Did France Cause the Great Depression?

In their Monetary History of the United States, Milton Friedman and Anna Schwartz held the Federal Reserve responsible for the transformation of the 1929 stock market crash into the worldwide great depression of the 1930s.

Now a new NBER working paper (29 october 2010) suggests that the French gold policy was also to blame. Here is a short presentation on the NBER website:

"France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932, creating an artificial shortage of reserves and putting other countries under enormous deflationary pressure. Douglas Irwin concludes that if the historical relationship between world gold reserves and world prices had not changed as it did, world prices would have increased only slightly between 1929 and 1933, instead of declining dramatically. Thus, it seems that France's shift in policy was an important contributor to the worldwide deflation of 1929-33."

Now beware of the enforcement of the "Deutsche Mark standard" by the European Central Bank that is managing the euro as a "strong" currency relative to the dollar (and thus to the yuan) and advocates strict austerity policies in Europe at a time when deflation appears to be the present and immediate danger. Have a look at a Mark Thoma's post (based on a San Francisco Fed analysis) showing that the US inflation rate path is following with a few years lag the Japanese one (see especialy the graph on the core inflation in Japan between 1989 and 2000, and in the US between 2001 and 2010).

A rerun of the 1930s has been avoided until now but the real bite of austerity programs in the eurozone is still to be felt in 2011 and 2012.