Archive for August 28th, 2018

World War I, Gold, and the Great Depression

August 28, 2018

Nice post by Hu Mcculloch. He revisits the Great Depression and says it was Gold Standard which was primarily responsible for the deep crisis we had back then.

My own view, after pondering the problem for many decades, is that indeed the Depression was monetary in origin, but that the ultimate blame lies not with U.S. domestic monetary and financial policy during the 1920s and 30s. Rather, the massive deflation was an inevitable consequence of Europe’s departure from the gold standard during World War I —  and its bungled and abrupt attempt to return to gold in the late 1920s.

In brief, the departure of the European belligerents from gold in 1914 massively reduced the global demand for gold, leading to the inflation of prices in terms of gold — and, therefore, in terms of currencies like the U.S. dollar which were convertible to gold at a fixed parity. After the war, Europe initially postponed its return to gold, leading to a plateau of high prices during the 1920s that came to be perceived as the new normal. In the late 1920s, there was a scramble to return to the pre-war gold standard, with the inevitable consequence that commodity prices — in terms of gold, and therefore in terms of the dollar — had to return to something approaching their 1914 level.

The deflation was thus inevitable, but was made much more harmful by its postponement and then abruptness. In retrospect, the UK could have returned to its pre-war parity with far less pain by emulating the U.S. post-Civil War policy of freezing the monetary base until the price level gradually fell to its pre-war level. France should not have over-devalued the franc, and then should have monetized its gold influx rather than acting as a global gold sink. Gold reserve ratios were unnecessarily high, especially in France.

And as there was no Gold Standard during 2008 crisis, the policies should not have reacted asif we are about to face another Great Depression:


Thinking about interactions between monetary and macroprudential policy: Learning from zebras and wildebeest

August 28, 2018

Nice speech by Jens Weidmann of Bundesbank.

He starts with

The Bundesbank is honoured to have organised this evening’s dinner. And for me, it’s a great pleasure to be here with you at the Annual Meeting of the Central Bank Research Association, or CEBRA for short.

CEBRA is a fine example of the art of the acronym. If you think about central bankers, I dare say creativity won’t exactly be the first quality that springs to mind. But coining new acronyms does appear to be one discipline that really gets central bankers’ creative juices flowing. We also came up with CAMELS, which stands for capital adequacy, asset quality, management, earnings, liquidity, and sensitivity to market risk. However, our acronyms are not just confined to hoofed animals. There is TARGET, of course. And we have ART, for alternative risk transfer; CAR, for capital adequacy ratio; and CEIOPS, which is short for Committee of European Insurance and Occupational Pensions Supervisors and has a certain pyramid ring to it.

Examples of contrived acronyms abound: they have been intentionally designed to convey a positive connotation or double meaning. In the case of CEBRA, one naturally thinks of those wild animals that are closely related to horses and populate Africa’s grasslands and savannahs. With their distinctive black and white stripes, zebra are a snappy image for the academic dialogue and discourse which we cherish at conferences such as this. But zebra are also known for forming large herds and intermingling with other mammals, especially with wildebeest, which are also known as gnus. Both species subsist on grasses, and you might think that they compete for food. So how come they graze peacefully in mixed herds? What’s behind their special relationship?

This was a long run-up, but it does lead to one of the key issues addressed at this year’s meeting: What’s behind the special relationship between monetary and macroprudential policies? What are the linkages between monetary policy and financial stability, and what follows from there?

In this context he draws insights from the animal kingdom on how macropru and mon policy should co-exist:

Taking on financial stability as an additional objective for monetary policy would likely do more harm than good. Nevertheless, central banks can play a productive role in safeguarding financial stability. It certainly makes sense to harness central banks’ high level of expertise with regard to financial stability risks. However, the “weapon of choice” for combatting these risks is not monetary policy – it is macroprudential policy. In his first speech as a Governor at the Federal Reserve Board, Ben Bernanke demanded: “Use the right tool for the job.”8

To stretch the analogy with the African fauna further, this is something we could compare to the feeding habits of zebra and wildebeest. They graze alongside each other, of course, but they actually feed from different grass heights, with zebra preferring taller grass and wildebeest focusing on short grass. Researchers have attributed this selection to anatomic differences in mouth dimensions.9

In a similar vein, macroprudential instruments can be used in a far more targeted way than monetary policy. They cut the grass at a different level, so to speak. This is of particular use with respect to the euro area. Macroprudential tools can be employed at the level of member countries to combat problematic developments in national financial systems – developments that cannot be counteracted by the single monetary policy.


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