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.

Big Banks Should Cut Dividends

The Italian ones show us the way here .

But cut the managers’ compensation and bonuses too.

Christina Romer’s Advice

Now isn’t the time to cut the deficit, here.

My comment: Quite sensible indeed.

Crisis 2012

An interesting forecast from Greg Ip in the Washington Post.

The First Industrial Revolution Ever and the Origin of Complex Life

« All animals, plants and fungi evolved from one ancestor, the first ever complex, or "eukaryotic", cell. This common ancestor had itself evolved from simple bacteria, but it has long been a mystery why this seems to have happened only once: bacteria, after all, have been around for billions of years.
…
Cells could not become complex until they could produce sufficient energy. This obstacle was overcome when a cell engulfed some bacteria and started using them as power generators – the first mitochondria.
…
Once freed from energy restraints, genomes could expand dramatically and cells capable of complex functions – such as communicating with each other and having specialised jobs – could evolve. Complex life was born. »

And, I would add, through specialization, exchange and production. Economics in a word.

A fascinating account of new research perspective by Nick Lane of University College London and Bill Martin of the University of Dusseldorf, in Newscientist.com.

Condoleeza Rice on German Reunification

« German Foreign Minister Hans-Dietrich Genscher, (…) seemed to think of the unification process as more of a merger. I preferred to see it as an acquisition. »

Read the complete interview in Spiegel Online.

Milton Friedman and the Interest-rate Fallacy

David Beckworth and William Ruger wonder what Friedman would say about Fed policy under Bernanke. Excerpt:

“First, low interest rates do not necessarily mean monetary policy is loose.

Friedman criticized the policies of the Fed in the 1930s and the Bank of Japan in the 1990s on this very point. Both central banks claimed to be highly accommodative at these times, pointing to low interest rates as evidence of easy monetary policy. Friedman countered, however, that low interest rates may reflect a weak economy rather than easy monetary policy.

Back in 1997, in fact, he called the idea of identifying low interest rates with easy monetary policy an interest-rate fallacy. The only time low interest rates do indicate loose monetary policy is when they are below the neutral interest-rate level, which is the interest-rate level where monetary policy is neither too simulative nor too contractionary and is pushing the economy toward its full potential.

The implication for today's Fed is that although its target federal funds rate is low, its stance still may not be very stimulative given that the neutral interest rate is also low. The Fed should not rely on the level of the federal funds rate to measure the stance of monetary policy to determine whether its actions are supporting or hindering the economy.”

Read their article in Investors.com.

ECB versus IMF

The Stelzer column in the Wall Street Journal .

A Few Reasons Why Economists Disagree (Mostly About Policies)

Solow's, Becker's and Mankiw's explanations: problems are especially complex, effects uncertain, and distributive outcomes contestable.

Read the New York Times column here .

Competitive Devaluations Could Be Good for Individual Countries and for the World Economy.

“Currency depreciation in the 1930s is almost universally dismissed or condemned. This paper advances a different interpretation of these policies. It documents first that depreciation benefited the initiating countries. It shows next that there can be no presumption that depreciation was beggar-thy-neighbor. While empirical analysis indicates that the foreign repercussions of individual devaluations were in fact negative, it does not imply that competitive devaluations taken by a group of countries were without mutual benefit. To the contrary, similar policies, had they been even more widely adopted and coordinated internationally, would have hastened recovery from the Great Depression.”

This quote is from Barry Eichengreen and Jeffrey Sachs, “Exchange Rates and Economic Recovery in the 1930s”, The Journal of Economic History, December 1985.


My comments: 1. The countries that exited the Gold Standard first got the strongest and most rapid economic recovery, while late floaters like France or Switzerland paid a heavy price in the form of a lengthier bout of depression and unemployment. Today the problem is to exit from the "Bretton Woods 2" regime of partly fixed exchange rates.

2. What we call “currency wars” or “chaos” can be seen as a simple “tâtonnement” of the governments towards and equilibrium vector of exchange rate prices. It is due to the fact that nobody knows exactly in advance the precise (and fluctuating) equilibrium price of the national currency, and especially not the other governments.

It follows that, while many economists claim that currency wars are a zero sum game (what one country gains another must loose) they nevertheless have a real utility: the production of new information about what the adequate equilibrium exchange rates should be. It is a positive sum game and a process of discovery, as useful as competition in other markets. Planners everywhere generally consider competition to be a pure waste. But they are wrong as the collapse of planned economies demonstrated.

Roubini on Currency War

"The first salvos in this war came in the form foreign-exchange intervention. To diversify away from US dollar assets while maintaining its effective dollar peg, China started to buy Japanese yen and South Korean won, hurting their competitiveness. So the Japanese started to intervene to weaken the yen.
This intervention upset the EU, as it has put upward pressure on the euro at a time when the European Central Bank has placed interest rates on hold while the Bank of Japan (BoJ) and the US Federal Reserve are easing monetary policy further. The euro’s rise will soon cause massive pain to the PIIGS, whose recessions will deepen, causing their sovereign risk to rise. The Europeans have thus already started verbal currency intervention and may soon be forced to make it formal."

Read the paper, here.

Job Search and Unemployment

Edward Glaeser explains the work of the new Nobel Laureates and its source in George Stigler’s economics of information here.

Factory Farming Is Extremely Inefficient

“It takes seven calories of food input into an animal to produce one calorie of food output.”

And the farm subsidy structure exacerbates the factory farm problem: it encourages farmers to feed corn to cows, a food that they’re not naturally able to digest.

Read the BigThink interview of Jonathan Safran Foer here .

More (Labor) Taxes, Less Work

Here is Greg Mankiw’s calculus.

Immigrants Boost US Employment and Production

According to a new study by Giovanni Peri for the San Francisco Fed:

"The effects of immigration on the total output and income of the U.S. economy can be studied by comparing output per worker and employment in states that have had large immigrant inflows with data from states that have few new foreign-born workers. Statistical analysis of state-level data shows that immigrants expand the economy's productive capacity by stimulating investment and promoting specialization. This produces efficiency gains and boosts income per worker. At the same time, evidence is scant that immigrants diminish the employment opportunities of U.S.-born workers."

Here is the article in the FRBSF newsletter.

Stelzer, Euromess, and "Eurosud"

All over Europe officials are doing the same thing over and over again and expecting different results, writes Irwin Stelzer in the Wall Street Journal.

Greece led the peripheral countries in piling up debts that it had little hope of ever repaying. Non-peripheral countries, most notably Britain and France, joined in the fun. Then, given that national cupboards are bare, the Euroland authorities stepped in with a cunning plan to handle excessive debt: borrow more to repay the previous wild borrowing. The Irish government thus will drive its deficit to 32% of GDP to bail out banks hit by the inability of property developers to repay excessive borrowings.

The current chosen path combines austerity with borrowing by Euroland as a whole. The borrowing in effect transfers the debts of the broke countries to Germany’s balance sheet, while austerity concentrates the burden of repayment on the current recipients of government outlays – public-sector workers, benefit recipients, and private sector contractors for whom the government is a major customer. And it lets the creditors, who made the excessive loans in the first place, off the hook.

However, “history suggests that austerity without loose monetary policy can be self-defeating. Never mind: Eurocrats will pay any price to avoid the humiliation of restructuring and unleashing inflation worries in Germany. So a combination of austerity and tighter credit is in store …”

"Euroland politicians think they can (1) fight markets, (2) inflict infinite pain on voters in democratic countries, and (3) whip the profligate into line. They can do none of these" because markets set the borrowing rates and voters turn out politicians who push them too far.

Sensibly, Stelzer advocates a currency depreciation, large enough to restore competitiveness of the peripheral countries (and maybe of the others also I would argue) to avoid debt “restructuring” and a heavy dose of inflation. But the currency he has in mind would be a newly created “Eurosud”, the result of partitioning the eurozone into two smaller areas.

That would prove, in my opinion, doubly illusory. First a new currency limited to the countries of southern Europe would not constitute an optimal currency area any more than the current eurozone, and the Eurosud "one size fits all" monetary policy would thus not prove adequate for anyone of the member countries. And second, it would raise all the problems of creating a new currency in the middle of a confidence crisis, a daunting task, much harder than a simple return to national currencies (for which national monetary institutions and central bank are still in place) that would soon have to be repeated later, when each country would have to turn back to its own former national currency. It would be much better to proceed directly to that second stage now, especially because the euro is again gaining strength relative to the dollar, losing all the benefits of its beginning of the year depreciation to more reasonable levels.

And meanwhile, interest differential between peripheral countries and Germany keep growing, reflecting the increasing risk of their government bonds.

Maps of Europe and National Stereotypes

Here.

Hat tip: Tyler Cowen

Ptolemy Knew a Lot About Germany's Urban Economy

In 150 AD, the mathematician and astronomer Ptolemy drew 26 maps of the known world in colored ink on dried animal skins. One of these depicts “Germania Magna”, an area far remote from his residence in Alexandria. He nevertheless demonstrated extensive knowledge of the country even though the map has been until now difficult to interpret despite repeated efforts by linguists and historians.

But new work by a group of classical philologists, mathematical historians and surveying experts at Berlin Technical University’s Department for Geodesy and Geoinformation Science has produced, from the Ptolemy’s drawing, an astonishing map of central Europe as it was 2.000 years ago. The map shows that the North and Baltic Seas were known as the “Germanic Ocean” and the Franconian Forest in northern Bavaria was “Sudeti Montes”. It also shows a large number of cities such as Bicurgium (present day Jena) and Navalia (Essen). It turns out that half of the present day cities in Germany are 2.000 years old.

Researchers believe Ptolemy drew on Roman traders’ travel itineraries, analyzed seafarers’ notes and consulted maps used by Roman legions operating to the north. It was primarily surveyors with the Roman army, which appears to have advanced as far as the Vistula River, who collected information on the barbarians’ lands. The researchers had the great fortune to be able to refer to a parchment tracked down at Topkapi Palace in Instanbul, the document being the oldest edition of Ptolemy’s work ever discovered.

The complete article in the Spiegel Online is well worth reading and it includes two photos of the ancient medieval copy of Ptolemy’s map.

Why Monogamy is Prevalent in Rich Nations

A post by Marina Adshade, a professor of economics at Dalhousie University in Halifax, Nova Scotia, with a reference to the original work of three Israeli economists, Eric Gould, Omer Moav, and Avi Simhon, published in the American Economic Review, 2008: “The Mystery of Monogamy”.

Read the Adshade article here.