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.
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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.
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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.