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The Great Depression was, unquestionably, the time when monetary
thinking throughout the Western world began to migrate from a
Classical approach emphasizing stable money (in practice, a gold
standard system), to a Mercantilist approach, emphasizing economic
management via interest rate manipulation and currency jiggering.
This is really only possible with a floating fiat currency, which is
why today’s Mercantilists are avid gold-standard-haters, and why we
have floating currencies today.
Most “economics” is really just propaganda, and along those lines,
for the last eighty years it has become popular to blame the Great
Depression on whatever policy you happen to dislike, and then claim
that the Great Depression would have been mitigated or helped by
whatever policy you happen to like. It’s equivalent to The Hitler
Analogy among the economics wonks.
Thus, it is no surprise that some economists want to blame the Great
Depression on the gold standard monetary system of that time. The
fact that gold standard systems had been used for many decades —
actually centuries — before then, and produced no such problems in
the past, and did not produce any such problems after their revival
in 1944 as the Bretton Woods system, is one of those inconvenient
facts that tends to get ignored. Why 1930, and no other time, in 500
years of history?
Now here’s the funny bit: the people who blame gold standard systems
for the Great Depression are … the gold standard advocates
themselves!
It’s ridiculous. It’s absurd. But, it’s true, and has been for
decades.
Here’s the even odder part: the Mercantilists (academic Keynesians),
including John Maynard Keynes himself and also his modern
counterparts like Barry Eichengreen or Paul Krugman — in other
words, the natural enemies of any stable-value system — don’t blame
the gold standard system for the Great Depression.
Talk about Freaky Friday.
The modern Mercantilists of course argue that some kind of interest
rate manipulation, and currency-jiggering including blatant
devaluation, would have helped the situation. They blame “Golden
Fetters” for preventing governments from rushing to the rescue more
quickly or effectively with their Funny Money solution. But, they
don’t blame the onset or cause of the Great Depression itself on the
gold standard system. They generally see it is a sort of loss of
“animal spirits” following the stock market crash of 1929, followed
by widespread bankruptcy and default, causing economies worldwide to
settle into a “new equilibrium” at a depressed level.
The capitalist self-healing process that many hoped for seemed
broken. There was no natural recovery, so the Mercantilists made up
some extraordinarily silly math to justify their notion that this
situation had to be resolved by government “stimulus,” in the form
of an orgy of Federal spending (“fiscal stimulus”) and cheap-money
tactics (“monetary stimulus”).
The Classical economists were embarrassed, and, far worse, were
thrown out of positions of influence (and remuneration). They could
have reacted to their failure by expanding their understanding of
economic cause and effect. For example, the Smoot-Hawley Tariff —
and the explosion of similar tariffs by governments worldwide in
retaliation — might have had something to do with the collapse of
world trade immediately afterwards.
Seems kinda obvious to me. It seemed obvious to others at the time
too, which is why more than 1000 economists in the U.S. publicly
voiced their opposition to it. But, afterwards, they sort of forgot
about it.
As economies rather predictably turned down, governments then
reacted with an explosion of domestic tax hikes, notably in Britain,
Germany and the United States. President Hoover famously raised the
top income tax rate from 25% to 63% in 1932, but this was actually
just one part of a wide-ranging assault that included an explosion
of excise taxes (Federal sales taxes), corporate taxes, and
state-level tax increases.
That might be bad for an economy. Just look at what has been
happening with “austerity” (tax hikes and
promised-but-not-actually-delivered-on spending cuts) in Europe, and
dozens of other countries worldwide that have fallen under the IMF’s
poisonous influence over the years. It was just like that, but
several multiples worse.
The Classical economists never really appreciated these rather
blatant economy-negative factors. Nope. In fact, the Classical
economists of the time were actually responsible for many of them,
especially the “austerity” strategy including giant tax hikes. In
the U.S., it was done by Republican Herbert Hoover.
Perhaps that is why, after World War II, historical interpretations
of the Great Depression by Classically-leaning authors tend to
mention these potentially rather important factors only in passing.
Thus lacking a suitable villain, they tend to grasp rather heavily
at monetary factors, most of which are more-or-less invented to play
the role.
This has taken a number of forms over the years. Some people argue
that the value of gold made some kind of explosive jump higher in
value — thus, requiring gold-linked currencies to follow gold’s
value higher, with deflationary implications. But why 1930, and no
other time in centuries of history? At this point a lot of
hand-waving ensues, because there is no real reason.
Some people argue that the gold standard systems of the late 1920s
had some kind of inherent flaw that caused them to go haywire in
some way. But what could that flaw be? A gold standard system is a
value link. If there is a flaw in the operation of the system, then
it is typically expressed as a failure for the currency to maintain
this promised value parity with gold bullion, or, at the very least,
the imposition of heavy capital controls and intervention to
maintain it. This is exactly what happened in the late 1960s. It
didn’t happen in the 1920s and early 1930s.
Still others argue that there was some kind of horribly destructive
credit boom, caused by monetary policy. And yet, the whole point of
a gold standard system is that there isn’t a monetary policy, of the
Keynesian sort that could, conceivably, induce such a credit boom.
(Credit booms have certainly happened during gold standard eras, but
they weren’t caused by Mercantilist currency-jiggering. These were
plain old-fashioned capitalist excess.)
And some people just Blame France. Exactly how France managed to
(accidentally) cause this global economic demolition is not well
explained. More hand-waving ensues, unsupported by historical
evidence.
I’ve looked into all of these hypotheses, over the course of fifteen
years, and haven’t found anything meaningful behind them. But
consider that John Maynard Keynes — who was no dummy about these
things — also found nothing inherently wrong with the gold standard
systems of that time. He just thought that the difficult problems of
the day justified a funny-money approach.
Part of the problem is that the majority of gold standard advocates,
over the past hundred years or so, haven’t had much understanding of
how gold standard systems actually work. If they did, they would
have known that these claims don’t make much sense. It’s like saying
that an automobile caught on fire because it was a hot day. It might
make sense to someone who doesn’t know anything about automobiles. A
mechanic would say: noooooot very likely.
That’s one reason I had to go into it, in great detail, in my new
book Gold: the Monetary Polaris (now available for
free in eBook form). This basic understanding is necessary to
make sense of historical events.
Maybe the Keynesian historians got it right this time. There was
nothing particularly wrong with the gold standard systems of the
1925-1931 period, except, in their view, that it prevented the
application of “monetary policy” when they felt it was needed.
But maybe it would have been better not to destroy world trade with
a tariff war, and then follow up with insane “austerity” tax hikes.
Maybe, if that damage had already been done, a good approach would
have been to simply reverse the policies, and return to the policy
conditions of 1928, in many countries worldwide.
Maybe, if that had been done, people wouldn’t have felt the need to
try to solve a tax policy disaster with a money-jiggering solution.
Maybe other people wouldn’t have tried to blame a tax policy
disaster on some sort of nonexistent monetary cause. And, maybe we
would still have a world gold standard system today.
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