Posted on 12/13/2005 5:45:39 AM PST by BJClinton
How the gold standard contributed to the Great Depression.
There always seem to be voices raising the possibility that a return to a monetary gold standard could solve all our problems. Among those championing this meme this week were Chris Mayer at Daily Reckoning, Robert Blumen at Mises Economics Blog, and some of my fellow blogjammers.
Under a pure gold standard, the government would stand ready to trade dollars for gold at a fixed rate. Under such a monetary rule, it seems the dollar is "as good as gold."
Except that it really isn't-- the dollar is only as good as the government's credibility to stick with the standard. If a government can go on a gold standard, it can go off, and historically countries have done exactly that all the time. The fact that speculators know this means that any currency adhering to a gold standard (or, in more modern times, a fixed exchange rate) may be subject to a speculative attack.
After suspending gold convertibility in World War I, many countries stayed off gold and experienced chaotic fiscal and monetary policies in the early 1920's. Many observers reasoned then, just as many observers reason today, that the only way to restore fiscal and monetary responsibility would be to go back on gold, and by the end of the 1920's, most countries had returned to the gold standard.
I argued in a paper titled, "The Role of the International Gold Standard in Propagating the Great Depression," published in Contemporary Policy Issues in 1988, that counting on a gold standard to enforce monetary and fiscal discipline in an environment in which speculators had great doubts about governments' ability to adhere to that discipline was a recipe for disaster. International capital flows became more erratic, not less, as doubts were raised about whether first the pound would be devalued and then the dollar. Britain gave in to the speculative attacks and abandoned gold in 1931, whereas the U.S. toughed it out by deliberately raising interest rates in 1931 at a time when the economy was already near free fall.
Because of this uncertainty, there was a big increase in demand for gold, the one safe asset in this setting, which meant the relative price of gold must rise. If everybody is trying to hoard more gold, you're going to have to pay more potatoes to get an ounce of gold. Since the U.S. insisted on holding the dollar price of gold fixed, this meant that the dollar price of potatoes had to fall. The longer a country stayed on the gold standard, the more overall deflation it experienced. Many of us are persuaded that this deflation greatly added to the economic difficulties of those countries that insisted on sticking with a fixed value of their currency in terms of gold.
Ben Bernanke and Harold James, in a paper called "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison" published in 1991 (NBER working paper version here), noted that 13 other countries besides the U.K. had decided to abandon their currencies' gold parity in 1931. Bernanke and James' data for the average growth rate of industrial production for these countries (plotted in the top panel above) was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.
A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920's and the reason many argue for a return to gold today. Saying you're on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you've set your house in order.
Nevertheless, I'm willing to grant Tim Iacono that the stuff is pretty.
I am not wrong. If the price of gold was 1,000,000 dollars an ounce, there would be enough gold.
That's the whole reason they went off the gold standard. Because you cannot "manufacture" gold. But you can print all the paper you want.
Paper is only a promise. And since we went off the gold standard, it is only a promise - of more paper.
Someone please send this guy a history book.
Government is the only entity that can render perfectly good commodities like paper and ink to be worthless.
,,, well, that's a couple of pounds that didn't find their way to Europe.
Arguably untrue. Lend-Lease and WWII led to recovery.
I'm not sure if it's totally worthless, but one thing is for sure.
The chickens are gonna come home to roost. And when the banks and creditors get into a squeeze, you could see chaos like never before.
So the government HAS to keep printing money and getting it into circulation... somehow. Because if the banks fail, the government goes under too.
I know it was sold forward.
And that's part of the problem, with gold leasing, etc. They loan the gold, and still keep it on the books as physical.
From what I hear, there are naked contracts for something like ten times the actual amount of physical silver in the world. If the holders decide they want physical, instead of a cash premium, silver prices would go to the moon.
A few are actually predicting that silver may become higher valued than gold.
Bump. A bunch of us have been making the calls for the PM train for awhile. It's not too late to get on board!
PS: If you're a youngster, and think you might get married someday, buy the ring now! Before it costs half as much as your next car!
Gold is mesmerizing, most malleable and prized for its durability but any man will trade his own weight in it when desperate for a single drop of water.
I am hoping that the whole world learned something from Katrina.
If a person spent ten minutes a day for the next month, they could easily be prepared to live the next month and not ever leave their front yard.
Doesn't take much at all - and it's only common sense.
It's odd you should bring that up, I almost never leave the property especially at this time of the year.
My water heater holds fifty gallons of potable water, the two toilets another 6 gallons total and the normal canned goods another three gallons easy.
We have flour, cornstarch, potatoes, rice and a small amount of bread on hand at all times.
I have at least five gallons of propane and two grills; about two gallons of gasoline and a few bricks, a shovel and lots of dirt, pots, pans and a dresser drawer full of flashlights and batteries.
I have blankets, sheets, towels, shop rags and three dogs for warmth, four bookcases of thrice-read books and incipient Alzheimers (selective), and the comfort of knowing that nothing will go to waste before my dogs starve to death.
I got a couple real obnoxious grey squirrels that live in my backyard, they love to tease my dog.
They don't know it, but they're on the menu!
I have alot of stuff stored in plastic containers, I should look at some of the older stuff and see how good it is. Wonder how long Velveeta lasts as long as you don't open it?
lol - -- -however:
("...many a truth is said in jest")
and btw, thanks for pinging me to this article
And my taters is comin up gangbusters! 2 plots, one with reds and purples, and the other one with russets! Last year, I had about 8 lettuce plants, and they went to seed, now I got more lettuce than you can shake a stick at. And lots of cabbage, last years is already flowering, it always weirds people out when they see me rip a cluster of flowers off a cabbage plant and eat them. But they're good!
Asia trading now, silver up .35, expect more on the up leg when Europe opens.
I don't know how they do it, but anytime we get near option expiration, if the price is high, they manage to bring it down. Maybe they rewrite the options and average out the strike price with the current price.
For as long as I can remember (back to 1973) there has always been a lot of manipulation in the gold and silver markets. But I still believe the trend for silver, gold and the other precious metals is up.
Btw, did you see all the various posts in the silver thread, more info added there.
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