Martin Wolf Reviews Adam Tooze on the 2008 Financial Crisis

The eminent Martin Wolf, a fine economist and the foremost financial journalist of his generation, has written an admiring review of a new book (Crashed: How a Decade of Financial Crises Changed the World) about the financial crisis of 2008 and the ensuing decade of aftershocks and turmoil and upheaval by the distinguished historian Adam Tooze. This is not the first time I have written a post commenting on a review of a book by Tooze; in 2015, I wrote a post about David Frum’s review of Tooze’s book on World War I and its aftermath (Deluge: The Great War, America and the Remaking of the World Order 1916-1931). No need to dwell on the obvious similarities between these two impressive volumes.

Let me admit at the outset that I haven’t read either book. Unquestionably my loss, but I hope at some point to redeem myself by reading both of them. But in this post I don’t intend to comment at length about Tooze’s argument. Judging from Martin Wolf’s review, I fully expect that I will agree with most of what Tooze has to say about the crisis.

My criticism – and I hesitate even to use that word – will be directed toward what, judging from Wolf’s review, Tooze seems to have been left out of his book. I am referring to the role of tight monetary policy, motivated by an excessive concern with inflation, when what was causing inflation was a persistent rise in energy and commodity prices that had little to do with monetary policy. Certainly, the failure to fully understand the role of monetary policy during the 2006 to 2008 period in the run-up to the financial crisis doesn’t negate all the excellent qualities that the book undoubtedly has, nevertheless, leaving out that essential part of the story that is like watching Hamlet without the prince.

Let me just offer a few examples from Wolf’s review. Early in the review, Wolf provides a clear overview of the nature of the crisis, its scope and the response.

As Tooze explains, the book examines “the struggle to contain the crisis in three interlocking zones of deep private financial integration: the transatlantic dollar-based financial system, the eurozone and the post-Soviet sphere of eastern Europe”. This implosion “entangled both public and private finances in a doom loop”. The failures of banks forced “scandalous government intervention to rescue private oligopolists”. The Federal Reserve even acted to provide liquidity to banks in other countries.

Such a huge crisis, Tooze points out, has inevitably deeply affected international affairs: relations between Germany and Greece, the UK and the eurozone, the US and the EU and the west and Russia were all affected. In all, he adds, the challenges were “mind-bogglingly technical and complex. They were vast in scale. They were fast moving. Between 2007 and 2012, the pressure was relentless.”

Tooze concludes this description of events with the judgment that “In its own terms, . . . the response patched together by the US Treasury and the Fed was remarkably successful.” Yet the success of these technocrats, first with support from the Democratic Congress at the end of the administration of George W Bush, and then under a Democratic president, brought the Democrats no political benefits.

This is all very insightful and I have no quarrel with any of it. But it mentions not a word about the role of monetary policy. Last month I wrote a post about the implications of a flat or inverted yield curve. The yield curve usually has an upward slope because short-term rates interest rates tend to be lower than long-term rates. Over the past year the yield curve has been steadily flattening as short term rates have been increasing while long-term rates have risen only slightly if at all. Many analysts are voicing concern that the yield curve may go flat or become inverted once again. And one reason that they worry is that the last time the yield curve became flat was late in 2006. Here’s how I described what happened to the yield curve in 2006 after the Fed started mechanically raising its Fed-funds target interest rate by 25 basis points every 6 weeks starting in June 2004.

The Fed having put itself on autopilot, the yield curve became flat or even slightly inverted in early 2006, implying that a substantial liquidity premium had to be absorbed in order to keep cash on hand to meet debt obligations. By the second quarter of 2006, insufficient liquidity caused the growth in total spending to slow, just when housing prices were peaking, a development that intensified the stresses on the financial system, further increasing the demand for liquidity. Despite the high liquidity premium and flat yield curve, total spending continued to increase modestly through 2006 and most of 2007. But after stock prices dropped in August 2007 and home prices continued to slide, growth in total spending slowed further at the end of 2007, and the downturn began.

Despite the weakening economy, the Fed remained focused primarily on inflation. The Fed did begin cutting its Fed Funds target from 5.25% in late 2007 once the downturn began, but the Fed’s reluctance to move aggressively to counter a recession that worsened rapidly in spring and summer of 2008 because the Fed remain fixated on headline inflation which was consistently higher than the Fed’s 2% target. But inflation was staying above the 2% target simply because of an ongoing supply shock that began in early 2006 when the price of oil was just over $50 a barrel and rose steadily with a short dip late in 2006 and early 2007 and continuing to rise above $100 a barrel in the summer of 2007 and peaking at over $140 a barrel in July 2008.

The mistake of tightening monetary policy in response to a supply shock in the midst of a recession would have been egregious under any circumstances, but in the context of a seriously weakened and fragile financial system, the mistake was simply calamitous. And, indeed, the calamitous consequences of that decision are plain. But somehow the connection between the focus of the Fed on inflation while the economy was contracting and the financial system was in peril has never been fully recognized by most observers and certainly not by the Federal Reserve officials who made those decisions. A few paragraphs later, Wolf observes.

Furthermore, because the banking systems had become so huge and intertwined, this became, in the words of Ben Bernanke — Fed chairman throughout the worst days of the crisis and a noted academic expert — the “worst financial crisis in global history, including the Great Depression”. The fact that the people who had been running the system had so little notion of these risks inevitably destroyed their claim to competence and, for some, even probity.

I will not agree or disagree with Bernanke that the 2008 crisis was the worse than 1929-30 or 1931 or 1933 crises, but it appears that they still have not fully understood their own role in precipitating the crisis. That is a story that remains to be told. I hope we don’t have to wait too much longer.

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39 Responses to “Martin Wolf Reviews Adam Tooze on the 2008 Financial Crisis”


  1. 1 Jacques René Giguère July 18, 2018 at 8:53 pm

    And once again, as in 1920’s-30’s, the worst policies came from France and Germany

  2. 2 Benjamin Cole July 19, 2018 at 8:47 am

    Great post. Reading Fed minutes up to 2008 is to see a monomaniacal fixation on inflation. Has the Fed reformed?

    No.

    So why do people believe in an independent central bank?

  3. 3 Frank Restly July 19, 2018 at 2:08 pm

    David,

    “Over the past year the yield curve has been steadily flattening as short term rates have been increasing while long-term rates have risen only slightly if at all.”

    Um, try again. Over the past year (July 2017 to July 2018), the yield on the ten year Treasury has increased from about 2.25% to 2.83% (0.58% net change).

    Over the same time frame (July 2017 to July 2018), the fed funds rate has been increased from 1.16% to 1.7% (0.53% net change).

    In fact the spread has gotten slightly wider.

    “Many analysts are voicing concern that the yield curve may go flat or become inverted once again.”

    Name one.

  4. 4 Frank Restly July 19, 2018 at 2:51 pm

    David,

    “But inflation was staying above the 2% target simply because of an ongoing supply shock that began in early 2006 when the price of oil was just over $50 a barrel and rose steadily with a short dip late in 2006 and early 2007 and continuing to rise above $100 a barrel in the summer of 2007 and peaking at over $140 a barrel in July 2008.”

    And you know (and the Fed was supposed to know) that the surging oil price was the result of a supply shock because?

    https://www.indexmundi.com/energy/?product=oil&graph=production

    2004 – 72.3 million barrels production (World)
    2005 – 73.5 million barrels production (World)
    2006 – 73.1 million barrels production (World)
    2007 – 72.7 million barrels production (World)
    2008 – 73.6 million barrels production (World)
    2009 – 72.4 million barrels production (World)
    2010 – 74.2 million barrels production (World)
    2011 – 74.3 million barrels production (World)

    Where in these numbers is this supply shock that began in 2006?

    Or perhaps you are referring to this:

    https://tradingeconomics.com/united-states/crude-oil-production

    U. S. crude oil production peaked in about 1969-1970 at about 10 million barrels per day. From that time it on, it fell to a low of 4 million barrels per day, hitting that level twice (once in 2004 and again in 2006).

    If you are going to make a “supply side” argument, at least indicate the data you are using to support that argument.

    Fact is, U. S. domestic production (supply) had been falling long before Ben Bernanke, Alan Greenspan, or Paul Volcker took the helm at the federal reserve, if this is indeed the “supply shock” you are referring to.

  5. 5 Henry Rech July 19, 2018 at 7:54 pm

    Jacques René Giguère said:

    “And once again, as in 1920’s-30’s, the worst policies came from France and Germany”

    I would argue the most catastrophic policy of the 1920s was Britain’s return to an overvalued pound. This added untoward pressures to the world financial system which eventually resulted in the demise of the gold exchange standard regime. The collapse of Wall St initiated a credit and liquidity crisis which accentuated the pressures on the world financial system.

  6. 6 Jacques René Giguère July 19, 2018 at 9:16 pm

    France policy of gold accumulation during the 1920’s compounded Britain (Churchill)’s policy of avervaluing the pound. But in its consequences, Brüning deflation was the worst.

  7. 7 Henry Rech July 20, 2018 at 5:51 am

    Jacques,

    It could be argued that France’s accumulation of gold would not have been possible to the extent that it did occur if the pound had been sensibly priced relative to gold. Why would anyone in their right mind hold positions in a clearly overvalued currency? France at one time held very high sterling balances endeavouring to ease the pressures on the pound as an act of good faith. Eventually, when it was obvious that the pound was going to sink France cashed in its sterling. It was the only sensible and responsible thing to do.

  8. 8 Frank Restly July 22, 2018 at 7:43 am

    Henry,

    It can also be argued that France’s accumulation of gold would have not had any effect on the global economy if it did not coincide with the dearth of new gold discoveries beginning in 1910.

    https://en.wikipedia.org/wiki/Gold_rush

  9. 9 David Glasner July 22, 2018 at 12:05 pm

    Jacques Rene, In 1929, it was France that was the main culprit and the US was an important but secondary player. Germany’s role was to default on its obligations, helping create a financial crisis and then prolonging the crisis by Bruening’s deliberate deflationary policy. In 2008, it was the US that precipitated the crisis, and Germany and the ECB exacerbated the crisis by their inflation-phobia and imposing unrealistic austerity measures on Greece.

    Benjamin, I think independence is problematic, but on balance the better option.

    Frank, In July 2017, the difference between the 10-year Treasury and the 3-month Treasury ranged between 108 and 134 basis points; in July 2018, the difference has ranged from 84 to 89 basis points.

    https://fred.stlouisfed.org/series/T10Y3M

    Without going into the weeds on the oil market in 2006-2008, i will just say that there was some kind of disturbance that caused the price of oil to more than double. I am calling that disturbance a supply shock, because it was primarily a relative price shift rather than an aggregate demand shock.

    Henry, We have argued about this many times already, and we both seem to be sticking to our story, so I will just register my opinion that the British pound was overvalued in 1925. By 1929, after 4 years of deflation, the pound was only slightly overvalued, if at all, relative to the dollar. On the other hand, when the franc was officially made convertible again into gold in 1928, it was deliberately undervalued. So the country with the most inappropriately valued currency in 1929 was France not Britain.

    Jacques, The Bruening policy was a disaster but its effects were at least in the short-term economic effects of the policy were largely limited to Germany and not exported to the rest of the world as the French gold accumulation policy was.

  10. 10 Frank Restly July 22, 2018 at 12:53 pm

    David,

    “Without going into the weeds on the oil market in 2006-2008, i will just say that there was some kind of disturbance that caused the price of oil to more than double. I am calling that disturbance a supply shock, because it was primarily a relative price shift rather than an aggregate demand shock.”

    What do you mean a relative price shift – relative to what?

    Copper?
    https://fred.stlouisfed.org/series/PCOPPUSDM

    Natural Gas?
    https://fred.stlouisfed.org/series/PNGASUSUSDM

    Gold?
    https://fred.stlouisfed.org/series/GOLDAMGBD228NLBM

  11. 11 David Glasner July 22, 2018 at 12:59 pm

    Frank, I mean a shift in one price compared to some comprehensive price index.

  12. 13 David Glasner July 22, 2018 at 1:56 pm

    That’s one possibility, not necessarily the best, but reasonable.

  13. 14 Frank Restly July 22, 2018 at 3:05 pm

    Okay,

    If we compare movements in both this index and for instance WTI oil, you see the same general movements from about 1998 to now.

    https://fred.stlouisfed.org/series/DCOILWTICO
    https://fred.stlouisfed.org/series/PPIACO

    Granted, the oil price movement was substantially larger:

    WTI Price divided Producer Price Index
    January 2004 – .243
    January 2005 – .310
    January 2006 – .399
    January 2007 – .332
    January 2008 – .514
    January 2009 – .243

    But using this data, oil prices (relative to a broad index) began their run up starting in 2004 (not 2006 as indicated in your article).

  14. 15 Henry Rech July 23, 2018 at 6:52 am

    David,

    Yes the the Franc was undervalued but by no more than a few percent (whereas the pound was overvalued several times this) and contributed to the pressures in the exchange markets.

    However, if the valuation of the pound was so benign and appropriate in 1929 why was it that the pound was eventually forced off gold in September 1931 and devalued considerably? Only then did the system begin to stabilize and Britain begin to regain its economic footing.

    And as you say yourself, to keep the pound at it’s parity, deflation was forced upon Britain and given that the pound was still one of the major world currencies and Britain still a major world economy, this deflation was transmitted internationally.

    To lay the blame of the collapse of the world financial order largely at the feet of the French, as you do, seems to me to be totally unreasonable.

    Not only where the French (and the US at various times) accumulating gold but so was the rest of Europe, particularly in 1931.

    There was a multitude of forces working from the early 1920s causing a progressive structural weakening of the system, and then in 1929 a system deeply shocked and traumatized by the collapse of Wall St.

  15. 16 Henry Rech July 23, 2018 at 5:53 pm

    Frank,

    You said:

    “It can also be argued that France’s accumulation of gold would have not had any effect on the global economy if it did not coincide with the dearth of new gold discoveries beginning in 1910.”

    The price of gold was fixed in US dollars and costs kept rising – it’s no wonder gold mine development fell off.

    Anyway, the statistics show that the French gold accumulation (and perhaps including the gold accumulation of the US, I can’t remember for the moment) in the late 1920s essentially captured mine production in those years. So it was hardly the case that gold was being sucked out of existing hoards. By and large the only countries to have consistently lost gold in the late 1920s was Japan and countries which relied on agricultural exports (from memory the likes of Canada, Australia and South America). The exports of these countries suffered consistent prices declines which negatively impacted on their trades balances. European countries were accumulating gold along with France and the US. Even Britain had years where it accumulated gold. Its worst outflow was in 1931 when the pressure on sterling was at its maximum.

  16. 17 David Glasner July 23, 2018 at 7:01 pm

    frank, You are right that that the price of oil began rising in 2004, not 2006. For purposes of my discussion when the rise started was not relevant, because the macroeconomic situation was not problematic in 2004 to 2006 period. I was concerned about what was happening in 2006 when the rise in home prices peaked setting in motion a chain of repercussions in the financial sector.

    Henry, Britain properly left the gold standard in 1931 to avoid the continuing deflation imposed by the insane policy of gold accumulation adopted by the Bank of France. By leaving the gold standard, Britain freed itself from any further deflation and began a modest recovery almost immediately. And as long we are on the subject of leaving the gold standard, perhaps you would like to tell us why, if its insane policy of gold accumulation was working out as splendidly as you seem to think it did, France decided to scrap the gold standard in 1936?

  17. 18 Henry Rech July 23, 2018 at 9:28 pm

    David,

    The main reason France was able to accumulate gold was because sterling was overvalued and France was seen as a haven of stability in a tumultuous world. The cause of the British deflation as you said yourself was Britain’s attempt to defend sterling’s parity with gold.

    World capital, short and long term, gravitated towards France. I have made no comment on whether this was good or bad for France. I have argued instead that this was not the major cause of world deflation – the British overvaluation of sterling was – this was one of the major causes of destabilizing capital flows in the late 1920s. I have not studied the period beyond the early thirties so I cannot offer a comment on why the French abandoned gold in 1936.

  18. 19 David Glasner July 24, 2018 at 5:36 am

    Henry, The British deflation from 1925 to 1929 was mild, bringing British prices in line with the prices of other countries on the gold standard, most notably the US where the price level was nearly stable from 1925 to 1929. So from 1925 to mid-1929, deflation was mild and largely confined to Britain. It was only late in 1929, more than four years after Britain’s resumption of the gold standard, that deflation accelerated and became a world-wide phenomenon. British gold holdings from 1925 to 1929 were roughly stable, though I am just relying on memory for that assertion. The amount of gold accumulated by France after it adopted its insane gold accumulation policy in 1928 was far more than the entire gold holdings of the Bank of England. So your characterization of what was happening from 1925 to 1929 is at odds with the facts.

  19. 20 Jacques René Gigère July 24, 2018 at 4:24 pm

    David: economically in the short term, Brüning’s policies had no effect on the world. But the internal political consequences were the seed of what happened in 1933-1945. We are Brüning’s grandchildren.

  20. 21 Henry Rech July 24, 2018 at 9:39 pm

    David,

    Below I have provided the change in gold stock holdings from December 1925 to June 1931. (Source: League of Nations, Report of the Gold Delegation of the Financial Committee, 1932.) The amounts are in US$’000,000.

    World Total +$1,834
    France +$1,233
    US +$714
    UK/Irish Free State +$51
    Second European 5* +$334
    Rest of Europe** +$88
    Japan -$152
    India +$42
    Total Primary Producers*** -$495
    Rest of World (incl. Russia) +$19

    * Germany, Belgium, Switzerland, Netherlands, Italy – i.e. the other major industrial economies in Europe.
    ** Europe minus France minus UK minus Second 5.
    *** Australia, New Zealand, Asia (excl. Japan and India), South America, Africa, Canada. These countries’ exports were mainly agricultural and mineral goods.

    The features of this table are of course the large French and US accumulation, the net accumulation of the UK, the significant accumulation by other European states and the significant decline in Japanese and primary producer stocks.

    The UK suffered a net reduction of US$275,000,000 in the period between July and December 1931 as the sterling crisis came to a head. The sterling crisis was brought on by the collapse of several Continental banks (mainly the Credit Anstalt and Danat Bank) in the first half of 1931.

    World gold production in this period averaged around 20M ozs p.a. or approximately US$80M p.a.. So for the period in question world gold production approximated US$440M. This, in total with the losses of Japan and the primary producers, almost equated the gains by France in the period.

    The only time the UK was pressured by significant gold outflows was during the sterling crisis of August and September 1931. In fact, during the sterling crisis, the US and France agreed to provide credits to the UK if the UK addressed its budgetary position.

    To hold sterling’s parity and to bring down internal costs the UK held interest rates high for several years from the mid 1920s.

    The US, in its attempt to quell speculation on Wall St jacked up its interest rate in 1928.

    The pressures wrought by these rate increases by the world’s two largest economic powers were transmitted to other economies.

    The fall in Wall St in late 1929 was the shock that resulted in a credit and liquidity crisis and a collapse in investment which reverberated around the world.

    I would say these were the prime deflationary forces at play in the late 1920s.

    French interest rates barely moved and did not contribute to world deflation. The French economy was a relative island of stability to which hot money and long term capital fled. It was these capital flows that contributed to the pressure on the foreign exchanges of other countries.

    The only countries to suffer significant gold loss was Japan and the primary producers. I would assert that this was mainly due to the persistent decline in commodity prices brought by the the deflationary factors discussed above and the burgeoning production from more highly productive enterprises as the result of the technological advances in the previous decade.

    The French and US gold accumulations pressured the world financial system but they were not the sole or major reasons for the collapse of the system as you and others argue, by any means.

  21. 22 Henry Rech July 25, 2018 at 1:31 am

    David,

    In answer to your question:

    “perhaps you would like to tell us why, if its insane policy of gold accumulation was working out as splendidly as you seem to think it did, France decided to scrap the gold standard in 1936?”

    Without looking at it closely, I would that most economies had gone off the gold standard by 1936 and as soon as each had left gold their economic performance picked up. France had to follow suite. If anything was insane, it would have been to remain on gold.

  22. 23 Frank Restly July 25, 2018 at 6:22 pm

    David,

    “Frank, You are right that that the price of oil began rising in 2004, not 2006. For purposes of my discussion when the rise started was not relevant, because the macroeconomic situation was not problematic in 2004 to 2006 period.”

    Your argument was that:

    “I am calling that disturbance a supply shock, because it was primarily a relative price shift rather than an aggregate demand shock.”

    Supply disruptions are normally national if not international news and so dating the time when the relative price of oil started changing and matching it to the “supply shock event” that took place seems perfectly rationale. Also,

    “The mistake of tightening monetary policy in response to a supply shock in the midst of a recession would have been egregious under any circumstances, but in the context of a seriously weakened and fragile financial system, the mistake was simply calamitous.”

    https://fred.stlouisfed.org/series/FEDFUNDS

    The Fed began tightening in July of 2004 and finished in July of 2006.
    The recession (officially) began in February of 2008, almost 2 years after the Fed finished tightening.

    Yes, housing prices began to descend earlier than that:

    https://fred.stlouisfed.org/series/SPCS20RSA

    Case Shiller 20 City Index began it’s decline in the first quarter of 2007.

    FYI, prior to about 1983, the CPI included house prices in it’s inflation measure. These days OER (owner’s equivalent rent) is used. See:

    https://www.bls.gov/opub/btn/volume-2/owners-equivalent-rent-and-the-consumer-price-index-30-years-and-counting.htm

    What you seem to be saying is that the central bank should ignore price
    run ups in credit financed goods (for instance mortgage backed homes) that saw a 200% increase from 2000 to 2006 – but then bend over backwards to contain the fallout from collapsing values.

    That creates an asymmetrical central bank reaction function that could be construed as politically motivated (See John Taylor and rules based central banking).

    Of course John is not very specific about what inflation measure should be used in his Taylor rule and whether house prices or OER should be used in that measure.

  23. 24 David Glasner July 26, 2018 at 9:39 am

    Jacques Rene, I agree that the indirect political effects of the Bruening policy were catastrophic for Germany and the whole world. I didn’t mean to imply otherwise in limiting my comment to the direct economic effects of Bruening’s policy.

    Henry, The statistics on gold holdings that you provide, either confirm or do not contradict my interpretation of the relative importance of the 1925 British resumption of the gold standard and the adoption in 1928 of its insane gold accumulation policy, largely implemented by the aggressive redemption of foreign exchange reserves for gold, by the Bank of France.

    I am glad to acknowledge that we agree completely that it would have been insane for France to remain on the gold standard in 1936.

    Frank, I think you are reading way too much into an off-hand remark I made, and i don’t quite see why you are devoting so much attention to it.

  24. 25 Henry Rech July 26, 2018 at 3:08 pm

    I notice I have made an error in my post above dealing with the gold stock statistics.

    I stated above that the value of annual gold production was c. US$80M. It was in fact c. US$400M. So that the value of gold production for the period in question was around US$2,000M.

    That is, new gold production more or less equated to the combined accumulation of gold by both the US and France in the period in question.

    So the facts are that in this 5 year period, the UK and other European countries did not suffer a loss of gold, in fact there was significant accumulation of gold by European countries and the accumulation of gold by the US and France was equivalent to new mine production. There was no shortage of gold.

    I would say this takes the heat out of the assertion that France was the sole cause of the collapse of the gold standard system, if at all.

    I will also dispute your claim that the French accumulation was the result of deliberate policy. There was prior to 1927/28 a deliberate policy of the French to accumulate gold. The aim of this policy was to restore its prewar gold reserve ratio. Beyond this period, there were institutional arrangements in place designed to prevent the French economy experiencing the high inflation rates of earlier in the decade. This gave the franc credibility. And whereas the US had a deliberate policy of sterilization, these institutional arrangements in France caused gold inflows to be not monetized, in fact Urwin himself (the arch purveyor of the notion of French culpability in destroying the international monetary system) has termed this “neutralization” rather than sterilization, recognizing it was not deliberate policy.

  25. 26 David Glasner July 28, 2018 at 8:22 pm

    Henry What your numbers show is that the total accumulation of gold by all central banks exceeded production, meaning that overall central banks were accumulating gold not all the newly produced gold but also gold previously held by private individuals and institutions. To accomplish this feat, it was necessary for the real value of gold to rise sufficiently to induce private individuals to voluntarily surrender their holdings of gold. That increase in the real value of gold, under a gold standard, is the equivalent of, and manifested in, deflation. I never said the Bank of France was the sold cause of the collapse of the gold standard but its insane policy was certainly a major and leading cause of that collapse. I readily assign dishonorable mention to the subsidiary role played by the US Federal Reserve.

  26. 27 Henry Rech July 29, 2018 at 4:02 pm

    David,

    “To accomplish this feat, it was necessary for the real value of gold to rise sufficiently to induce private individuals to voluntarily surrender their holdings of gold.”

    Maybe. There was a significant movement of gold from private to public hoards post war – gold coins were progressively taken out of circulation. However, if private holders were concerned about the deflation that was occurring in the late 1920s you would think they would hang on to their gold. (This might explain why official world gold stocks fell in the July to December 1931 period as the financial system began to dismember.)

  27. 28 Henry Rech July 29, 2018 at 4:16 pm

    The other important question to consider is the issue of war reparations and war debt repayments. Prior to 1929, the US was lending Germany money so as to enable payment of reparations to mainly France. This ceased. The UK and France were also repaying war debts to the US.

    In the periods January 1925 to December 1928 and January 1929 to June 1931 respectively, France received US$557M and US$343M in reparations.

    In the periods January 1925 to December 1928 and January 1929 to June 1931 respectively, the US received US$807M and US$555M in debt repayments.

    These payments were made largely in gold.

    France refused to accept German goods as reparations. This is understandable given these goods would compete with French produced goods and cause dislocations in French industry – in effect France would punish herself rather than Germany.

    These payments constituted a significant proportion of gold accumulation by France and the US and were not a function of a deliberate monetary policy.

  28. 29 Henry Rech July 29, 2018 at 4:41 pm

    Below, I have recast the table of world gold stock movements to reflect what happened in the crucial two and a half year period from January 1929 to June 1931.

    World Total +US$1026M
    France +US$940M
    US +US$972M
    UK +US$29M
    Germany -US$317M
    Second European 4* +US$174M
    Rest of Europe -US$4M
    Japan -US$117M
    India +US$27M
    Total Primary Goods Producers** -US$670M
    Rest of World -US$8M

    * Belgium, Switzerland, Netherlands, Italy
    ** Australia, New Zealand, Asia (excl. Japan and India), South America, Africa, Canada.

    The main features are the more or less equivalent French/US accumulation, the significant loss by Germany owing to reparations, the significant increase in gold stocks by the rest of Europe, the huge losses incurred by Japan and the primary producing countries.

    In all the literature I have read on the subject, the huge losses by Japan and the primary producing countries and the significant increase in rest of Europe stocks have never been noted, noticed or made much of.

    Researchers have focused on the bald US/French accumulation and have essentially ignored the rest of it.

    To me this all adds up to situation which needs a more thorough investigation.

  29. 30 Jacques René Giguère July 29, 2018 at 4:56 pm

    “These payments constituted a significant proportion of gold accumulation by France and the US and were not a function of a deliberate monetary policy.”
    But given the idea that gold accumulation was harmless, given the French belief in “inflation gagée” (pledged or backed inflation), these payments became part of a deliberate monetary policy.

  30. 31 Henry Rech July 29, 2018 at 8:22 pm

    Jaques,

    What do you mean by “inflation gagee”?

    Inflation backed by what? Gold?

    Are you saying the French authorities would accept inflation as long as there was an excess of gold reserves over the cover ratio?

  31. 32 Jacques René Giguère July 29, 2018 at 9:13 pm

    Yes. French authorities considered that , as long it was backed by gold, no increase (or decrease) in money supply could have any effects. So said my old prof Roger Dehem (already old when I studied in the early 70’s) see

    https://www.pulaval.com/produit/histoire-de-la-pensee-economique-des-mercantilistes-a-j-m-keynes.

    Student of Allais and colleague of Debreux, he was old enough to have met in his youth people at the Banque de France who explained him the concept. Obviously, the sad fate of Spain after the gold influx from America had not taught them anything. Like the Bourbons, forgive nothing, learn nothing. Decades later, he was still bewildered…

  32. 33 Henry Rech July 29, 2018 at 9:53 pm

    OK. So it was believed that there would actually no inflation of prices just the monetary aggregates?

    I do not think that at the time the French would do anything to let price inflation get out of hand.

    In any event, we are talking about deliberate policies to acquire gold per se.

    The French were intent on receiving reparations for the war and would not accept German goods, which to me makes sense in the situation. So gold was acceptable. Perhaps the French may also have accepted payment in US$s if the Germans had them in sufficient quantity? – which they, no doubt, would have cashed in for gold at the US Fed. 🙂

  33. 34 Jacques René Giguère July 29, 2018 at 9:58 pm

    They would have cashed them in gold. As they did in the ’60’s.
    I don’t know if you can read french but see that article from 1965 where De Gaulle says:” Gold doesn’t change”.

  34. 35 Jacques René Giguère July 29, 2018 at 10:01 pm

    Correction: the text is not from 1965 but about 1965. Shouldn’t work after midnight, especially when I’m on holiday.

  35. 36 Henry Rech July 30, 2018 at 12:20 am

    @ 12.00

  36. 37 Henry Rech July 30, 2018 at 12:27 am

    4 th February 1965.

    “….l’or, qui ne change pas de nature…”

  37. 38 Jacques René Giguère July 30, 2018 at 8:13 am

    Then they designed the euro. French gold fetichism plus german-french ignorance of balance-of-payments accounting. Plus hard money as a way to discipline the working class (Mundell).

  38. 39 John Hope August 1, 2018 at 1:05 pm

    Wolf understands money to some degree, but Tooze hasn’t got a clue how money is created . On that account with the book and the review fail.


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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.

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