Posted on 05/14/2008 12:16:13 PM PDT by conservatism_IS_compassion
World War I made gold unstable.
. . . In addition, uncertainty over exchange rates and reparations (which were fixed in gold) increased the demand for reserves. In the face of this situation would not the increased demand for gold brought about by a return to the gold standard bring on a deflation? A few economists, like Charles Rist of France, Ludwig von Mises of Austria and Gustav Cassel of Sweden, thought it would.
Cassel(1925) had been very explicit even before Britain returned to gold . . .
After gold had been restored, Cassel pursued his line of reasoning further, warning of the need to economize on the monetary use of gold in order to ward off a depression. In 1928 he wrote: "The great problem before us is how to meet the growing scarcity of gold which threatens the world both from increased demand and from diminished supply. We must solve this problem by a systematic restriction of the monetary demand for gold. Only if we succeed in doing this can we hope to prevent a permanent fall of the general price level and a prolonged and world-wide depression which would inevitably be connected with such a fall in prices."
Rist, Mises and Cassel proved to be right. Deflation was already in the air in the late 1920's with the fall in prices of agricultural products and raw materials. The Wall Street crash in 1929 was another symptom, and generalized deflation began in 1930.
. . . Had the price of gold been raised in the late 1920's, or, alternatively, had the major central banks pursued policies of general price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution and no World War II.
(Excerpt) Read more at robertmundell.net ...
World War I made gold an unstable store of value [by concentrating it in the US].Some economists correctly predicted that return to the gold standard after WWI would cause a deflation.
Had the price of gold been raised in the late 1920's,
or had the major central banks pursued policies of price stability instead of adhering to the gold standard,
there would have been no Great Depression, no Nazi revolution and no World War II.
I remembered seeing an article in the WSJ based on this lecture, back in the day. And I thought it was germane to the discussion of the Obama theory that the current housing credit crunch is reminiscent of the Great Depression.
No. The war made European economies in general unstable because of the destruction, the taxation, the debts, etc. Those who wanted to be able to print money at will scapegoated gold, but there was nothing wrong with gold. The fact that the US had a concentration of gold simply meant the the US would be buying a lot of goods from Europe, which would have been a good thing for the European economies.
Some economists correctly predicted that return to the gold standard after WWI would cause a deflation.
In the first place there is nothing wrong with deflation per se. In peacetime it just means the economy is getting more efficient so everyone's savings are increasing in value. This author name drops von Mises and he's right about von Mises' prediction. What he doesn't tell us is that von Mises had nothing against deflation.
In the second place any excessive deflation was caused by the the war, not by gold. Going off the gold standard didn't relieve the effect of the war but it did transfer the worst economic effects of the war from the well connected to the general public.
Had the price of gold been raised in the late 1920's, or had the major central banks pursued policies of price stability instead of adhering to the gold standard, there would have been no Great Depression, no Nazi revolution and no World War II.
Where to begin... The Nazi phenomena was a result of the unfair Versailles treaty. It had nothing to do with the gold standard and the suggestion is just stupid.
The central banks were never on a pure gold standard to begin with. Every country practiced fractional reserve banking and most central banks did follow a policy of price stability (though not Germany of course). The Fed printed money all through the twenties. It was precisely those policies that caused the inefficiencies that led to the depression.
Never forget that the Nobel Memorial Prize in economics is awarded by a central bank.
Also never forget that most economists get their paychecks from a government.
I'm not certain that a more merciful Versailles Treaty could have stopped the rise of German National Socialism. Nationalism and eugenics was the coin of the realm in European intellectual circles (and Germany had some of the most cutting-edge scientific academies). Socialism was the by-word of European economics. Yes, there's "the butterfly effect" and all that, but we'll never know exactly *how* things would have been different if we'd take a particular right fork instead of the left.
Some economists correctly predicted that return to the gold standard after WWI would cause a deflation.
In the first place there is nothing wrong with deflation per se. In peacetime it just means the economy is getting more efficient so everyone’s savings are increasing in value. This author name drops von Mises and he’s right about von Mises’ prediction. What he doesn’t tell us is that von Mises had nothing against deflation.
In the second place any excessive deflation was caused by the the war, not by gold. Going off the gold standard didn’t relieve the effect of the war but it did transfer the worst economic effects of the war from the well connected to the general public.
Churchill’s decision as Chancellor of the Exchequer to return post World War I Britain to the Gold Standard based on the pound-gold value before the WWI was a disaster for Britain. Even Churchill admitted it was the biggest mistake of his life. British industries found themselves at a huge competitive disadvantage due to the overvalued pound and the necessary high interest rates to maintain the reinstated gold standard. British industries reacted by trying to impose wage cuts and longer hours on workers. The end result was the Miners and General Strike of 1926
The Germans surrendered on terms and we didn't honor the terms we had given them. What's more, the British continued the hunger blockade of Germany for six months after hostilities had ended. When Wilson's emissary, Herbert Hover, tried to enlist the help of the French to persuade the British to end the blockade the French prime minister responded "we think there are about twenty million Germans too many".
As I said they scapegoated the gold standard. The British converted their entire economy to war production during the war. Of course they found it difficult to compete against the US after the war. But this is a result of the war, not the gold standard.
How Churchill must have salivated at the prospect of being able to just print money at will.
The same conditions pertained after WWII, but the US tried something different then, and instituted the Marshall Plan to get Europe's economy going again. Had the US done that after WWI, and forgiven British/French debt and shipped back the gold they had sold off - simultaneously requiring the forgiveness of the German reparations "debt" - Europe would have been in a condition to recover stably.
But presumably that would have required more magnanimity than the Americans were feeling at the time . . . The trouble is that that is a second guess, based on how bad things actually went after WWI the way the money standard was in fact done.
The Marshall Plan was mostly money given to European governments and I think its effects are largely overrated. I'll leave that for another thread though.
I think returning the gold after WWI would have been unnecessary. What we could have done was simply spend it there. If you really want to help an economy recover then buy what they sell - I feel the same way about African agriculture today BTW.
I completely agree about forgiving the reparations. However I think we were right to let the debts stand, except that there should not have been any sort of government support. If a loan goes into default that's a lesson for the bank but it's also a hit to the defaulter's credit worthiness. I agree with Coolidge's famous quip "They bought the money didn't they?"
"They bought the money didn't they?"
Sure did . . . and we later became their allies in the same fight. Today we would have no other thought than that our first strength we could bring to a fight for which we were not otherwise prepared would be financial.Germany's strategy was to "bleed France white," a butcher strategy, and almost succeeded before America entered the war. America hadn't suffered from that. To immediately help Britain and France, the first thing to have done would have been to infuse some cash/gold into their economies. So that they would be able to buy American goods sorely needed in their economies and their militaries.
Give them the money, knowing beforehand that it would have inflationary implications for the US economy. A price to be borne for supporting allies in a desperate struggle.
Sure. The rise of totalitarianism was not unique to Germany. Spain, Italy, USSR to name a few...
I think what happened was the Great Depression was causing so much anxiety that people were more willing to let some authority figure make all the decisions for them.
Ping
Italy and Spain were never totalitarian, unless you count the Spanish Republican government during the final phases of the civil war. Mussolini did coin the term totalitarian and he liked to use it a lot. But the Duce never had anything like the power Hitler and Stalin had. Italy only executed about a dozen political criminals during the entire period the fascists were in power (mostly Slovenian "terrorists").
The USSR wasn't the result of Versailles but arguably may have caused the outcome at Versailles. Germany had an abortive communist revolution in between the armistice and the peace conference and their army completely dissolved. So they no longer posed any sort of threat to the allies, who then proceeded to impose a harsh treaty.
Sorry, I meant dictatorship.
Okay. But that was eighteen years before the National Socialists had their huge gains and Hitler took the Chancellorship. The soldiers of WWII were just starting to become grandparents at that time.
Hitler's campaign rhetoric is all about the betrayal - the "November Crime". Even the anti-jewish rhetoric is partly based on the the fact that bolshevism was seen as a Jewish plot.
And the soldiers of WWI were not quite grand parents yet. Hitler himself had been a corporal in WWI. To the contrary. The Nazi ascension corresponds exactly with the WWI generation coming of age.
If by "coming of age" you mean the WWI soldiers entering their late 30s and 40s, then I agree. But that just suggests the WWI generation felt humiliated by German's WWI defeat. The Nazi rhetoric benefitted from this, and also from the nationalism of college-age students who did not experience WWI directly but were stewing in the contemporary intellectual zeitgeist. But all this has nothing to do with the Versailles Treaty obligations crushing the German economy.
However, it would be interesting to find out whether, during the onset of the worldwide Depression, French newspapers stepped up provocative language about squeezing more of Versailles's reparations from Germany.
During the interwar period the French government was doing a great deal of agitation against Germany. The Versailles treaty called for the continuous occupation of parts of Germany, and the French were panicked by the failure of their allies, the US and the British, to provide occupation forces. At one point France even tried to divide Germany by setting up an independent Rhine Republic.
There is a one hour lecture on the Versailles treaty and its aftermath on YouTube that is worth watching. Six Months that Changed the World
The best book to come out lately on WWI is, in my opinion, Thomas Flemming's An Illusion of Victory.
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