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The Depression was exceptional in its economic ferocity. As Liaquat Ahamed writes in his book "Lords of Finance": "During a three-year period, real GDP [gross domestic product] in the major economies fell by over 25 percent, a quarter of the adult male population was thrown out of work. . . . The economic turmoil created hardships in every corner of the globe, from the prairies of Canada to the teeming cities of Asia."
Anyone who wants to know why should read this engrossing book. Ahamed, a professional money manager, attributes the Depression to two central causes: the misguided restoration of the gold standard in the 1920s and the massive inter-governmental debts, including German reparations, resulting from World War I.
His story builds on the scholarship of economists Milton Friedman, Anna Schwartz, Charles Kindleberger, Barry Eichengreen and Peter Temin. But Ahamed excels in evoking the political and personal forces that led to disaster. His title refers to four men deeply implicated in the era's perverse policies: Montagu Norman, governor of the Bank of England; Benjamin Strong, head of the New York Federal Reserve Bank; Émile Moreau, head of the Banque de France; and Hjalmar Schacht, head of Germany's Reichsbank. Their determination to reinstate the gold standard -- seen as necessary for global prosperity -- brought ruin.
Under the gold standard, paper money was backed by gold reserves. If gold flowed into a country (normally from a trade surplus or a foreign loan), its money and credit supply were supposed to expand. If gold flowed out, money and credit were supposed to contract. During World War I, Europe's governments suspended the gold standard. They financed the war with paper money and loans from America. The appeal of restoring the gold standard was that it would instill confidence by making paper money trustworthy.
Unfortunately, the war damaged the system beyond repair. Britain, the key country, was left with only 7.5 percent of the world's gold reserves in 1925. Together, the United States and France held more than half the world's gold. The war had expanded U.S. reserves, and when France returned to gold, it did so with an undervalued exchange rate that boosted exports and gold reserves. Meanwhile, German reparations to Britain and France were massive, while those countries owed huge amounts to the United States. The global financial system was so debt-laden that it "cracked at the first pressure," writes Ahamed.
That came after a rise in American interest rates in 1928 forced other countries to follow (no one wanted to lose gold by having investors shift funds elsewhere) and ultimately led to the 1929 stock market crash. As economies weakened, debts went into default. Bank panics ensued. Credit and industrial production declined. Unemployment rose. Weakness fed on weakness.
Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed "
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints. Since gold is the necessary base for currency and bank deposits, the quantity of common money also increases arresting the fall in market prices. Alternatively, when additional gold enters the monetary system from whatever source, it tends to raise money prices. Offsetting the potential price level increase are the nominal increases in goods, services, and capital that normally occur. In either case, successive approximations of goods production and money production through the market system generate an ongoing monetary equilibrium."
This is in contrast to the monetary policy embraced by the Fed, which did not allow the supply of money to find equilibrium with the market. Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
Is killing Libertarians your avocation or just a hobby?
We didn't have a real gold standard in place at the time that could have caused the Great Depression. Once again, we need only look at the Federal Reserve for the cause of the Great Depression, and Hoover and Roosevelt's interventionist policies for exacerbating the situation.
Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold… It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed…"
What the hell are they talking here? How does one economize on gold? How does "neutralization or offsetting of international influences on domestic money supplies, incomes, and prices" make the gold standard a facade?
Sounds like BS to me, but withhold judgment if someone can explain this.
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints.
Since gold is the necessary base for currency and bank deposits, the quantity of common money also increases arresting the fall in market prices.
Alternatively, when additional gold enters the monetary system from whatever source, it tends to raise money prices. Offsetting the potential price level increase are the nominal increases in goods, services, and capital that normally occur. In either case, successive approximations of goods production and money production through the market system generate an ongoing monetary equilibrium."
This is in contrast to the monetary policy embraced by the Fed, which did not allow the supply of money to find equilibrium with the market.
Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
Is killing Libertarians your avocation or just a hobby?
He hardly "killed" us Libertarians by posting an article that states that the gold standard, which was hardly a gold standard, was responsible for the Great Depression.
We didn't have a real gold standard in place at the time that could have caused the Great Depression. Once again, we need only look at the Federal Reserve for the cause of the Great Depression, and Hoover and Roosevelt's interventionist policies for exacerbating the situation.
Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed "
What the hell are they talking here? How does one economize on gold? How does "neutralization or offsetting of international influences on domestic money supplies, incomes, and prices" make the gold standard a facade?
Sounds like BS to me, but withhold judgment if someone can explain this.
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints.
How exactly does this happen? When you need to expand the money supply you just dig up more gold? Gold is a limited resource! That is the problem with it. If you are in a recession and banks and people want gold to hoard, you can't just dig more up.
That is why the Fed contributed to the great depression. Because the nation was on a freaking gold standard and everyone wanted gold, the Fed had to increase interest rates at the very worst possible time.
We saw how well that worked in the GD with 50% deflation or whatever it was.
This is nonsense, it assumes that the supply of gold will somehow magically be exactly matching what the growing economy needs.
This is in contrast to the monetary policy embraced by the Fed, which did not allow the supply of money to find equilibrium with the market.
LOL, no it didn't because it was trying to maintain the freaking gold standards.
Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
Well shoot, maybe if the our money supply just had not involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices, everything would be peachy.
We didn't have a real gold standard in place at the time that could have caused the Great Depression. Once again, we need only look at the Federal Reserve for the cause of the Great Depression, and Hoover and Roosevelt's interventionist policies for exacerbating the situation.
What the hell are they talking here? How does one economize on gold? How does "neutralization or offsetting of international influences on domestic money supplies, incomes, and prices" make the gold standard a facade?
Sounds like BS to me, but withhold judgment if someone can explain this.
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints.
How exactly does this happen? When you need to expand the money supply you just dig up more gold? Gold is a limited resource! That is the problem with it. If you are in a recession and banks and people want gold to hoard, you can't just dig more up.
That is why the Fed contributed to the great depression. Because the nation was on a freaking gold standard and everyone wanted gold, the Fed had to increase interest rates at the very worst possible time.
We saw how well that worked in the GD with 50% deflation or whatever it was.
This is nonsense, it assumes that the supply of gold will somehow magically be exactly matching what the growing economy needs.
LOL, no it didn't because it was trying to maintain the freaking gold standards.
Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
Well shoot, maybe if the our money supply just had not involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices, everything would be peachy.
You don't need to expand the money supply. Banks can't hoard gold under a gold standard because all the paper currency must be redeemable in gold on demand, hoarding gold under a true gold standard would be fraud.
A growing economy does not need an increase in the supply of gold, once again.
Again, it was a false gold standard.
Isn't it great that Americans work all week to earn paper money that the US Government, through central banks, can simply create with no work at all? That's super!
We didn't have a real gold standard in place at the time that could have caused the Great Depression. Once again, we need only look at the Federal Reserve for the cause of the Great Depression, and Hoover and Roosevelt's interventionist policies for exacerbating the situation.
Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed "
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints. Since gold is the necessary base for currency and bank deposits, the quantity of common money also increases arresting the fall in market prices. Alternatively, when additional gold enters the monetary system from whatever source, it tends to raise money prices. Offsetting the potential price level increase are the nominal increases in goods, services, and capital that normally occur. In either case, successive approximations of goods production and money production through the market system generate an ongoing monetary equilibrium."
This is in contrast to the monetary policy embraced by the Fed, which did not allow the supply of money to find equilibrium with the market. Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
The Semantic Subversion of the Gold Standard and Free Banking - Kevin D. Rollins - Mises Institute
You don't need to expand the money supply. Banks can't hoard gold under a gold standard because all the paper currency must be redeemable in gold on demand, hoarding gold under a true gold standard would be fraud.
A growing economy does not need an increase in the supply of gold, once again.
Again, it was a false gold standard.
We didn't have a real gold standard in place at the time that could have caused the Great Depression. Once again, we need only look at the Federal Reserve for the cause of the Great Depression, and Hoover and Roosevelt's interventionist policies for exacerbating the situation.
Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold… It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed…"
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints. Since gold is the necessary base for currency and bank deposits, the quantity of common money also increases arresting the fall in market prices. Alternatively, when additional gold enters the monetary system from whatever source, it tends to raise money prices. Offsetting the potential price level increase are the nominal increases in goods, services, and capital that normally occur. In either case, successive approximations of goods production and money production through the market system generate an ongoing monetary equilibrium."
This is in contrast to the monetary policy embraced by the Fed, which did not allow the supply of money to find equilibrium with the market. Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
The Semantic Subversion of the Gold Standard and Free Banking - Kevin D. Rollins - Mises Institute
Whether or not it was a "real" gold standard is irrelevant. The fact of the matter is that being tied to the gold standard constricted monetary policy, and led to the utterly insane decision to raise interest rates in 1931 to stem the flow of gold outside of the United States. In 1931, the monetary base contracted 12% because the outflow of gold, causing the US to raise interest rates. That is utterly crazy in a depression.
It also demonstrates it as a worthless practical system because it becomes a huge application of game theory. The Fed had to raise interest rates because another country went off the gold standard. Thus, you can stick it to your trading partners by allowing the currency to float, making any such standard impractical.
The gold standard was not the only cause of the Depression. I believe it was caused primarily by the mistakes of the Fed. However, when you have a constricting monetary policy when the economy is screaming for a loose one, the gold standard is a horrible system.
How is it irrelevant whether or not it was a real gold standard when you're blaming the gold standard?
We didn't have a real gold standard in place at the time that could have caused the Great Depression. Once again, we need only look at the Federal Reserve for the cause of the Great Depression, and Hoover and Roosevelt's interventionist policies for exacerbating the situation.
Timberlake (225) answers that the "interwar gold standard was not a gold standard. It was an entirely different system than the pre-1914 gold standard that had existed for 100 years. Timberlake brings in Leland Yeager to make the case: "The gold standard of the late 1920s was hardly more than a façade. It involved extreme measures to economise on gold It involved neutralization or offsetting of international influences on domestic money supplies, incomes, and prices. Gold standard methods of balance-of-payments equilibrium were largely destroyed "
In other words, it was Fed policy, not the gold standard that precipitated the Depression. By contrast, Timberlake (199) explains how a pure gold standard should function:
"A true gold standard is a complete commodity-money system and, therefore, has an appeal not found in some other monetary arrangements. Under an authentic gold standard, the demand for, and supply of, money react simultaneously, through market prices for all goods and services and the monetary metal, to determine a given quantity of money. If prices of all goods and services and capital tend to fall, say, because of an increased demand for common money, the value of monetary gold being fixed in dollar terms rises in real terms, stimulating increases in the production and importation of gold, and the supply of gold to the mints. Since gold is the necessary base for currency and bank deposits, the quantity of common money also increases arresting the fall in market prices. Alternatively, when additional gold enters the monetary system from whatever source, it tends to raise money prices. Offsetting the potential price level increase are the nominal increases in goods, services, and capital that normally occur. In either case, successive approximations of goods production and money production through the market system generate an ongoing monetary equilibrium."
This is in contrast to the monetary policy embraced by the Fed, which did not allow the supply of money to find equilibrium with the market. Being clear about the definitions of the term "the gold standard" would allow economists (and the public) to properly discuss a complex subject like monetary policy. If it were recognized that "the gold standard" was not in effect in the buildup to the Great Depression, would policymakers and the public be so wary of the concept today?
The Semantic Subversion of the Gold Standard and Free Banking - Kevin D. Rollins - Mises Institute
Whether or not it was a "real" gold standard is irrelevant. The fact of the matter is that being tied to the gold standard constricted monetary policy, and led to the utterly insane decision to raise interest rates in 1931 to stem the flow of gold outside of the United States. In 1931, the monetary base contracted 12% because the outflow of gold, causing the US to raise interest rates. That is utterly crazy in a depression.
It also demonstrates it as a worthless practical system because it becomes a huge application of game theory. The Fed had to raise interest rates because another country went off the gold standard. Thus, you can stick it to your trading partners by allowing the currency to float, making any such standard impractical.
The gold standard was not the only cause of the Depression. I believe it was caused primarily by the mistakes of the Fed. However, when you have a constricting monetary policy when the economy is screaming for a loose one, the gold standard is a horrible system.
Isn't it great that Americans work all week to earn paper money that the US Government, through central banks, can simply create with no work at all? That's super!
If the Fed was required to maintain a gold standard, then how was it the fault of the Fed for doing what it was required to do?
If the Fed was required to maintain a gold standard, then how was it the fault of the Fed for doing what it was required to do?
They raised rates too high in the late 20s, then did little to counter the flight of banking reserves from the system as reserves shrunk to a third. The ratio of currency to deposits was actually near a low in the summer of 1930, but then soared as banks began failing en mass and depositors pulled their money out of the banking system to stuff into their mattresses. It was bank failures which ultimately lead to a sharp recession becoming the Great Depression. The Fed could have injected liquidity into the banking system but did not.
This is why the government is doing everything it can to save the banking system with an alphabet soup of programs, increased deposit guarantees, direct stakes in banks, guaranteeing debt, expanding its balance sheet, etc. It is trying to avoid the panics that lead to the implosion of the financial system in the 1930s.
Makes sense. But how can the suddenly fiscally concerned Republicans score political victory if they don't slam everything Obama does as being wasteful and unnecessary?
