the Bank of France, and b) the portfolio decisions of the Bank of France about how, given the exchange rate of the franc and given the monetary policy it adopted, the resulting quantity of foreign-exchange reserves would be held.

I referred to Friedman’s foreward in which he quoted from his own essay “Should There Be an Independent Monetary Authority?” contrasting the personal weakness of W. P. G. Harding, Governor of the Federal Reserve in 1919-20, with the personal strength of Moreau. Quoting from Harding’s memoirs in which he acknowledged that his acquiescence in the U.S. Treasury’s desire to borrow at “reasonable” interest rates caused the Board to follow monetary policies that ultimately caused a rapid postwar inflation

Almost every student of the period is agreed that the great mistake of the Reserve System in postwar monetary policy was to permit the money stock to expand very rapidly in 1919 and then to step very hard on the brakes in 1920. This policy was almost surely responsible for both the sharp postwar rise in prices and the sharp subsequent decline. It is amusing to read Harding’s answer in his memoirs to criticism that was later made of the policies followed. He does not question that alternative policies might well have been preferable for the economy as a whole, but emphasizes the treasury’s desire to float securities at a reasonable rate of interest, and calls attention to a then-existing law under which the treasury could replace the head of the Reserve System. Essentially he was saying the same thing that I heard another member of the Reserve Board say shortly after World War II when the bond-support program was in question. In response to the view expressed by some of my colleagues and myself that the bond-support program should be dropped, he largely agreed but said ‘Do you want us to lose our jobs?’

The importance of personality is strikingly revealed by the contrast between Harding’s behavior and that of Emile Moreau in France under much more difficult circumstances. Moreau formally had no independence whatsoever from the central government. He was named by the premier, and could be discharged at any time by the premier. But when he was asked by the premier to provide the treasury with funds in a manner that he considered inappropriate and undesirable, he flatly refused to do so. Of course, what happened was that Moreau was not discharged, that he did not do what the premier had asked him to, and that stabilization was rather more successful.

Now, if you didn’t read this passage carefully, in particular the part about Moreau’s threat to resign, as I did not the first three or four times that I read it, you might not have noticed what a peculiar description Friedman gives of the incident in which Moreau threatened to resign following a request “by the premier to provide the treasury with funds in a manner that he considered inappropriate and undesirable.” That sounds like a very strange request for the premier to make to the Governor of the Bank of France. The Bank of France doesn’t just “provide funds” to the Treasury. What exactly was the request? And what exactly was “inappropriate and undesirable” about that request?

I have to say again that I have not read Moreau’s memoir, so I can’t state flatly that there is no incident in Moreau’s memoir corresponding to Friedman’s strange account. However, Jacques Rueff, in his preface to the 1954 French edition (translated as well in the 1991 English edition), quotes from Moreau’s own journal entries how the final decision to stabilize the French franc at the new official parity of 125 per pound was reached. And Friedman actually refers to Rueff’s preface in his foreward! Let’s read what Rueff has to say:

The page for May 30, 1928, on which Mr. Moreau set out the problem of legal stabilization, is an admirable lesson in financial wisdom and political courage. I reproduce it here in its entirety with the hope that it will be constantly present in the minds of those who will be obliged in the future to cope with French monetary problems.

“The word drama may sound surprising when it is applied to an event which was inevitable, given the financial and monetary recovery achieved in the past two years. Since July 1926 a balanced budget has been assured, the National Treasury has achieved a surplus and the cleaning up of the balance sheet of the Bank of France has been completed. The April 1928 elections have confirmed the triumph of Mr. Poincaré and the wisdom of the ideas which he represents. . . . Under such conditions there is nothing more natural than to stabilize the currency, which has in fact already been pegged at the same level for the last eighteen months.

“But things are not quite that simple. The 1926-28 recovery restored confidence to those who had actually begun to give up hope for their country and its capacity to recover from the dark hours of July 1926. . . . perhaps too much confidence.

“Distinguished minds maintained that it was possible to return the franc to its prewar parity, in the same way as was done with the pound sterling. And how tempting it would be to thereby cancel the effects of the war and postwar periods and to pay back in the same currency those who had lent the state funds which for them often represented an entire lifetime of unremitting labor.

“International speculation seemed to prove them right, because it kept changing its dollars and pounds for francs, hoping that the franc would be finally revalued.

“Raymond Poincaré, who was honesty itself and who, unlike most politicians, was truly devoted to the public interest and the glory of France, did, deep in his heart, agree with those awaiting a revaluation.

“But I myself had to play the ungrateful role of representative of the technicians who knew that after the financial bloodletting of the past years it was impossible to regain the original parity of the franc.

“I was aware, as had already been determined by the Committee of Experts in 1926, that it was impossible to revalue the franc beyond certain limits without subjecting the national economy to a particularly painful re-adaptation. If we were to sacrifice the vital force of the nation to its acquired wealth, we would put at risk the recovery we had already accomplished. We would be, in effect, preparing a counter-speculation against our currency that would come within a rather short time.

“Since the parity of 125 francs to one pound has held for long months and the national economy seems to have adapted itself to it, it should be at this rate that we stabilize without further delay.

“This is what I had to tell Mr. Poincaré at the beginning of June 1928, tipping the scales of his judgment with the threat of my resignation.” [my emphasis, DG]

So what this tells me is that the very act of personal strength that so impressed Friedman . . . was not about some imaginary “inappropriate” request made by Poincaré (“who was honesty itself”) for the Bank to provide funds to the treasury, but about whether the franc should be stabilized at 125 francs per pound, a peg that Friedman asserts was “accidental.” Obviously, it was not “accidental” at all, but . . . based on the judgment of Moreau and his advisers . . . as attested to by Rueff in his preface.

Just to avoid misunderstanding, I would just say here that I am not suggesting that Friedman was intentionally misrepresenting any facts. I think that he was just being very sloppy in assuming that the facts actually were what he rather cluelessly imagined them to be.

Before concluding, I will quote again from Friedman’s foreword:

Benjamin Strong and Emile Moreau were admirable characters of personal force and integrity. But in my view, the common policies they followed were misguided and contributed to the severity and rapidity of transmission of the U.S. shock to the international community. We stressed that the U.S. “did not permit the inflow of gold to expand the U.S. money stock. We not only sterilized it, we went much further. Our money stock moved perversely, going down as the gold stock went up” from 1929 to 1931. France did the same, both before and after 1929.

Strong and Moreau tried to reconcile two ultimately incompatible objectives: fixed exchange rates and internal price stability. Thanks to the level at which Britain returned to gold in 1925, the U.S. dollar was undervalued, and thanks to the level at which France returned to gold at the end of 1926, so was the French franc. Both countries as a result experienced substantial gold inflows.

New Comment. Actually, between December 1926 and December 1928, US gold reserves decreased by almost $350 million while French gold reserves increased by almost $550 million, suggesting that factors other than whether the currency peg was under- or over-valued determined the direction in which gold was flowing.

Gold-standard rules called for letting the stock of money rise in response to the gold inflows and for price inflation in the U.S. and France, and deflation in Britain, to end the over-and under-valuations. But both Strong and Moreau were determined to prevent inflation and accordingly both sterilized the gold inflows, preventing them from providing the required increase in the quantity of money. The result was to drain the other central banks of the world of their gold reserves, so that they became excessively vulnerable to reserve drains. France’s contribution to this process was, I now realize, much greater than we treated it as being in our History.

New Comment. I pause here to insert the following diatribe about the mutually supporting fallacies of the price-specie-flow mechanism, the rules of the game under the gold standard, and central-bank sterilization expounded on by Friedman, and, to my surprise and dismay, assented to by Irwin and Beckworth. Inflation rates under a gold standard are, to a first approximation, governed by international price arbitrage so that prices difference between the same tradeable commodities in different locations cannot exceed the cost of transporting those commodities between those locations. Even if not all goods are tradeable, the prices of non-tradeables are subject to forces bringing their prices toward an equilibrium relationship with the prices of tradeables that are tightly pinned down by arbitrage. Given those constraints, monetary policy at the national level can have only a second-order effect on national inflation rates, because the prices of non-tradeables that might conceivably be sensitive to localized monetary effects are simultaneously being driven toward equilibrium relationships with tradeable-goods prices.

The idea that the supposed sterilization policies about which Friedman complains had anything to do with the pursuit of national price-level targets is simply inconsistent with a theoretically sound understanding of how national price levels were determined under the gold standard. The sterilization idea mistakenly assumes that, under the gold standard, the quantity of money in any country is what determines national price levels and that monetary policy in each country has to operate to adjust the quantity of money in each country to a level consistent with the fixed-exchange-rate target set by the gold standard.

Again, the causality runs in the opposite direction;  under a gold standard, national price levels are, as a first approximation, determined by convertibility, and the quantity of money in a country is whatever amount of money that people in that country want to hold given the price level. If the quantity of money that the people in a country want to hold is supplied by the national monetary authority or by the local banking system, the public can obtain the additional money they demand exchanging their own liabilities for the liabilities of the monetary authority or the local banks, without having to reduce their own spending in order to import the gold necessary to obtain additional banknotes from the central bank. And if the people want to get rid of excess cash, they can dispose of the cash through banking system without having to dispose of it via a net increase in total spending involving an import surplus. The role of gold imports is to fill in for any deficiency in the amount of money supplied by the monetary authority and the local banks, while gold exports are a means of disposing of excess cash that people are unwilling to hold. France was continually importing gold after the franc was stabilized in 1926 not because the franc was undervalued, but because the French monetary system was such that the additional cash demanded by the public could not be created without obtaining gold to be deposited in the vaults of the Bank of France. To describe the Bank of France as sterilizing gold imports betrays a failure to understand the imports of gold were not an accidental event that should have triggered a compensatory policy response to increase the French money supply correspondingly. The inflow of gold was itself the policy and the result that the Bank of France deliberately set out to implement. If the policy was to import gold, then calling the policy gold sterilization makes no sense, because, the quantity of money held by the French public would have been, as a first approximation, about the same whatever policy the Bank of France followed. What would have been different was the quantity of gold reserves held by the Bank of France.

To think that sterilization describes a policy in which the Bank of France kept the French money stock from growing as much as it ought to have grown is just an absurd way to think about how the quantity of money was determined under the gold standard. But it is an absurdity that has pervaded discussion of the gold standard, for almost two centuries. Hawtrey, and, two or three generations later, Earl Thompson, and, independently Harry Johnson and associates (most notably Donald McCloskey and Richard Zecher in their two important papers on the gold standard) explained the right way to think about how the gold standard worked. But the old absurdities, reiterated and propagated by Friedman in his Monetary History, have proven remarkably resistant to basic economic analysis and to straightforward empirical evidence. Now back to my critique of Friedman’s foreward.

These two paragraphs are full of misconceptions; I will try to clarify and correct them. First Friedman refers to “the U.S. shock to the international community.” What is he talking about? I don’t know. Is he talking about the crash of 1929, which he dismissed as being of little consequence for the subsequent course of the Great Depression, whose importance in Friedman’s view was certainly far less than that of the failure of the Bank of United States? But from December 1926 to December 1929, total monetary gold holdings in the world increased by about $1 billion; while US gold holdings declined by nearly $200 million, French holdings increased by $922 million over 90% of the increase in total world official gold reserves. So for Friedman to have even suggested that the shock to the system came from the US and not from France is simply astonishing.

Friedman’s discussion of sterilization lacks any coherent theoretical foundation, because, working with the most naïve version of the price-specie-flow mechanism, he imagines that flows of gold are entirely passive, and that the job of the monetary authority under a gold standard was to ensure that the domestic money stock would vary proportionately with the total stock of gold. But that view of the world ignores the possibility that the demand to hold money in any country could change. Thus, Friedman, in asserting that the US money stock moved perversely from 1929 to 1931, going down as the gold stock went up, misunderstands the dynamic operating in that period. The gold stock went up because, with the banking system faltering, the public was shifting their holdings of money balances from demand deposits to currency. Legal reserves were required against currency, but not against demand deposits, so the shift from deposits to currency necessitated an increase in gold reserves. To be sure the US increase in the demand for gold, driving up its value, was an amplifying factor in the worldwide deflation, but total US holdings of gold from December 1929 to December 1931 rose by $150 million compared with an increase of $1.06 billion in French holdings of gold over the same period. So the US contribution to world deflation at that stage of the Depression was small relative to that of France.

Friedman is correct that fixed exchange rates and internal price stability are incompatible, but he contradicts himself a few sentences later by asserting that Strong and Moreau violated gold-standard rules in order to stabilize their domestic price levels, as if it were the gold-standard rules rather than market forces that would force domestic price levels into correspondence with a common international level. Friedman asserts that the US dollar was undervalued after 1925 because the British pound was overvalued, presuming with no apparent basis that the US balance of payments was determined entirely by its trade with Great Britain. As I observed above, the exchange rate is just one of the determinants of the direction and magnitude of gold flows under the gold standard, and, as also pointed out above, gold was generally flowing out of the US after 1926 until the ferocious tightening of Fed policy at the end of 1928 and in 1929 caused a sizable inflow of gold into the US in 1929.

However, when, in the aggregate, central banks were tightening their policies, thereby tending to accumulate gold, the international gold market would come under pressure, driving up the value of gold relative goods, thereby causing deflationary pressure among all the gold standard countries. That is what happened in 1929, when the US started to accumulate gold even as the insane Bank of France was acting as a giant international vacuum cleaner sucking in gold from everywhere else in the world. Friedman, even as he was acknowledging that he had underestimated the importance of the Bank of France in the Monetary History, never figured this out. He was obsessed, instead with relatively trivial effects of overvaluation of the pound, and undervaluation of the franc and the dollar. Talk about missing the forest for the trees.


33 Responses to “Milton Friedman and How not to Think about the Gold Standard, France, Sterilization and the Great Depression”

  1. 1 maynardGkeynes November 13, 2017 at 10:24 pm

    France’s wholesale price inflation peaked at 350% in 1926. Perhaps one might say that they they were fighting the last war, but against such a background of near hyperinflation, the gold standard must have seemed pretty sensible to policymakers at the time. Really not that different from what Britain did with Sterling — Keynes saw the mistake, but he was among the few.


  2. 2 JKH November 13, 2017 at 10:45 pm

    “So the causality runs from money to reserves, not, as the price-specie-flow mechanism and the rules-of-the-game idea presume, from reserves to money.”

    I think I’ve mentioned this before, but this is something that MMT gets wrong (iconically via Mosler), which I find extremely interesting. One of their core themes is the comparison between fiat causality and gold standard causality (in respect of money/reserves). It mistakenly claims that these are directionally opposite causalities. (In both systems, (required) reserves actually follow the creation of money; not vice versa.) And it positions this misperception as a sort of foundational constraint distinction between gold and fiat systems – something I was suspicious of, and never understood, until I confirmed to my own satisfaction (for the first time from another source) by reading your posts that it’s wrong. Rather ironic for a group/cult that prides itself on its understanding of relevant operational and accounting matters. They’ve done a sort of Rubik’s Cube semi-transformation version of Friedman’s mistake – who in effect doubled up by getting both fiat and gold standard causalities wrong.


  3. 3 JKH November 14, 2017 at 5:23 am

    As a corollary point, I wonder if there is any example under the gold standard regime of a commercial banking system (of one of the major countries) being constrained by the lack of availability of incremental gold reserves to the point where they shut down lending operations? I can see a general “tightness” in the system influencing individual bank credit decisions and constraining money supply growth in that way; or a bank being under credit watch from other banks or from a central bank because of its own solvency or liquidity condition; but banks in general being unable to lend operationally because of lack of gold availability (and therefore lack of prospective required gold backing) is quite another thing. I don’t know, but I suspect it never happened. (A central bank for example would be adjusting interest rates continuously as necessary in order to attract gold inflows to meet required reserves if necessary.) And that would be another way of proving the point at an operational level.


  4. 4 JKH November 14, 2017 at 5:32 am

    I think you may have enunciated in effect a ‘General Theory’ discrediting the money multiplier – proving its equal falseness in both fiat and gold standard cases


  5. 5 Jacques René Giguère November 14, 2017 at 7:52 am

    The Banque de France policies were deleterious to the world economy but not insane. Accumulating the international means of payment was existential if France ever was once again confronted with a large scale conflict. (“Ruat caelum fiat France ” might we say…
    Moreau never intended to sterilize the gold imports. In fact, the inflation generated was deemed harmless as the currency was backed by gold. It even had a name; “inflation gagée”, something that could be translated as “backed inflation”. (I alluded to the concept in a comment here a few years ago.)The idea seeming to be that inflation was not harmful as the “national wealth” (the stock of gold) was increasing.
    The lack of multiple languages fluency among Anglo-Saxons in general (anf Americans in particular) sometimes have consequences.


  6. 6 JP Koning November 14, 2017 at 7:58 am

    Hi David, just a quick question about the Fed’s role in all of this.

    Am I right in my logic? The Fed raised its discount rate in 1928. So a US-based bank account with enough balances to redeem an ounce of gold now earned more than a British or German account with balances equivalent to an ounce of gold. To take advantage of this excess return, Germans and Brits would have had to buy gold on the open market or redeem their deposits for gold and ship the metal to the US, then deposit in it in a US bank to earn a superior return. And it is this sort of buying that–combined with the Insane Bank of France’s purchases–pushed up the world price of gold?


  7. 7 JKH November 14, 2017 at 11:27 am

    Regarding JP’s question, my understanding is that an increase in US interest rates would induce capital flows into the US (from Britain for example), thereby creating demand for US dollars, and putting upward pressure on the dollar exchange rate (relative to sterling for example). Due to the fixed currency exchange rates relative to gold in both London and New York, professional arbitrageurs in Britain could buy sterling in exchange for dollars, sell sterling to the Bank of England in exchange for gold, and sell gold in exchange for dollars to the Fed. That sequence would provide dollars to the British capital exporter at a market rate of exchange (relatively expensive due to upward pressure on the dollar) that allowed the arbitrageur to turn a profit relative to the effective rate he could achieve by buying and selling gold at the fixed exchange rates administered by the Bank of England and the Fed respectively. And that process of arbitrage intervention would stop the upward pressure on the dollar around that general level of market exchange rates.

    I’m sure David can/will override that if it’s wrong.

    Another great post on the subject. My one observation (and this may be why I’ve interjected on JP’s point), is that it wouldn’t hurt to emphasize a little more the critical role that interest rate policy plays in these gold flows. It seems to me that the central bank policy for gold flows must be proactive, partly as a matter of matching up gold reserve availability to the reserve requirements generated by what is an essentially endogenous money creation process in the domestic banking system, that happening in the face of chosen required reserve ratios administered by the monetary authorities. And the interest rate policy must be correspondingly proactive in inducing those gold flows as per that objective as necessary. I think that’s all consistent with rejecting the backward causality confusion of Friedman on the subject.


  8. 8 JKH November 14, 2017 at 11:41 am

    my last comment implicitly identifies central bank monetary policy as setting the policy interest rate, which they do of course

    even Volcker did that, although he apparently didn’t realize that’s what he was doing in effect


  9. 9 Henry Rech November 14, 2017 at 12:55 pm


    Your continued characterization of the French accumulation of gold in the late 1920s as “insane” is very disappointing. I believe that the US accumulation of gold must then be deemed equally “insane” as was the overvaluation of the pound. The overvaluation of the pound caused a severe deflation in the UK and it could be argued it was these deflationary forces that contributed majorly to the collapse of the world monetary system.

    As I have previously demonstrated, it was not only France that accumulated gold in the late 1920s. Just about every other major European economy did the same, not of course, to the same extent as France. The main losers of gold were the agricultural producers such as Australia, New Zealand, Canada, Asia, South America and Africa. I would argue that these countries lost gold because of the long term deterioration in their balance of payments owing the long term deterioration in commodity prices. I would argue that this long term price decline was the result of overproduction on the back of changing technology (mechanization) and the corporatization of agriculture and was not solely the result of a gold shortage if at all.

    Aftalion, as previously reported by me, argued that the Bank of France did everything in its power to quell France’s gold accumulation. However, the emerging dire circumstances of the world monetary system drove capital to safe havens – France was considered a safe haven.

    On this point, it is worth reiterating again, that the French, prior to 1928, did have a deliberate policy of accumulating gold, wanting to re-establish the gold stock lost during the War. Post 1928, gold flows in to France were caused by massive private indigenous returns of long term capital to France and by flows of hot foreign capital seeking a safe haven in France. Hot international capital was staying away from the pound because of its perceived overvaluation. France was also accumulating large sterling balances. If I was the Bank of France I would not want to be holding balances in an overvalued currency.

    And it was Cassel himself who argued that:

    “The fundamental cause (of the rise in gold value) was the claim of reparations and war debts, combined with the unwillingness of the receiving countries (France and the US) to receive natural payment in the form of goods and services (the transfer problem).” (My parentheses.)

    (This was exacerbated by the US ceasing its loans to Germany which would have offset the gold flows pressures.)

    So perhaps the blame for the Great Depression can be laid at the feet of the Treaty of Versailles.

    Cassel had also argued that the world gold supply had to increase by 2.8% pa for the system to have sufficient gold reserves to avoid a deflationary bias. History shows that this growth rate was surpassed. So Cassel’s fears were misplaced. And the statistics show that the major European economies did not lose gold through the course of the late 1920s.

    The post Wall St Crash environment was toxic. Capital was seeking safe haven. The system was in shock. Credit disappeared. Liquidity disappeared. The world’s payments system was collapsing under a strained progressive structural weakening since the War. I am not arguing that the distortions in the world gold stock accumulation had no effect. I would argue, however, that if there is any insanity present, it is to argue, as you do (and you are in esteemed company), that the French accumulation of gold caused the Great Depression. 🙂


  10. 10 maynardGkeynes November 14, 2017 at 1:04 pm

    David: I distinguish between “disastrous” and “insane.” I am sure you do as well, which is why I think you are making a further point about French policy, which eludes me for the time being. Can you explain (or perhaps explain again) your choice of words?


  11. 11 Lord November 14, 2017 at 4:42 pm

    Should sterilization always be read as hoarding? Given the high tariffs of the period, it would seem difficult for trade to equalize prices.


  12. 12 David Glasner November 14, 2017 at 5:59 pm

    maynard, My issue is not with the decision to go back to the gold standard, either in Britain or France, but with the policy of the Bank of France. A much different policy, along the lines advocated by Hawtrey and Cassel might well have succeeded. Acknowledging that gold standard might have been successfully recreated in the 1920s is very different from recommending that we try to do almost a century later.

    JKH, What you say about MMT is very interesting. I have only the sketchiest knowledge of what MMT is all about, and I also see some overlap between their views and my own about the direction of causality, but I certainly agree with you that there seems to be no basis for distinguishing between fiat money and a gold standard on that basis.

    About the effects of a lack of gold, there are always international sources of gold from which to draw, so it is hard to imagine that there was ever more than a very short-term situation in which gold was not available. Given the difficulty of transporting gold across the ocean, there might have been occasions when a lack of gold in geographically isolated locations could have resulted in a short-term crisis. But I have no factual knowledge about such an event or events.

    Jacques, I don’t mean “insane” in a clinical sense. It is just an exaggerated figure of speech that I have adopted as a literary trope for attention-getting purposes. I thought that people would catch on to the rhetorical function that “insane” was being used for, but in this post, commenters seem to be reading me way too literally. Inflation in France resulted from the choice of an undervalued exchange rate which meant that internal prices in France had to rise to the level of prices in other gold standard countries.

    JP, I actually don’t get exactly what mechanism you are trying to describe. What I have in mind is that an increase in interest rates, causes foreign people and banks to shift non-US balances to US instruments. In addition rising US interest rates tend to reduce spending for reasons described by Hawtrey in many of his works. Reduced spending implies that imports go down and exports go up, creating an export surplus and an inflow of gold to finance the export surplus. The world price of gold is fixed in nominal terms under the gold standard, so an increase in the demand for monetary gold reflected in rising interest rates, is manifested in lower prices of goods and services in terms of gold. JKH provides further detail in his response with which I agree. But I think of it simply in terms of the effect on the balance of trade and balance of payments.

    Henry, As I said to Jacques above, I think you are putting too much emphasis on a particular meaning of the word “insane” when I am using it in a looser sense for my own rhetorical purposes. Having said that, I would also point out that although the US did, very unfortunately and misguidedly, increase its holdings of gold in 1929, the increase in US gold holdings over the 1927 to 1932 period was a small fraction of the increase in French gold holdings over the same period. See the table in the post about Friedman from which I quoted in this post. In addition, the overvaluation of sterling did not cause a severe deflation in England between from 1925 to 1929. The 1925 to 1928 British deflation was dictated by the need for British prices to fall slightly to match the international gold price level. That mild deflation which was accompanied by rising output and falling – though still high – unemployment had essentially nothing to do with the deflation that started late in 1929 and was caused by entirely different forces.

    You have made your argument about gold losses before, and I don’t see what significance it can possibly have. France’s holdings of gold increased by much more than the total increase in gold holdings in the world, so it is a truism that some countries were losing gold. What does that prove?

    Aftalion was a distinguished economist, but so was Friedman, so I don’t feel unduly intimidated by the knowledge that I am disagreeing with Aftalion. But I do agree that the burden of reparations and war debts were important factors that increased the vulnerability of the world economy to the deflationary effects of the increase in monetary demand for gold. And I wouldn’t dispute that Versailles Treaty had important and harmful long term consequences.

    I have previously pointed out to you that Cassel’s argument about the deflationary effect of underproduction of gold was a different argument from the explanation he provided for the Great Depression, so bringing up that argument in this context is just beside the point and irrelevant to this discussion.

    maynard, If you have read my responses above, I think you should understand, even if you disagree with, why I use the adjective “insane.”

    Lord, Hoarding by central banks might be a better term than “sterilization” but I am trying to provide a broader context for the argument. Tariffs were high at various times and places before the 1920s. Even if prices are not equalized, the basic tendencies I am describing are still in operation. International trade was increasing rapidly for most of the 1920s.


  13. 13 Henry Rech November 14, 2017 at 6:57 pm


    “France’s holdings of gold increased by much more than the total increase in gold holdings in the world, so it is a truism that some countries were losing gold.”

    And the countries losing gold were largely the agricultural producing countries which were having severe balance of payments problems. This was not a contrivance of the French central bank. The major economies of Europe increased their gold reserves in this period. A fact you seem to be not able to acknowledge.

    “Aftalion was a distinguished economist, but so was Friedman, so I don’t feel unduly intimidated by the knowledge that I am disagreeing with Aftalion. ”

    Aftalion claimed that France was doing it best to co-operate with the British authorities to ease the gold situation. Moure made the same point. While prior to 1928, there was a deliberate French policy to increase gold reserves, post 1928 there was not. It was private capital flows driven by the uncertain climate. The uncertain climate was underwritten by a strongly overvalued British pound and a weakly undervalues franc. This was one of the main tensions in the world payments system. It was the British penchant for preserving parity that pressured the system. Capital did not want to reside in sterling balances. It could be argued that British intransigence was the cause of the dislocation in financial markets. The French authorities did their best to not inflame the situation.

    Your “insane Bank of France” moniker suggests there was a determined and contrived plan by the French to accumulate gold post 1928. I would argue there was not. Yes, the French were concerned to protect the integrity of their currency (the “franc Poincare”) but they were cognizant of the pressures that were being generated. The British on the other hand insisted in maintaining a grossly overvalued currency. It was not until the break with gold that these currency pressures were alleviated. Once currencies were permitted to depreciate, the system began to stabilize.

    The criticisms leveled at the French probably came from disgruntled British bankers who lost business as the French central bank converted sterling balances to gold. Balogh (“The Import of Gold into France”, The Economic Journal, September 1930) claims that these criticisms were not shared in “responsible circles”.

    “I have previously pointed out to you that Cassel’s argument about the deflationary effect of underproduction of gold was a different argument from the explanation he provided for the Great Depression, so bringing up that argument in this context is just beside the point and irrelevant to this discussion.”

    I don’t think it is irrelevant. Your argument relies on the shortage of gold
    caused by French accumulation. One there was no overall shortage of gold. Two, only a limited number of countries lost gold, and French policies were not the cause of their predicament.


  14. 14 JP Koning November 15, 2017 at 9:15 am

    JKH and David, thanks for your comments. That makes things clearer for me.

    Under a gold standard, if the world’s major central banks all start to buy gold, then that causes deflation. But if central banks all increase their discount rates in concert, will the same sort of forces be set off? It seems to by working together there would be no effect on the balance of trade and payments. So there would be no increase in the demand for monetary gold, and thus no deflation?


  15. 15 JKH November 15, 2017 at 10:02 am


    David is more the expert, but I would have thought that an increase in interest rates would reduce the demand for non-monetary gold by causing some to convert their gold at central banks in favor of earning interest on a financial asset. Put another way, the carrying cost of borrowing to hold gold would also go up. At the same time, the reduction in the quantity of non-monetary gold would cause the value of gold to go up. So both interest rates and gold quantity effects would seem to be deflationary. And this would work separate from the international trade realm, which would seem to have a neutral effect as you suggest.

    Don’t know if that’s right, and no doubt there are other variables to consider.


  16. 16 David Glasner November 15, 2017 at 10:23 am

    Henry, It is not surprising that the countries losing gold were those with balance of payments deficits, but countries with balance of payments deficits don’t necessarily lose gold. So the two relevant questions are: (1) why were countries with balance of payments deficits losing gold reserves rather than financing those deficits by other means as often happens? And (2) why did (almost) all of the gold lost find its way into the vaults of the Bank of France?

    I don’t know what Aftalion claimed the French were doing when their share of the world’s gold reserves quadrupled between 1927 and 1932, but if he did in fact claim that France was doing its best to cooperate to “ease the gold situation” (whatever that might mean), I would not regard it as evidence of either his good judgment or good faith. The claim that the French had a deliberate policy of increasing gold reserves only before, but not after 1928, is flatly contradicted by data which show that the yearly increases in French gold reserves were greater after 1928 than before 1928.

    The overvaluation of the British pound was gradually diminishing over the 1925-1928 period as evidenced by the mild British deflation and increasing British output and employment over that period. It is just wrong to attribute a world-wide deflation in terms of gold to the overvaluation of sterling that was gradually diminishing over time.

    Your citation of Balogh’s article is misleading, because if you read to the entire article you will find that he explains that the inflow of gold into France were necessitated by the public’s increasing demand to hold cash which meant that, in order to supply the cash, French banks had to increase their reserves at the Bank of France. Increasing reserves at the Bank of France was not possible unless they offered the Bank of France an asset in exchange for the reserves. The asset offered was, for the most part, gold, because the Bank of France was unwilling to accept assets other than gold in exchange for reserves, which is precisely what I say in my post. That unwillingness of the Bank of France to accept assets other than gold in exchange for new bank reserves was caused by the monetary law of 1928, which had been drafted by the Bank of France, prohibiting the Bank of France from engaging in open-market operations that would have enabled the Bank of France to supply reserves to the banking system in exchange for securities not just in exchange for gold. In his article, Balogh called for the law to be changed to allow the Bank of France to engage in open market operations. Nobody in France paid attention.

    Finally, whether there is a shortage of gold depends on the relationship between the available stock of gold and the demand for gold. Cassel’s argument in 1919 was based on the assumption that the demand for gold would increase at a rate of 2.8% a year. The stock of gold increased by about that amount during the 1920s so that there was approximate price stability until 1929 when the world demand for gold, driven primarily by the insane Bank of France with an assist from the clueless Federal Reserve, began increasing rapidly. So relative to the available stock of gold, the rapidly rising demand for gold did cause a shortage of gold, which meant that the value of gold started to rise rapidly, producing the deflationary catastrophe known as the Great Depression. The fact that only a few countries experienced absolute losses in their gold holdings does not mean that there was no shortage of gold at the pre-depression value of gold. With an almost vertical supply curve and a highly inelastic demand curve even a small shift to the right in the overall demand curve will produce a big increase in the market clearing price.


  17. 17 Henry Rech November 15, 2017 at 1:15 pm


    ” (1) why were countries with balance of payments deficits losing gold reserves rather than financing those deficits by other means as often happens? ”

    I don’t know precisely but my guess is that their creditors would not want to hold assets in the debtor currencies, their currencies being under pressure. Blind Freddie could see that the world payments system was heading for disaster. So creditors would want to protect their assets.

    “(2) why did (almost) all of the gold lost find its way into the vaults of the Bank of France?”

    The franc was seen as a hard currency. In times of turmoil, capital seeks the safety of hard currencies. That the franc was seen as a hard currency was because of the deliberate policy of the French authorities. The French did not have a policy of accumulating gold after 1928. It occurred naturally as international capital sought haven in the franc. After their post War inflationary experience, the French had no desire to see their currency weaken. There were political pressures to return to a pre-war parity (a la UK). However, good sense prevailed and a parity was set to take account of changes in the internal price level. You know all this.

    “I don’t know what Aftalion claimed the French were doing when their share of the world’s gold reserves quadrupled between 1927 and 1932”

    I suggest you read Aftalion’s contribution to the League of Nations’ report “Selected Documents on the Distribution of Gold submitted to the Gold Delegation of the Financial Committee” 1931. He says the French attempts to quell the gold flows was forestalled by the strong international demand for the franc. Kenneth Moure (“Managing the franc Poincare” – 1991) in his introduction, says the French co-operated with the British to control gold movements. (I have not read the book yet so I don’t have the detailed accounts in the later chapters.)

    Through the late 1920s and early 1930s, the French were accumulating large sterling balances. Given that the gold/fixed currency system was about to blow up, it is understandable that the French would not want to hold huge sterling balances – the British pound was overvalued and due for a significant correction.

    “It is just wrong to attribute a world-wide deflation in terms of gold to the overvaluation of sterling that was gradually diminishing over time. ”

    That is a matter of opinion and I disagree with your opinion. The British deflation added to the pressures of world wide deflation. The UK economy was still significant in the world scene. In any event, sterling was seen as overvalued, that’s why international capital ran to the franc and France accumulated huge sterling balances.

    “Your citation of Balogh’s article is misleading”

    I don’t think so. What I said he said, he said. However, I agree that Balogh’s paper has points of interest to both sides of the argument. While Balogh acknowledges that the French gold accumulation is problematic, he also empathizes with their predicament. He suggests that ways should be found of recycling French offshore balances using the BIS.

    “….you will find that he explains that the inflow of gold into France were necessitated by the public’s increasing demand to hold cash…. ”

    Yes, this is the point. The French public wanted cash and the French authorities responded. However, there was also a massive repatriation of indigenous funds from offshore happening, adding to the domestic pressures for currency. Post 1928, there was no deliberate, considered policy to increase their gold reserves, as you argue.

    “So relative to the available stock of gold, the rapidly rising demand for gold did cause a shortage of gold, which meant that the value of gold started to rise rapidly, producing the deflationary catastrophe known as the Great Depression…………With an almost vertical supply curve and a highly inelastic demand curve even a small shift to the right in the overall demand curve will produce a big increase in the market clearing price.”

    Somehow this does not pass the smell test. It sounds reasonable but I don’t believe it is. It is far too simplistic.

    Was the supply curve vertical? OK, physical mine production takes time to respond. However, the other potential component of supply is the already existing stock of gold. I think it would be almost impossible to say how the gold supply curve might look – it involves complex considerations.


  18. 18 David Glasner November 15, 2017 at 8:53 pm

    JP, I think that I agree with JKH that an increase in the central bank’s short-term lending rate would cause an inflow of gold into the central bank from non-monetary holdings of gold to take advantage of the expected differential rate of return from holding cash over the return on holding gold. But that effect would probably be small. When central banks wanted to increase their holdings of gold, they could also just go and buy gold in the open market from gold dealers and in that way reduce the amount of gold available for non-monetary uses, thereby raising the relative value of gold in terms of other commodities. Unless central banks are withdrawing gold formerly put to non-monetary uses, the relative value of gold in terms of commodities is not going to increase. If central banks are just trading the existing monetary stock of gold among themselves, there would be no pressure on the value of gold. It is only by inducing gold to flow out of the non-monetary uses that the value of gold is affected.


  19. 19 JKH November 16, 2017 at 2:54 am

    “mutually supporting fallacies of the price-specie-flow mechanism, the rules of the game under the gold standard, and central-bank sterilization”

    I’m not a scholar, but I can only imagine this as one of the more powerful summary descriptions ever written about how the gold standard did and didn’t operate.

    It is stunning that this trifecta of misunderstanding about the gold era is carried on today in the plain vanilla version of the erroneous money multiplier, equally wrong back then as it is now, in a parade of targeted ignorance led by luminaries like Krugman.

    I think that the obvious importance of understanding this about the gold standard, and its continuation in modern form, suggests that we likely can’t comprehend just how much damage has been done to the general quality of (monetary) economics as a subject matter today – with notable exceptions*.

    * Godley and Lavoie, ‘Monetary Economics’ 2008, is the first and only place other than your blog that I’ve run into this correct understanding – in my limited travels. It’s good to know that Hawtrey el al are part of the group.


  20. 20 JP Koning November 16, 2017 at 8:19 am

    JKH and David, thanks for your helpful comments.


  21. 21 David Glasner November 16, 2017 at 9:22 am

    Henry, The whole world was not rushing to hold franc denominated assets between 1928 and 1932. As Balogh, whom you quoted approvingly (but misleadingly despite the literal accuracy of the quotation), states in his 1930 article, the only way for the French public to obtain cash was to deposit gold with the Bank of France. See p. 55 of Moure’s 1991 book and you will see that from June 1928 to December 1931 the gold holdings of the Bank of France increased by nearly 40 million francs while the banknotes issued by the Bank of France in circulation increased by only 27 million francs. The world payments system was heading for disaster only because of the insane policy of the Bank of France, sane people could not have imagined that the French would persist in their insanity. But they did! If Aftalion really believed that the French were cooperating with the British to halt the influx of gold into France but were overwhelmed by the strong international demand for francs, he was delusional. I have Moure’s book in front of me now and I copy the relevant paragraph from his introduction.

    “Chapters 2 and 3 cover French policy making with regard to gold and international economic cooperation. The rapid growth of French gold reserves in 1929 and 1930 drew strong criticism from abroad, particularly from Britain, where French gold accumulation was blamed for the severity of the depression. Chapter 2 analyzes French gold policy from 1928 to 1932: the understanding of the problem, efforts at cooperation with Britain to control gold movements, assistance in trying to save the pound sterling in the summer of 1931, and the final rush of gold acquisition in 1932 as France liquidated its foreign exchange holdings. French understanding of the gold standard promoted a passive monetary policy that would continue beyond the period of acquisition, while the large accumulation of gold reserves convinced policy makers that they were following the right course. [my emphasis] . . . In 1933, French policy evolved from complacency with regard to a crisis for which France felt no responsibility to conviction hat currency depreciation threatened to destroy the monetary foundation of economic and social order and that exchange-rate stabilization was the essential first step to economic recovery.” (p. 7)

    And since you yourself have cited Moure as an authority, consider this quotation from his 2002 book The Gold Standard Illusion: France, The Bank of France, and the International Gold Standard 1914-1939.

    “Based on archival research, particularly in recently available records at the Bank of France, this study uses a careful exploration of French experience to test how far the new orthodoxy is supported by the historical record of gold standard policy in the country where belief in the gold standard was strongest and most stubborn, and whose gold policy is held to have had the most pronounced impact on the international system. The results sustain much of the gold standard interpretation of the Depression, finding gold standard belief and logic to have played a determining role in the deflationary impulse that brought on the Depression. But they do not support claims that a gold standard ‘regime’ determined policy or that ‘rules of the game’ played a significant role in policy making. Individual and institutional players were involved in a game, the contours of which were determined not by gold standard rules, but by rigid conceptions of economic orthodoxy. Rather than a flawed gold standard leading ineluctably to world depression, The Gold Standard Illusion finds policy errors in France and elsewhere to have been rooted in contemporary economic belief, of which gold standard orthodoxy was but one part. Belief in a mythical gold standard promoted policy choices (and arguments to justify them) that encouraged contraction in the midst of depression. [my emphasis] The severity of the Depression in the 1930s was in good part the price paid for this gold standard illusion.” (p. 2)

    The response of the French authorities to the increasing demands of the French public for liquidity was to not respond to those demands unless they first deposited gold with the Bank of France. That was the root cause of the disaster.


  22. 22 JKH November 16, 2017 at 6:51 pm

    That podcast is quite painful at the 47 minute mark.


  23. 23 Henry Rech November 16, 2017 at 8:05 pm


    “The response of the French authorities to the increasing demands of the French public for liquidity was to not respond to those demands unless they first deposited gold with the Bank of France. That was the root cause of the disaster.”

    OK. So it starts with private demand for currency, not rapacious demand for gold by the French authorities.

    “The whole world was not rushing to hold franc denominated assets between 1928 and 1932.”

    Here’s a couple of things I quickly found:

    The published foreign exchange holdings of the Bank of France for the years, 1927, 1928, 1929, 1930 were (millions of Swiss francs): 535, 6657, 5286, 5314. Note the huge jump from 1927 to 1928 after the franc stabilization (“The Gold Exchange Standard”, Karl Blessing, BIS, Oct 1932 – note: Blessing went on to become the President of the Bundesbank in 1958). The subsequent decline was probably due to gold conversion.

    See p 990 of “The International Gold Standard Reinterpreted”, W. A. Brown:

    “Foreign funds sought safety in the comparative security of the French market.”

    (A few pages later Brown also refers to Aftalion’s claims about the Bank of France’s attempts to moderate inward gold flows, if you’re interested, and you can’t get your hands on the original League of Nations’ report.)

    I can find other references with some more effort.

    Regarding the comments in the Introduction to Moure’s book (“Managing the franc Poincare”) that you have reproduced above, you chose to highlight the comments that suited you. Why not highlight these:

    “the understanding of the problem, efforts at cooperation with Britain to control gold movements, assistance in trying to save the pound sterling in the summer of 1931, and the final rush of gold acquisition in 1932 as France liquidated its foreign exchange holdings.”

    which speak of co-operation and assistance and not a wanton deliberate policy of gold accumulation?

    (I don’t have the book yet, so I haven’t read the relevant chapters.)

    Regarding Moure’s other book from which you quote, I have not read that either, however, there is a review of the book online written by Julian Jackson (who has also written about this period in economic history). What he says towards the end of the review about Moure’s conclusions is:

    “(Clark) Johnson’s idea that the French had flouted the rules of the game is rejected on the grounds that there was, in fact, no general agreement on what those rules should be, and that the France’s interpretation of them was entirely legitimate. Moure sees no evidence that the Bank of France deliberately sought to lower world prices. What it did want was above all to avoid inflation. The Bank of France took the view that it was incumbent upon countries losing gold to take the necessary corrective action, and that when they did the bank of France was to put no obstacles in the way of the resulting outflow of gold from France.”

    All this is to say that French policy was about preserving the stability of the franc and not designed to accumulate gold specifically.

    “As Balogh, whom you quoted approvingly (but misleadingly despite the literal accuracy of the quotation),…..”

    You have repeatedly referred to my being misleading. I was not misleading. What I said Balogh said, he said and he intended to say it. There was no pulling his comment out of context. Please stop this nonsense.

    Now, I WILL take selective comments from Balogh, which you have ignored (should I accuse you of being misleading?):

    p 442:

    “And as we shall show below, the Bank of France can only be charged with this (i.e. sterilization) if the gold inflow is caused by the conversion of its foreign exchange holdings. No such transactions, however, have taken place this year (i.e 1930), and they have occurred only to limited extent in previous years. It appears, therefore, that those who make the charge of willful hoarding mistake for conscious tactics the shortcomings of the French banking system and of the gold standard in general.”

    p 445:

    “The study of the balance of international payments clearly shows that the accusation that the French have willingly and consciously “hoarded” or “sterilized” gold does not hold for the greater part of gold imports.”

    I’m sure you can find quotes to offset these in Balogh. As I have previously remarked, Balogh has points to make for both sides of the argument. Here’s such a one:

    p 457:

    “It is, on the other hand, of the utmost importance that these gold imports, which are an additional (not the sole/prime factor as DG argues) factor of disturbance in a very grave economic situation, should come to an end……….The statements of responsible statesmen show that they are well aware of the truth that a failure of France to co-operate in the maintenance of economic stability and in overcoming the present state of depression…..can only harm her own development……It cannot do any good, however, if the French authorities merely stress the fact – as they like to do – that the French gold imports are due to “natural causes” to the automatism of the gold standard.”

    It is clear he believes that, while the situation is dangerous, the French have not willfully and wantonly sought to accumulate gold and are acutely aware that the impact French gold imports have on the world financial system and potentially on France itself.

    In contrast, you argue that France willfully and wantonly chased gold for its own sake.

    Your claim that you use the term “insane” as merely a provocation (for some unexplained reason) I find strange. I believe you actually believe they were insane. Every opportunity you have you repeat this “provocation”. You obviously have no designs on receiving the French Legion of Honour. 🙂


  24. 24 Henry Rech November 16, 2017 at 8:08 pm

    “That podcast is quite painful at the 47 minute mark.”

    Would you like to explain that JKH?


  25. 25 JKH November 17, 2017 at 3:11 am

    because the discussion at the 47 minute mark encapsulates :

    “mutually supporting fallacies of the price-specie-flow mechanism, the rules of the game under the gold standard, and central-bank sterilization”


  26. 26 JKH November 17, 2017 at 3:36 am

    actually, its more than that – its the basic idea that reserves follow money (as highlighted correctly in the post); not that money follows reserves (as incorrectly suggested in the podcast) – although the other stuff noted above is an extension of the incorrect interpretation

    and that full misalignment is covered in the post as well


  27. 27 Henry Rech November 22, 2017 at 4:22 pm

    The more one looks at the pattern of capital flows in the late 1920s, it becomes clear that capital was staying away from London and heading for New York and Paris. And the reason I would offer is that the pound was grossly overvalued, and given the turmoil in financial markets, no-one in their right mind would park their money in a currency that was overvalued and pending a readjustment (downwards). It seems to me, if there was an insanity in financial quarters, it was the insanity of the British who reset the pound at the prewar parity in 1925. I would argue this was the most destabilizing factor in international monetary system in the late 1920s. The British have themselves to blame for the troubles and the loss of gold they endured in the late 1920s. The French and the Americans were the beneficiaries of this crazy/insane British policy from which they did not relent until the pressure became unbearable and left gold in September 1931. The French held on to large tranches of sterling balances, endeavouring to save the British from themselves, for as long as the could. Inevitably, when the obvious (a sterling devaluation) was no longer avoidable they quit their sterling balances.


  28. 28 kaleberg November 30, 2017 at 10:18 am

    I was just reading the May 1930 issue of Fortune which had some notes on this very issue. (Yes, I tend to get a bit behind in my reading.) The Fortune article on the Gold Standard noted that France’s economy and currency were devastated by the war. In fact, it was the cheap French economy and low relative price level that brought that Jazz Age artist community to Paris. It also led French investors, including banks, to lend money to parties in other nations, primarily the US and Britain. This meant French gold was lent overseas, and, as the practice was at the time, the gold was transferred from France to the nations of the debtors.

    The French economy began to recover in the late 1920s. This meant more investment opportunities and a higher rate of return on local lending. Naturally, French bankers and investors began to shift their investments to France. That meant gold was moved from the US, Britain and elsewhere back to France, the land of its owners. Now, one could argue that this was horribly selfish of the French or perhaps misguided. Still, with the French recovery finally underway, it is no surprise that French owned gold was being repatriated.

    One can argue about the exact ratio of gold to francs that the French government chose, just as one can argue about the exact ratio of pounds or dollars to gold, but the gold standard was a mechanism for limiting the availability of capital. It’s very attraction to the wealthy is that it allows them to maintain their wealth by denying others an ability to improve their lot. The US and British economies recovered from the war more quickly than France’s and there was French gold available for them. When France started to recover, there was suddenly a gold shortage.

    In 19th century theory, this conflict should have been resolved by the gold being optimally deployed across all the economies, perhaps reducing growth rates in the US and Britain while allowing faster growth in France. There would have to be an adjustment to price levels to drive this. This, of course, ignores the dynamics of actual economies. The necessary adjustments would not be critically damped, as the engineers say. Those adjustments would drive bounce and instability as the system state drifted towards its poles and flirted with its zeroes.

    The problem wasn’t what individuals, banks and nations did with their gold and currency. That problem was with the use of a mechanism to limit the growth of capital. Interestingly, our current problem is that we have removed all the limits on the growth of capital, but that’s another story.


  29. 29 Henry Rech November 30, 2017 at 12:56 pm

    “When France started to recover, there was suddenly a gold shortage. ”

    The question is, was there?

    In the late 1920s, the countries that lost gold appeared to be the agricultural exporters. I would put that down to their deteriorating trade positions because commodity prices had been weak for some years. It could be argued that commodity prices were weak because of overproduction caused by technology improvements and corporatization of agriculture, not general deflationary forces. Most of the major European countries had rising gold stocks during this period. It seems that French gold accumulation was sourced effectively and largely from new production.


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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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