The Gold Standard and the Great Depression

This deflation caused people to fear bank collapses, which caused them to pull their deposits, precipitating bank collapses. In the Austrian school, this type of behavior is not supposed to happen, but it did.

Eh? Austrians would say that banking panics are a market response to unsound banking practices, ie excessive fractional reserve lending.

As Rabbi stated, when credit is restrictive, economic activity is constrained, as it was under the gold standard. When countries are no longer bound by those restrictions, credit and economic activity are no longer constrained by this anchor. When countries left the gold standard, their economies began to rise again.

So, how about that 1920 depression that lasted barely over a year?

*whistles past the graveyard*

edit: also why is it that the cost and supply of credit should be centrally planned? Every other commodity you can name--wheat, corn, oil, coffee, OJ--is determined by a meeting of buyers and sellers, who work out a market price. If you advocated central planning the price of these commodities, people would laugh; but advocate centrally planning the price of credit, and suddenly its a great idea.
 
Last edited:
This deflation caused people to fear bank collapses, which caused them to pull their deposits, precipitating bank collapses. In the Austrian school, this type of behavior is not supposed to happen, but it did.

Eh? Austrians would say that banking panics are a market response to unsound banking practices, ie excessive fractional reserve lending.

As Rabbi stated, when credit is restrictive, economic activity is constrained, as it was under the gold standard. When countries are no longer bound by those restrictions, credit and economic activity are no longer constrained by this anchor. When countries left the gold standard, their economies began to rise again.

So, how about that 1920 depression that lasted barely over a year?

*whistles past the graveyard*

edit: also why is it that the cost and supply of credit should be centrally planned? Every other commodity you can name--wheat, corn, oil, coffee, OJ--is determined by a meeting of buyers and sellers, who work out a market price. If you advocated central planning the price of these commodities, people would laugh; but advocate centrally planning the price of credit, and suddenly its a great idea.
Banking panics are caused by a lack of confidence in banks. And we haven't seen many since the Depression for a reason.
What about the 1920 recession? What about the 1893 recession? What about any of it? There were more recessions, depression, and panics under the gold standard than since.
THe cost, supply and demand of credit do float in a free market. Go shop for a mortgage sometime. Or a business loan.
 
This deflation caused people to fear bank collapses, which caused them to pull their deposits, precipitating bank collapses. In the Austrian school, this type of behavior is not supposed to happen, but it did.

Eh? Austrians would say that banking panics are a market response to unsound banking practices, ie excessive fractional reserve lending.

As Rabbi stated, when credit is restrictive, economic activity is constrained, as it was under the gold standard. When countries are no longer bound by those restrictions, credit and economic activity are no longer constrained by this anchor. When countries left the gold standard, their economies began to rise again.

So, how about that 1920 depression that lasted barely over a year?

*whistles past the graveyard*

edit: also why is it that the cost and supply of credit should be centrally planned? Every other commodity you can name--wheat, corn, oil, coffee, OJ--is determined by a meeting of buyers and sellers, who work out a market price. If you advocated central planning the price of these commodities, people would laugh; but advocate centrally planning the price of credit, and suddenly its a great idea.
Banking panics are caused by a lack of confidence in banks. And we haven't seen many since the Depression for a reason.
What about the 1920 recession? What about the 1893 recession? What about any of it? There were more recessions, depression, and panics under the gold standard than since.
THe cost, supply and demand of credit do float in a free market. Go shop for a mortgage sometime. Or a business loan.
What I dislike is that this whole fiat monetary system is so engrained in people it becomes part of our psyche...

And I dont mean this to just pick on you Rabbi.. Its prevalent with many people.

Look at these statements... "Go shop for a mortgage sometime." " [go shop for] a business loan."


To me, one shouldnt want to (or have to) shop for a mortgage.. They should shop for a house. And likewise they shouldnt shop for a business loan, but a business.
 
Wow, debasing the currency lowers real incomes, which then means that businesses can hire more people?

I wonder what Krugman's take is on the depression of 1921? The one that was as bad as the great depression, only it was over in 2 years without inflating the currency.

Notice how historians and others completely ignore the Depression of 1921?
 
Eh? Austrians would say that banking panics are a market response to unsound banking practices, ie excessive fractional reserve lending.



So, how about that 1920 depression that lasted barely over a year?

*whistles past the graveyard*

edit: also why is it that the cost and supply of credit should be centrally planned? Every other commodity you can name--wheat, corn, oil, coffee, OJ--is determined by a meeting of buyers and sellers, who work out a market price. If you advocated central planning the price of these commodities, people would laugh; but advocate centrally planning the price of credit, and suddenly its a great idea.
Banking panics are caused by a lack of confidence in banks. And we haven't seen many since the Depression for a reason.
What about the 1920 recession? What about the 1893 recession? What about any of it? There were more recessions, depression, and panics under the gold standard than since.
THe cost, supply and demand of credit do float in a free market. Go shop for a mortgage sometime. Or a business loan.
What I dislike is that this whole fiat monetary system is so engrained in people it becomes part of our psyche...

And I dont mean this to just pick on you Rabbi.. Its prevalent with many people.

Look at these statements... "Go shop for a mortgage sometime." " [go shop for] a business loan."


To me, one shouldnt want to (or have to) shop for a mortgage.. They should shop for a house. And likewise they shouldnt shop for a business loan, but a business.

HuH??? You are remarkably incoherent here, even for you.
Are loans not products/services that come about by interaction in the marketplace between buyers and sellers? Many business deals have floundered because appropriate financing could not be secured. Would you have the principals go ahead and do it anyway?
 
Eh? Austrians would say that banking panics are a market response to unsound banking practices, ie excessive fractional reserve lending.

Austrians would say that people would act rationally and the market would clear at an equilibrium price where returns are attractive relative to risk. During the Depression, this did not happen. There is one study out there which looked at hundreds of bank failures in nine states during the Depression, and the conclusion was that banks which failed tended to be as strong if not stronger than banks which did not. This is irrational but perfectly understandable if you realize that people act on fear and greed.

So, how about that 1920 depression that lasted barely over a year?

*whistles past the graveyard*

The 1920 depression was very different. It came about as soldiers returned home and demand from war spending collapsed. The 1929-33 Depression was a result of excess debt in the financial system on top of an economy which was experiencing global deflation for a decade in the agriculture sector, the withdrawal of one-third of reserves from the banking system, and the gold standard, which forced the Fed to raise rates in 1931.

edit: also why is it that the cost and supply of credit should be centrally planned? Every other commodity you can name--wheat, corn, oil, coffee, OJ--is determined by a meeting of buyers and sellers, who work out a market price. If you advocated central planning the price of these commodities, people would laugh; but advocate centrally planning the price of credit, and suddenly its a great idea.

The supply of credit is not centrally planned. The price of short-term credit is essentially controlled by the Fed.
 
What I dislike is that this whole fiat monetary system is so engrained in people it becomes part of our psyche...

And I dont mean this to just pick on you Rabbi.. Its prevalent with many people.

Look at these statements... "Go shop for a mortgage sometime." " [go shop for] a business loan."


To me, one shouldnt want to (or have to) shop for a mortgage.. They should shop for a house. And likewise they shouldnt shop for a business loan, but a business.

People do shop for a house or a business. They also shop for a loan to buy that house or business. Why would someone shop for a house or business but not shop for financing to buy that house or business?
 
Banking panics are caused by a lack of confidence in banks. And we haven't seen many since the Depression for a reason.
What about the 1920 recession? What about the 1893 recession? What about any of it? There were more recessions, depression, and panics under the gold standard than since.
THe cost, supply and demand of credit do float in a free market. Go shop for a mortgage sometime. Or a business loan.
What I dislike is that this whole fiat monetary system is so engrained in people it becomes part of our psyche...

And I dont mean this to just pick on you Rabbi.. Its prevalent with many people.

Look at these statements... "Go shop for a mortgage sometime." " [go shop for] a business loan."


To me, one shouldnt want to (or have to) shop for a mortgage.. They should shop for a house. And likewise they shouldnt shop for a business loan, but a business.

HuH??? You are remarkably incoherent here, even for you.
Are loans not products/services that come about by interaction in the marketplace between buyers and sellers? Many business deals have floundered because appropriate financing could not be secured. Would you have the principals go ahead and do it anyway?
I think you missed my point. The point Im making is that most people shouldnt need a mortgage. I mean my grandpa paid $2,000 for his house back in the day.. and theres nothing wrong with that..

Its akin to the way student loans bid up the price of college tuition.. Many years ago one could get a summer job and work their way through college and pay for their tuition in cash.. Nowadays kids graduate and have a big student loan to pay off.

We need solid money and lower prices not easier and easier terms to go into debt so we can keep the ponzi scheme going.
 
Eh? Austrians would say that banking panics are a market response to unsound banking practices, ie excessive fractional reserve lending.

Austrians would say that people would act rationally and the market would clear at an equilibrium price where returns are attractive relative to risk. During the Depression, this did not happen. There is one study out there which looked at hundreds of bank failures in nine states during the Depression, and the conclusion was that banks which failed tended to be as strong if not stronger than banks which did not. This is irrational but perfectly understandable if you realize that people act on fear and greed.

So, how about that 1920 depression that lasted barely over a year?

*whistles past the graveyard*

The 1920 depression was very different. It came about as soldiers returned home and demand from war spending collapsed. The 1929-33 Depression was a result of excess debt in the financial system on top of an economy which was experiencing global deflation for a decade in the agriculture sector, the withdrawal of one-third of reserves from the banking system, and the gold standard, which forced the Fed to raise rates in 1931.

edit: also why is it that the cost and supply of credit should be centrally planned? Every other commodity you can name--wheat, corn, oil, coffee, OJ--is determined by a meeting of buyers and sellers, who work out a market price. If you advocated central planning the price of these commodities, people would laugh; but advocate centrally planning the price of credit, and suddenly its a great idea.

The supply of credit is not centrally planned. The price of short-term credit is essentially controlled by the Fed.

Dont these two sentences contradict one another?
 
I think you missed my point. The point Im making is that most people shouldnt need a mortgage. I mean my grandpa paid $2,000 for his house back in the day.. and theres nothing wrong with that..

Its akin to the way student loans bid up the price of college tuition.. Many years ago one could get a summer job and work their way through college and pay for their tuition in cash.. Nowadays kids graduate and have a big student loan to pay off.

We need solid money and lower prices not easier and easier terms to go into debt so we can keep the ponzi scheme going.

Wow. We're verging onto total meltdown here.
So now everyone should pay for everything with gold coins? I can just see the head of GE's appliance division signing a deal for a new factory, with a big ole bag of St Gauden's for the first installment.
 
As countries abandoned the gold standard during the Depression, they began to grow again. The longer countries waited to leave the gold standard, the longer they waited for growth to resume.

Barry Eichengreen pointed out years ago that major economies went off gold in the following order: Japan, Britain, Germany, US, France. [... the correlation between going off gold and recovery is in fact perfect] And here’s what happened to their industrial output:

gd_recovery.png

Modified goldbugism at the WSJ - Paul Krugman Blog - NYTimes.com
The U.S. abandoned the gold standard, as a matter of course, back in 1913.

The runs on American banks back at that time were to exchange worthless fiat currency -of which there was too much to redeem- for coin, not because people wanted greenbacks.
 
As countries abandoned the gold standard during the Depression, they began to grow again. The longer countries waited to leave the gold standard, the longer they waited for growth to resume.

Barry Eichengreen pointed out years ago that major economies went off gold in the following order: Japan, Britain, Germany, US, France. [... the correlation between going off gold and recovery is in fact perfect] And here’s what happened to their industrial output:

gd_recovery.png

Modified goldbugism at the WSJ - Paul Krugman Blog - NYTimes.com

It might have worked well for them in the short run, but in the long run they all got f*cked over.

Paper ain't money. I'm not so hung up on Gold as I am commodity currency. You can't print prosperity.

With electronic fund transfers we do not need gold or paper money anymore. All we will need is a microchip in our eyebrows or in our wrist that can be scanned in order to make purchases. When they come out, I will be one of the first to be chipped.
 
Last edited:
The U.S. abandoned the gold standard, as a matter of course, back in 1913.

The US was on a gold ratio in that the Fed pegged the value of the dollar to gold. It also adhered to that standard and took catastrophic steps in response to the changes in the flows of gold. In 1931, the Fed raised rates from 1.5% to 3.5% solely to stop the outflow of gold, a remarkably idiotic step which led to the final leg down in the Depression.

The runs on American banks back at that time were to exchange worthless fiat currency -of which there was too much to redeem- for coin, not because people wanted greenbacks.

Though gold was in demand, the primary cause of bank runs was because people thought they would fail and demanded any money out of their deposit accounts.
 
The supply of credit is not centrally planned. The price of short-term credit is essentially controlled by the Fed.

Dont these two sentences contradict one another?

No. They are the complete opposite. Controlling supply effects the price while controlling price effects supply. You can control the price of something or you can control the supply of something, but you cannot control both.
 
I think you missed my point. The point Im making is that most people shouldnt need a mortgage. I mean my grandpa paid $2,000 for his house back in the day.. and theres nothing wrong with that..

Its akin to the way student loans bid up the price of college tuition.. Many years ago one could get a summer job and work their way through college and pay for their tuition in cash.. Nowadays kids graduate and have a big student loan to pay off.

We need solid money and lower prices not easier and easier terms to go into debt so we can keep the ponzi scheme going.

Wow. We're verging onto total meltdown here.
So now everyone should pay for everything with gold coins? I can just see the head of GE's appliance division signing a deal for a new factory, with a big ole bag of St Gauden's for the first installment.
You know, if your whole point on being involved in an online forum is just to make fun and post a lot of noise, why bother?

I dont agree with any of your viewpoints Rabbi on the subject of the fed, but I can still maintain a modicum of maturity and sincere interest when discussing your points.
 
Austrians would say that people would act rationally and the market would clear at an equilibrium price where returns are attractive relative to risk. During the Depression, this did not happen. There is one study out there which looked at hundreds of bank failures in nine states during the Depression, and the conclusion was that banks which failed tended to be as strong if not stronger than banks which did not. This is irrational but perfectly understandable if you realize that people act on fear and greed.

There are better ways of explaining bank failures. Restrictive banking laws that prevented them from diversifying their portfolios, for example. Canada didn't have these laws and as a result didn't have a problem with bank failures.

Wow. We're verging onto total meltdown here.
So now everyone should pay for everything with gold coins? I can just see the head of GE's appliance division signing a deal for a new factory, with a big ole bag of St Gauden's for the first installment.

Come on now, honestly. There are plenty of reasons for advocating fiat currency that sound reasonable. This doesn't even sound reasonable. They had paper scrip that served as a proxy for gold, just as we have cashier's checks and wire transfers today that substitute for forklift bales of $100 bills. America went from a sleepy agricultural backwater to the world's biggest manufacturer under an (imperfect) bimetal standard (I don't advocate a bimetal standard, at least not as it was implemented before).

The real problem was with banks that loaned out more paper tickets than they had gold on hand. It would be like a parking valet, handing out multiple sets of keys for the same car. They still do this under today's paper standard of course, so nothing has really changed in that regard.
 
Last edited:
In a world of electronic fund transfers, money is a nuisance. I do not spend money. I haven't for a quarter of a century now. Eventually we will be totally free from that bacteria covered means of conveyance.

If we detached the Fed from any association with real banks, we could then have the Fed forgive all of our Government Debt and start off with a clean ledger.

Wouldn't that be fine. Meanwhile we have to worry about the Yen tanking versus the Dollar. I think the Japanese should just go on the Dollar and forget about their own currency.
 
Last edited:
There are better ways of explaining bank failures. Restrictive banking laws that prevented them from diversifying their portfolios, for example. Canada didn't have these laws and as a result didn't have a problem with bank failures.

We are explaining why banks failed in the 1930s. Banks in Canada failed during the Great Depression.

As for today, Citigroup is extremely diversified and it would have been bankrupt had it not been for the state. AIG was the biggest, most diversified insurer in the world. RBS was highly diversified. Wachovia was a large, well diversified bank that would have gone under had it not been shoved into the arms of Wells Fargo by the FDIC.

Canadian banks have done better because regulations require them to be better capitalized than American banks, banking in Canada is an oligopoly with 6 banks controlling 90% of the market, and because the housing bubble in Canada did not collapse like it did in the US.
 
Last edited:
There are better ways of explaining bank failures. Restrictive banking laws that prevented them from diversifying their portfolios, for example. Canada didn't have these laws and as a result didn't have a problem with bank failures.

We are explaining why banks failed in the 1930s. Banks in Canada failed during the Great Depression.

As for today, Citigroup is extremely diversified and it would have been bankrupt had it not been for the state. AIG was the biggest, most diversified insurer in the world. RBS was highly diversified. Wachovia was a large, well diversified bank that would have gone under had it not been shoved into the arms of Wells Fargo by the FDIC.

Canadian banks have done better because regulations require them to be better capitalized than American banks, banking in Canada is an oligopoly with 6 banks controlling 90% of the market, and because the housing bubble in Canada did not collapse like it did in the US.

OBVIOUSLY, You are not diversified enough if the housing collapse or derivative losses can cause bankruptcy.
 
OBVIOUSLY, You are not diversified enough if the housing collapse or derivative losses can cause bankruptcy.

No, it is not "diversified enough." It's not "reserved enough."

The division that brought down AIG was a small part of their business. Derivatives were a small part of Citigroup. Without the investment bank, Citi would have been fine.
 

Forum List

Back
Top