Discussion of “The French Gold Stock and the Great Deflation”

James D. Hamilton

University of California, San Diego

Consider an economy with a single produced good (potatoes)

• aggregate price level = P dollars per potato

• relative price of gold = R potatoes per ounce of gold

• dollars per ounce of gold =

dollars potatoes dollars

potato ounce of gold ounce of gold

P RPR

Gold standard: dollars per ounce of gold (PR) is fixed

If relative price of gold (R) goes up, price level (P) must fall

dollars potatoes dollars

potato ounce of gold ounce of gold

P RPR

Monthly wholesale prices 1923-1926

0

50

100

150

200

250

1923 1924 1925 1926 1927

France

US

UK

Monthly wholesale prices 1923-1926

0

50

100

150

200

250

1923 1924 1925 1926 1927

France

US

UK

Belgium

Hyperinflations in Germany, Austria, Poland, Russia, Hungary

1931: European financial distress

• Failure of Austria’s Credit-Anstalt

• Bank runs in Hungary, Czechoslovakia, Romania, Poland, Germany

Depositors outside Berlin bank, 1931

Source: Hamilton (1988)

Private discount rates in Belgium, Switzerland, and France

Source: Hamilton (1988)

Yields on short-term U.S. Treasury securities

Can gold standard restore confidence out of chaos?

• If government not trustworthy without a gold standard, do you trust it to follow a gold standard?

• Britain-- no

• France and U.S.-- yes, but at a cost

Source: Bernanke and James (1991)