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Extract from Gold Standards and the Real Bills
Doctrine in U.S. Monetary Policy by Richard Timberlake. The references to
"Bernanke 1993" are to Ben Bernanke's 1993 article "The World
on a Cross of Gold" in the Journal of Monetary Economics.
Ben Bernanke, in a laudatory review of Golden Fetters, agrees with its
main thesis. “Eichengreen,” Bernanke
states, “has made the case that the international gold standard, as
reconstituted following World War I, played a central role in the initiation
and propagation of the worldwide slump” (Bernanke 1993, 252). “In
this masterful new book,” he notes approvingly, “Barry Eichengreen has gone well beyond his previous work to
marshal a powerful indictment of the interwar gold standard, and of the
political leaders and economic policy-makers who allowed themselves
to be bound by golden fetters while the world economy collapsed.” The
United States, especially, absorbed and sterilized gold, “largely
reflecting conscious Federal Reserve policy. . . . Monetary policy became
tight in the U.S. in 1928. . . . High returns on both bonds and stocks
attracted gold into the U.S., but the Fed, intent on its domestic policy
goals, sterilized the inflows” (Bernanke 1993, 253-258).
Bernanke’s words, much like Temin’s and Eichengreen’s,
contradict his argument. If central banks could
absorb and sterilize gold, “reflecting conscious Federal Reserve
policy,” the central bank, not the gold standard, was running the show.
...
Bernanke finally poses a very apt question that he leaves unanswered.
“Why was there such a sharp contrast between the stability of the gold
standard regime of the classical, pre-World War I period and the extreme
instability associated with the interwar gold standard?” (Bernanke
1993, 261).
Here are two commentaries that may help answer his question. The first is
from Lionel D. Edie, a prominent economist of the time. At a conference of
economists in early 1932, he stated,
The Federal Reserve Act cut the tie which binds the
gold reserve directly to the credit [money] volume, and by so doing
automatically cut off the basic function of the gold standard . . . in an
essential respect we abandoned [the automatic money supply function] some
time ago. . . . We are not now on the gold standard . . . and we have not
been for some time . . . it is time to recognize that the Federal Reserve
mechanism does not constitute an automatic self-corrective device for
perpetuating a gold standard. (Edie1932, 119-128)
And Leland Yeager in 1966 described the “gold standard” of the
1920s in these words:
The gold standard of the late 1920s was hardly more
than a façade. It involved extreme measures to economize on gold. . .
. It involved the neutralization or offsetting of international influences on
domestic money supplies, incomes, and prices. Gold standard methods of
balance of payments equilibrium were largely destroyed and were not replaced
by any alternative. . . . With both the price and income and the
exchange-rate mechanisms of balance of payments adjustment out of operation, disequilibriums were accumulated or merely palliated, not
continuously corrected. (Yeager 1966, 290)
These commentaries provide the answer to Bernanke: “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.
Also quoted in the article is the following from Joseph Schumpeter's 1954
History of Economic Analysis:
An ‘automatic’ gold currency is part and parcel of a laissezfaire and free-trade economy. It links every
nation’s money rates and price levels with the money-rates and price
levels of all the other nations that are ‘on gold.’ It is
extremely sensitive to government expenditure and even to attitudes or
policies that do not involve expenditure directly, for example, to foreign
policy, to certain policies of taxation, and, in general, to precisely all
those policies that violate the principles of [classical] liberalism. This is
the reason why gold is so unpopular now [1950] and also why it was so popular
in a bourgeois era. It imposes restrictions upon governments or bureaucracies
that are much more powerful than is parliamentary criticism. It is both the
badge and the guarantee of bourgeois freedom—of freedom not simply of
the bourgeois interest, but of freedom in the bourgeois sense. From this
standpoint a man may quite rationally fight for it, even if fully convinced
of the validity of all that has ever been urged against it on economic
grounds. From the standpoint of etatisme and
planning, a man may not less rationally condemn it, even if fully convinced
of the validity of all that has ever been urged for it on economic grounds.
Bron Suchecki
Goldchat.blogspot.com
Bron Suchecki has worked in the precious metals
markets since 1994, when he joined the Perth Mint as an Administration Officer
in their Sydney retail outlet. In 1998 he moved to Perth to work in the then
fledgling Depository division. He has held a number of roles since then in
the treasury, risk and governance areas of the Mint.
All posts are Bron's personal opinion and not
endorsed by the Perth Mint in any way.
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