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We've been looking at the idea that there was some kind of giant rise
-- in excess of 100%, which is to say, a doubling or more of gold's
real value -- around the 1929-1933 period.
September
11, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s
I've been saying that there is no evidence of any such rise in the
previous 500 years of history. After all, if gold did do things like
that, causing Great Depressions along the way, it would not make a very
good basis of monetary systems. The fact that gold continued to be used
as a monetary basis, beating all contenders including silver, suggests
that such things simply did not happen.
Let's look at some data.
This is a chart of commodity prices compared to gold, from 1750 to
1970. As we can see, the dramatic drop of commodity prices in
1929-1933, unrelated to war,
was unprecedented during this time period. The drop around 1816-1819
was related to the War of 1812, in which there was also some
devaluation of the U.S. dollar. This was remedied in 1819. There was
also, during this time, the Napoleonic Wars, which created a great
demand for commodities from the U.S. (much like World War I), and which
ended of course with Waterloo in 1815. So, that was another wartime
episode, rather a lot like the spike related to World War I. Then there
is the slow decline of prices, over a twenty year period, into the
mid-1890s. I've talked about this several times, concluding that it was
mostly, and perhaps entirely, a matter of a commodity supply glut
rather than a case of gold rising in value.
Another thing we see here is that commodity prices after WWII are again
at the higher end of their historical range. This implies, if anything,
a lowish value of gold. Thus, if there was a 100%+ rise in gold's value
in 1929-1933, then there must have also been a corresponding fall in
value sometime afterwards, to return gold's value to something more
like its 1920s level. In other words, we would have a decline in the
value of gold by a similar giant, sudden, unprecedented amount, some
(unidentified) time between 1933 and 1950.
November
21, 2015: Let's Resolve the Gold Standard "Deflation" Fallacy
Despite the decline in commodity prices in 1880-1896, or perhaps
enabled by it, U.S. industrial production rose dramatically during the
time period -- one of the most prosperous times, by this metric, up to
the present day. Economists who compare this time to the Great
Depression
should probably be laughed at. If there was any rise in gold's value
during this time, it was modest enough that it didn't impair the
splendid prosperity of the time period -- the "Gilded Age" as Mark
Twain called it.
Now, let's go farther back by looking at commodity prices in Britain
compared to gold.
Again, we have a wartime rise in prices related to the Napoleonic Wars,
and of course the spike related to WWI. Outside of those two events,
however, the record is very stable. There was something of a rise from
1560-1600 or so. This is the time of the Spanish conquest of the New
World. However, after the initial looting, almost all of the new mine
production was silver, not gold. From 1550-1650, estimated world
production of silver rose tenfold, while production of gold rose only
50%. The looting began around 1523 and was pretty much over by
1550, so any effect of that gold flow on commodity prices should have
been over not too long afterwards. Instead, during the time of the
looting, we find that commodity prices vs. gold in Britain hardly
changed at all. The story that "a huge inflow of gold from the New
World caused a giant rise in commodity prices" is basically fiction.
What was happening, however, is that Henry VIII was devaluing
the British pound,
naturally causing rising prices in terms of the devalued pound. The
pound was reduced to about a third its previous silver content,
implying a threefold rise in nominal prices. Henry's reign was
1509-1547, coinciding with the time of looting of the Inca and Aztec
gold by the Spanish.
Here's another dataset, going back to 1400 in Britain:
This commodity dataset is divided into metals and agricultural
products. There's a rise in agricultural product prices, roughly
doubling over 100 years, 1500-1600. However, most of this rise comes
after 1570, which was about 30 years after the Spanish gold looting
period. We also see that metals prices were very flat, which suggests
that price rises in agricultural products here were perhaps not related
to changes in the value of gold, but rather had something to do with
supply/demand for farm products.
All in all, it is a very impressive record of stability of value for
gold, at least as far as can be expressed by the record of commodity
prices, for a five-hundred year period before 1940. I think you can
agree that there is no evidence here of any sudden 100%+ increase in
gold's value happening over perhaps four years -- the claim made by the
"giant rise in gold's value" people for the 1929-1933 period. So, if
that did happen, it was totally unprecedented.
Now, if there was some kind of explosive increase in gold's value
beginning in 1929, you would expect it to be caused by some kind of
first-time-in-five-hundred-years imbalance between supply and demand.
Gold's supply doesn't change very much, because it is not consumed.
Thus, the "aboveground supply" is essentially the aggregate of
centuries of gold production. Annual mining production is only a small
percentage of this, around 2%. So, if you start with 100 units of gold
and have production of 2 units, you end with 102 units. If production
falls by 50%, to 1 unit, then you start with 100 and end with 101. And
if gold production doubles to 4 units, you start at 100 and end at 104.
As you can see, it is very difficult to meaningfully alter the "supply"
of gold with any kind of change in mining supply. This is often cited
as a reason for gold's natural stability of value -- the quality that
makes it an excellent basis for monetary systems.
Much the same was true of silver. Before 1870, silver was also mostly
accumulated in the form of coinage, bullion and housewares. The giant
silver mining boom of the 16th century did indeed depress the value of
silver vs. gold, but not by very much.
As we can see here, the giant tenfold increase in silver production
1550-1650 led to a decline in the value of silver vs. gold, from about
11:1 to about 16:1, over a period of two hundred years, 1500-1700. In
practical terms, you would have hardly noticed this slow evolution in
any given year, or even in a decade, or maybe even in a lifetime. Your
grandfather would be telling stories of "when I was a child, it took
twelve ounces of silver to buy an ounce of gold, not fourteen!" and
nobody would care of course.
A similar tenfold increase in world gold mining production occurred in
1840-1860. We looked at that here:
January 24, 2016: The Gold Mining Boom of the 1850s
That was a whopper, no doubt about it.
And yet, even that elevated rate of production was still just a small
percentage of the aboveground gold accumulated over the previous 5000
years of gold mining history. (The GFMS estimates of aboveground gold
used here are higher than some other estimates.)
Here is GFMS's estimate of aboveground gold during the time period.
From that, it would perhaps not be too surprising that there was no
particular evidence of a decline in gold's value, resulting from the
increase in mine supply.
The conclusion here is: if there was some kind of gigantic
supply/demand imbalance in 1929-1933, then it is pretty hard to get
there from the supply side. Even these colossal changes in mining
production -- a tenfold increase! -- in either silver or gold didn't
really move the needle much. If a tenfold increase in production didn't
move the needle much, it is logical to presume that perhaps a tenfold
(i.e., 90%) decrease wouldn't do much either. There never has been a
90% decrease, so we don't know. But, there have been a few 10% or 20%
decreases, which we might reasonably expect to have no real effect at
all.
I think that is enough for today. We will continue with this theme for
a while longer.
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