Did France Precipitate The Great Depression?


I don’t know about you, but in my readings on the Great Depression, I find that many authors, both European and American, imply that the United States was to blame for the Great Depression.  But I have another theory…  Though the causes of the Great Depression are numerous and complex, I think the precipitate action came not from the United States– but from France…

Before the 1930s… before the great stock market crash of 1929… before the end of the Roaring Twenties… before Herbert Hoover assumed the Presidency… France was unleashing a financial tidal wave…

Reading the very informative The Gold Standard In Theory And History, edited by Eichengreen and Flandreau, I came across a 1944 report of the League Of Nations entitled International Currency Experience.  According to this report…

France in 1928 decided to accept only gold for payments due from abroad.

The great sucking sound then heard ‘round the globe would have been the sound of the world’s gold being drained into France, giving France what the authors of the report call an “enormous surplus” of gold in its coffers.  With less gold in circulation, upward pressure would have been put on the value of gold-backed currencies, having the flipside effect of a worldwide click-down in the price level… otherwise known as deflation.

Why was France’s gold grab bad– very bad– for the world’s economy?  After the First World War, the world attempted to go back on the gold standard (in which each nation’s currency was backed by gold).  The gold standard had worked pretty well for decades before the war.  However, the gold standard was never very successful between the two world wars.

Many nations were struggling economically after the big war, and they had gotten into the habit of borrowing the gold they needed for their reserves.  Gold reserves were crucial to countries, for they helped maintain  confidence in the currency– everyone knew that if they ever got nervous about a particular country’s currency evaluation, they could always change-in that nation’s currency for an equivalent amount of gold.  It was up to each country to keep enough gold reserves on hand to leave no doubt in anyone’s mind that it possessed enough gold to exchange for currency on demand.

However, according to the theory I’m proposing today, with prices falling worldwide after France’s little maneuver pushed up the value of money, the business climate turned sour.  The world’s financial centers (basically London and New York) became unable to continue lending generously.  Thus, debtor nations found themselves dipping into their reserves to make payments.  And less gold reserves meant less money could be printed, since money under a gold standard regime must be backed by gold at a reasonable ratio of gold-to-dollars-printed.

Says the League Of Nations report…

It is clear that when debtor countries used up their foreign-exchange reserves for payments to the centers in which the reserves were held, there occurred an extinction” [of] “international currency reserves.”  In other worlds, the Gold Standard was done for.

An international “liquidity crisis” soon descended upon world.  Economies starving for gold attempted to lure-in funds by raising interest rates offered on investments, but to no avail.  “Higher interest rates [were] powerless to stop the general flight from the gold exchange standard,” declares the League report.  What the higher interest rates may have accomplished, however, was to make it less likely that companies and individuals would borrow money– and less profitable if they did.

A general breakdown in confidence in exchange rate stability ensued.  Investments held by one nation in another nation’s currency were liquidated with haste– before the bottom could drop out of the now-unbacked foreign currency.  In fact, even conducting business between different countries became extremely difficult as currency fears rendered the operation of any functioning exchange standard “quite impossible.”  Britain, hemorrhaging gold at an alarming rate, was eventually forced (Sept 1931) off the Gold Standard entirely.  The reverberations of this event were felt all the way across the Atlantic– in the city which was in the process of replacing London as the financial capital of the world… New York.  And from there… to the world…

“It is clear,” states the League’s report, “that to a certain extent the pressure resulting from the collapse of the gold exchange system was passed on from London and New York to the world’s debtor countries.”

With the collapse of the Gold Standard, the world economy shuddered and stalled, and monies stopped crossing borders seeking investment opportunities, leading to “the abrupt cessation or even reversal of capital moments.”   The Great Depression was upon us.

Thanks a lot, France.


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