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All through this year, we've been exploring various things that have
been said about the Interwar Period, which I call 1914-1944 although
you could extend it perhaps to 1950. The Bretton Woods Agreement dates
from 1944, but there was still a lot of turmoil afterwards, including
hyperinflation in Germany, Japan and China (plus the victory of the
communists in China) before all three countries established a new gold
standard basis in 1949-1950. Even the Bretton Woods signatories had a
lot of turmoil, including a wave of devaluations worldwide led by
Britain in 1949, and also a bit of a floating dollar in the U.S. before
the Fed Accord of 1951.
But, this is really about the 1914-1939 era, in particular the Great
Depression. The trauma associated with that experience is still around
with us today, and tends to take the form of an intense attachment to
floating fiat currencies, by both the left-leaning Keynesians and the
right-leaning Monetarists. This attachment tends to have a (somewhat
irrational) basis in two related ideas: first, that a floating
currency, or the tool of monetary distortion, is a necessary element of
government. The second is that the gold standard systems of the time
somehow didn't work properly, although this is never very well
explained.
Both of these ideas are related to the "Tyranny of Prices, Interest and
Money," which economists fell into beginning in the 1870s and haven't
really escaped even to the present day. Once economics has been reduced
to these three elements, you just naturally end up with the conclusions
that people came to in the 1930s and afterwards.
July
10, 2016: The Tyranny of Prices, Interest, and Money
The way out of the box
is to see that economies don't just self-destruct due to an "autonomous
decline in aggregate demand," a term that has no meaning except:
"there's a recession." ("Autonomous" means "for no reason".) An
enormous number of easily-identified nonmonetary disasters -- in other
words, not related to Prices, Interest and Money -- were taking
place, beginning with a worldwide tariff war set off by the threat (and
later passage) of the Smoot-Hawley Tariff in the U.S., and followed by
major domestic tax hikes by many governments, among many things. These
are obvious enough that we certainly don't need to rely on any
"it-came-from-a-blue-sky" fantasies that Keynesians entertained for
decades. Second, there wasn't any problem with the money. There was a
problem with virtually everything else, from tariff and tax policy, to
systemic issues including bank solvency and sovereign default, to
regulatory attacks on business, to political instability on a broader
scale. And, of course, all kinds of monetary chaos after the British
devaluation of September 1931. But, the gold standard system itself, in
1925-1931 and among its adherents after 1931, was basically fine -- a
conclusion which was conventional wisdom until the 1960s.
Following the September 1931 British devaluation, another twenty-two
countries also devalued by the end of 1931 (including British
commonwealth countries), leaving only twenty-two countries (out of
fifty-four) remaining on a gold standard. By this point, anyone
continuing with a gold standard without devaluation was subject to a
variety of pressures. This included, of course, direct trade
consequences: a flood of cheap imports undermining domestic industries,
and a collapse of foreign export markets. But, it also included other
things, such as: any financial institution with assets that had been
devalued (like foreign bonds), but liabilities that had not (like
domestic deposits), were now insolvent. Issues such as these, once a
large number of countries devalue, tend to cause other countries to
devalue alongside to normalize exchange rates. This was true after
1931, and also after 1971. Nobody wanted the U.S. to devalue and float
the dollar in 1971 -- they wanted to keep the gold-based Bretton Woods
system. However, the result was that all other countries floated and
devalued too.
A proper understanding of the Interwar Period helps release the trauma
associated with the time, and also the irrational death-grip on
floating currencies as some kind of solution to the problem that they
didn't understand. Most currencies were devalued and floated by the end
of 1931, and yet the Great Depression ground on for years afterwards.
Once you see that the Great Depression had identifiable causes, you can
then go about fixing those problems directly, or avoiding them in the
first place, rather than grasping for funny-money as a solution for
world-economy-destroying disasters that seem to arise out of thin air.
Also, once you see that the Great Depression had identifiable causes,
you don't have to go blaming some kind of nonexistent monetary cause,
which has led both the Monetarists and Austrians to invent a lot of
nonsense theory, because you simply can't get there otherwise.
If the gold standard of the time was fine, then it could be fine to use
it again. Also, you have to clear out all the nonsense theory,
necessary to invent a monetary cause that didn't exist, to allow for
the revival of a correct theoretical foundation that will allow a gold
standard system to re-emerge in the future.
Before this year, we looked at elements of the Interwar Period in a number of items, including:
August
17, 2014: Gold Holdings of Central Banks and Governments 2: The Larger
View, 1850-2000
August
10, 2014: Gold Holdings of Central Banks and Governments, 1913-1941
August
3, 2014: The Reichsbank, 1924-1941
July
27, 2014: The Bank of France, 1914-1941
July
20, 2014: The Bank of England, 1914-1941
July
18, 2014: Foreign Exchange Rates 1913-1941 #8: A Brief Summary
July
17, 2014: Devaluations of the 1930s Don't Justify Today's Funny Money
Excess
June
22, 2014: Foreign Exchange Rates 1913-1941 #7: Switzerland's
Independence; Turkey Avoids Devaluation
June
19, 2014: Explaining "Freaky Friday" -- How the Gold Guys Became Their
Own Worst Enemies
June
1, 2014: Foreign Exchange Rates 1913-1941 #6: Hyperinflation in Poland;
Russia's WWI Decline
May
25, 2014: Foreign Exchange Rates 1913-1941 #5: Devaluations By Japan
and France
April
27, 2014: Foreign Exchange Rates 1913-1941 #4: Britain Leads the World
Into Currency Chaos
April
20, 2014: Foreign Exchange Rates 1913-1941 #3: The Brief Rebuilding of
the World Gold Standard System
April
6, 2014: Foreign Exchange Rates 1913-1941 #2: The Currency Upheavals of
the Interwar Period
March 30, 2014: Foreign Exchange Rates 1913-1941: Just Looking At the
Data
March
20, 2014: The Gold Standard Guys Are Their Own Worst Enemies
January
26, 2014: The Federal Reserve in the 1930s #2: Interest Rates
January
23, 2014: Keynes and Rothbard Agreed: Today's Economics is Mercantilism
January
19, 2014: The Federal Reserve in the 1930s
January
5, 2014: The Bank of England, 1913-1927
February
24, 2013: Japan: the Yen 1914-1941
December
23, 2012: The Federal Reserve in the 1920s 4: The Historical Record
December
16, 2012: The Federal Reserve in the 1920s 3: Balance Sheet and Base
Money
November
25, 2012: The Federal Reserve in the 1920s 2: Interest Rates
November
18, 2012: The Federal Reserve in the 1920s
July
22, 2012: The Composition of U.S. Currency 1941-1970
July
15, 2012: The Composition of U.S. Currency 1880-1941
May
13, 2012: The "Gold Exchange Standard"
April
4, 2012: The Gold Standard and "Balanced Trade"
April
1, 2012: Did the Gold Standard Cause the Great Depression?
Here are the items from this year:
September
25, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 3:
Supply and Demand
September
18, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 2:
Never Happened Before
September
11, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s
September
4, 2016: What Is "Sterilization"? 2: The Complexity of Central Bank
Activity
August
28, 2016: What Is "Sterilization"?
August
11, 2016: The Gigantic Importance of "Supply Side Economics"
August
7, 2016: Blame France 3: Dump A Pile Of Argle-Bargle On Their Heads
July
31, 2016: Blame France 2: Balance Sheet Peeping
July
24, 2016: Blame France
July
18, 2016: The "Price-Specie Flow Mechanism" 2: Let's Kill It For Good
July
10, 2016: The Tyranny of Prices, Interest, and Money
June
26, 2016: Foreign Exchange Transactions and the "Gold Exchange
Standard"
June
12, 2016: Milton Friedman Blames the Federal Reserve
June
5, 2016: Irving Fisher and "Debt Deflation"
May
22, 2016: The Devaluation of the British Pound, September 21, 1931
May
14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2:
Paying Off Debt
April
3, 2016: Credit Expansion and Contraction in the 1920s and 1930s
March
19, 2016: The "Price-Specie Flow Mechanism"
February 14, 2016: The Balance of Payments
February
7, 2016: Blame Benjamin Strong 2: So Obvious It's Hard To
Believe
January 31, 2016: Blame Benjamin Strong
January 24, 2016: The Gold Mining Boom of the 1850s
January 17, 2016: David Hume, "On the Balance of Trade," 1752
I've identified five main proposals -- all from "libertarian free
market" thinkers -- that posit some kind of monetary problem during the
1920s and 1930s. They are:
The "Austrian" Narrative: The
"Austrian" claim that there was some kind of giant credit boom or
"malinvestment" engineered purposefully by the Federal Reserve in the
U.S. during the 1920s. The bust of this "malinvestment boom" supposedly
was the main factor behind the 1929-1933 breakdown.
The "Monetarist" Narrative: The
"Monetarist" claim that the Federal Reserve was making some kind of
mistake by "allowing" M2 (basically, bank deposits) to decline.
The "Gold Exchange Standard" Narrative: A claim popularized by Jacques Rueff that the "gold exchange standard" had something to do with the problems of the 1930s.
The "Blame France" Narrative: Something to do with France.
The "Giant Rise in the Value of Gold" Narrative:
The claim that there was some kind of giant rise in the value of gold,
which caused all gold-linked currencies to rise alongside, with
substantial consequences. The cause of this rise is typically
identified as central bank demand.
The first four items share something in common: they are basically
contrary to the monetary theory that I hold, and have described in
great detail (especially in Gold: the Once and Future Money and Gold: the Monetary Polaris) which includes certain postulates:
1) That
there is no monetary "inflation" (causing "malinvestment" or
"artificial boom" in the "Austrian" narrative) unless there is a
decline in currency value, for example a decline in currency value vs.
gold or other currencies. Similarly, there is no monetary "deflation"
(causing problems in the "Monetarist" and "Blame France" narratives)
without a rise in currency value, for example vs. gold or other
currencies.
We can see this is true in examples such as the Bank of England during
the 19th century, where there were many contractions of base money
supply, sometimes in excess of 15% in a year. However, this did not
cause any "monetary deflation" because the value of the currency didn't
change -- it remained at its gold parity. The reduction in supply was
simply the accomodation of a reduction in demand, via the automatic
currency-board-like mechanisms of a gold standard system. Similarly,
the 163-times increase in base money in the U.S. between 1775 and 1900
did not cause any "monetary inflation," because again the value of the
currency didn't change. It was an increase in supply to accomodate an
increase in demand, reflective of the economic growth during that time
period.
Or, to quote Ludwig von Mises on the topic:
In theoretical investigation there is
only one meaning that can rationally be attached to the expressin
iflation: an increase in the quantity of money ... that is not offset
by a corresponding increase in the need for money ... so that a fall in
the objective exchange value of money must occur. Again, deflation (or
restriction, or contraction) signifies a diminution of the quantity of
money ... which is not offset by a corresponding diminution of the
demand for money ... so that an increase in the objective exchange
value of money occurs.
This description leaves out some options where a fall in the value of a
currency can take place with no increase in base money supply; or even
with a decline in base money supply. Von Mises later said:
Changes in the money relation [balance
of supply and demand for money] are not only caused by governments
issuing additional paper money. ... Prices also rise the same way if,
without a corresponding reduction in the quantity of money available,
the demand for money falls because of a general tendency toward the
diminution of cash holdings.
2) That base money is basically
a residual of the gold parity link; in other words, the outcome of the
process which maintains the value of the currency at its gold parity
value, using techniques similar to a currency board. Thus, whatever it
is, is what it had to be to maintain the gold parity. In other words,
the supply that matches demand at the parity value.
The fifth item, the "Giant Rise in the Value of Gold" theory, is
consistent with the theory I hold. A rise in gold's value would create
"deflationary" monetary implications for currencies linked to gold in
value.
I will summarize some of our findings for each of these five claims:
The "Austrian" Narrative
The "Austrian" narrative, popularized by Murray Rothbard, fails
to answer the question of: how did this supposedly
world-economy-destroying disaster take place while currencies,
especially the U.S. dollar, were on a gold standard? This would seem to
be a rather big hurdle, especially for gold standard advocates like
Rothbard and the other Austrians. The answer, of course, is that it
couldn't -- the "Austrian" narrative is basically a criticism of
floating-fiat-currency Keynesian monetary fiddling. Although it is
certainly descriptive of our own times, and even the Bretton Woods era
when Keynesian fiddling was coming into constant conflict with gold
parity policies, this was not the case at all in the 1920s. But beyond
such things, we have the demonstrable fact that all of Benjamin
Strong's ambitions did not seem to lead to any change in base money at
all. It was all cancelled out by the natural workings of the gold
standard operations procedures of the time, particularly gold
conversion. And if there was no change to base money, and no change to
currency value, exactly how did these world-economy-destroying
disasters come about?
January 31, 2016: Blame Benjamin Strong
February
7, 2016: Blame Benjamin Strong 2: So Obvious It's Hard To
Believe
May
14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2:
Paying Off Debt
April
3, 2016: Credit Expansion and Contraction in the 1920s and 1930s
The "Monetarist" Narrative
The "Monetarist" narrative,
popularized by Milton Friedman, basically hints that there was a
"monetary deflation" caused by Federal Reserve negligence. To support
this assertion, the Monetarists ignore base money -- the only kind of
money created by the Federal Reserve -- and instead look at "M2", which
is basically bank deposits. Bank deposits are banks' primary
liabilities. Their assets are loans. Both contracted. So, the decline
in bank deposits was basically a credit contraction, not a "monetary
contraction." It is really not much different than Irving Fischer's
"debt-deflation" observations, but looked at from the perspective of
bank liabilities rather than bank assets. The difference is that
Fischer recognized this phenomenon -- which was real and problematic --
as a credit phenomenon, which didn't have anything to do with the
money, which was soundly linked to gold.
Just like the Austrians, the Monetarists also had to torture their
basic monetary theory to invent a disaster where none existed. There
was no rise in the value of the dollar vs. gold, and thus no "monetary
deflation." U.S. base money actually expanded modestly in the early
1930s. As if to prove Friedman wrong, the Federal Reserve, under
political pressure, actually undertook a major expansion in open-market
purchases of government bonds in 1932. This was completely cancelled
out by gold conversion and reductions in other forms of credit, thus
showing definitively that the Federal Reserve was in no way
undersupplying base money. Increases in base money, via open-market
operations, simply caused a sagging dollar value vs. the gold parity,
and consequent gold conversion outflows.
The real purpose of Friedman's mishmash was to lay blame on Irving
Fischer's "debt-deflation" on the Federal Reserve. It was basically a
means of claiming that the Federal Reserve should have somehow
prevented the credit contraction by increasing base money. Such an
increase in base money would have caused a substantial devalution and
floating of the dollar. So, Friedman's arguments amount to a series of
justifications for devaluation and floating fiat currencies, the same
recommendation made by Keynesians such as Barry Eichengreen.
It is a little like Greece today, which has also had a decline in M2 by
about 40% since 2010, along with a decline in nominal GDP by 25%. Many
economists have argued that Greece should devalue and embrace a
floating fiat currency, as a means to somehow address this economic
collapse. (These devaluers, for the most part, don't have any other
ideas; they are one-tool economists.) In these arguments, they are no
different than the Barry Eichengreens who suggest the same things would
have been good for central banks of the 1930s. Today, it is fairly easy
to see that the euro itself is not the cause of Greece's problems.
Other countries using the same currency have been reasonably healthy.
Much the same thing was going on in the 1930s. The gold standard was
not causing the disaster. Today, we could imagine that Friedman could
point to the 40% decline in Greece's M2 and claim "deflation." It would
serve as a justification for devaluation and floating fiat currencies.
There really isn't too much more to the "Monetarist" narrative than that.
June
12, 2016: Milton Friedman Blames the Federal Reserve
June
5, 2016: Irving Fisher and "Debt Deflation"
May
14, 2016: Credit Expansion And Contraction Of The 1920s and 1930s #2:
Paying Off Debt
April
3, 2016: Credit Expansion and Contraction in the 1920s and 1930s
The "Gold Exchange Standard" Narrative
This is the idea that there was some kind of dramatic flaw in the
supposed "gold-exchange standard" arrangements of the 1920s and 1930s
that led to some kind of disaster. What this flaw was, and what the
disaster was that it caused, tend to be rather hazy. Variations on a
"gold-exchange standard" were actually quite common before 1914 too --
indeed, nearly every central bank besides the United States and France
held substantial foreign reserves, which they acquired through the
process of managing their currency values with transactions with other
currencies, rather than with gold directly or via domestic credit
assets. The general pattern of the pre-1914 period was also one of
"gold-exchange standards" among peripheral countries. During the 1920s
there were a lot more monopoly central banks, due to the spread of
central banks in Latin America during that decade, and also the
emergence of several new countries (especially in Eastern Europe) after
the war.
A "gold exchange standard" is much the same as a currency board. We
have currency boards today, linked to the euro or dollar, and they work
quite well without issues. So, what was the problem then? This is never
explained -- because, basically, it can't be explained. The countries
that had "gold exchange standards" didn't really have any problem
keeping their currency values linked to their reserve/target currencies
and thus to gold. Those that did (in Latin America, arguably) were
simply sloppy, or had other agendas.
The arguments about the supposedly disastrous "gold exchange
standards", though confused, tend to have two components. One is the
idea that these systems were somehow "inflationary," due to some kind
of "mismatch" in the "balance of payments." This is related to the idea
of a "price-specie flow mechanism," which of course did not exist. This
notion of "inflation" seems to be related to the decline of currencies
during WWI and their return to gold standard systems at devalued rates,
notably by France in 1926 although several other countries also
experienced permanent declines in currency value. This decline in
currency value would have caused an upward adjustment of nominal prices
in France during the 1920s. Also, France had a booming economy, fueled
by some big reductions in tax rates. The combination of a booming
economy, and nominal price adjustments related to the wartime
devaluation, could lead people to search for mistaken causes. Once
countries returned to a gold standard, in the mid-1920s, there was no
further decline in currency value and thus no new "monetary inflation"
-- the rising prices were the result of the previous devaluation.
Devaluations were rare before 1914, so people didn't understand them
very well.
July
18, 2016: The "Price-Specie Flow Mechanism" 2: Let's Kill It For Good
March
19, 2016: The "Price-Specie Flow Mechanism"
February 14, 2016: The Balance of Payments
France and the U.S. were the only major countries that did not have
foreign reserve assets before 1914. France, in particular, focused on
large reserve holdings of bullion. The return to a gold standard in
1926 was accomplished by linking the French franc to the British pound,
a "gold exchange standard." In 1928, direct gold convertibility was
restored in France, and the process began by which the Bank of France
returned to its prewar policy of holding no foreign reserves. Thus,
there was a longstanding tradition in France of rejecting any foreign
reserve holdings, and also holding large amounts of bullion.
June
26, 2016: Foreign Exchange Transactions and the "Gold Exchange
Standard"
The second component to the "blame the gold exchange standard"
arguments is that the "gold exchange standard" -- including the
practice of other central banks holding substantial reserve assets of
British government bonds or other pound-denominated credit instruments
-- forced Britain off the gold standard in 1931, and also led to the
chain of follow-on devaluations that happened before the end of that
year. British government bonds are not a liability of the Bank of
England. Yes, they could be sold for British pound base money, and this
base money converted to gold on demand by the BoE. You could say much
the same thing for any pound-denominated debt instrument, including
regular bank deposits. However, in this, central banks were no
different than any other holder of pound-denominated debt instruments.
If the British government bonds were not owned by central banks, they
would be owned by someone else, and the outcome would be the same. The
reason the British pound left gold in September 1931 was that the Bank
of England refused to support the pound's value with a contraction of
the monetary base. This was supposed to happen automatically as a
consequence of gold conversion outflows -- and it appears that there
were at least 100 million pounds of gold conversion leading up to the
devaluation (including at least 50 million of bullion borrowed from the
Federal Reserve and Bank of France), which would have resulted in a
reduction of the Bank of England's monetary base by about 20%. That's a
lot. No such reduction happened, however.
May
22, 2016: The Devaluation of the British Pound, September 21, 1931
In other words, the gold outflow was "sterilized."
August
28, 2016: What Is "Sterilization"?
September
4, 2016: What Is "Sterilization"? 2: The Complexity of Central Bank
Activity
Although I don't have the numbers here at hand -- I'd like to look them
up later -- I believe that the Bank of France actually held about
two-thirds of all British pound foreign reserves held by all central
banks in 1931. During the crisis, the Bank of France was not selling
its reserves and converting them into bullion at the Bank of England
(less debt/more gold). Rather, it was doing the exact opposite --
lending bullion to the BoE! (More debt/less gold) I don't think other
central banks were converting very much either. Maybe nothing. They did so mostly
following the devaluation, much as the Bank of France did.
The fact that many currencies were linked to the British pound via the
"gold exchange standard" did indeed contribute to the wave of follow-on
devaluations later in 1931. For one thing, the decline in value of the
pound-denominated bonds on the assets side of their balance sheets
would have rendered them technically with negative book value, if their
liabilities (base money) remained linked to gold. But, the connections were
broader and more general than that. Several countries that devalued in 1931 were British commonwealth countries. The
fact that Egypt and India, both parts of the British Empire, devalued
along with Britain should surprise no-one, no matter what the
specifics of their central bank operations happened to be. Japan also
devalued, in December 1931, due mostly to trade competitiveness issues.
The "Blame France" Narrative
After it restored gold convertibility in 1928, the Bank of France began
to swap some of its large holdings of foreign exchange reserves for
gold bullion -- thus returning to its pre-1914 norm. This continued
after the devaluation of the pound in 1931, which certainly emphasized
again the risks of holding the debt of governments that devalue. Also,
the Bank of France experienced large bullion inflows in 1928-1931,
basically as a result of increasing demand for francs. The combination
of both factors resulted in a large accumulation of bullion at the Bank
of France.
So what? The value of the franc didn't change. It remained linked to
gold. If the value of gold didn't change (arguably), then there were no
consequences for other central banks either, whose currencies also
remained linked to gold, and whose base money supplies reflected that
link, no matter what the Bank of France did or didn't do.
This large increase in bullion holdings at the Bank of France has
proved irresistable to the legions of economists still looking for some
kind of monetary disaster that took place. Their arguments here tend to
be particularly fuzzy, which is no surprise since you can't really make
a rational argument of it. Who cares if some gold was in the vault of
the Bank of France, instead of someone else's vault. What it boils down
to is: without either some kind of rise or decline in the value of
other currencies (vs. gold), you really can't get any kind of Great
Depression-causing monetary catastrophes.
As part of the hodgepodge of notions that tend to be piled up by the
France-Blamers, there is the idea that the accumulation of gold bullion
by France could have resulted in a rising value of gold. More demand.
But, this notion doesn't survive even the briefest scrutiny. We'll
batch it into the "Giant Rise of the Value of Gold" theories below.
July
24, 2016: Blame France
July
31, 2016: Blame France 2: Balance Sheet Peeping
August
7, 2016: Blame France 3: Dump A Pile Of Argle-Bargle On Their Heads
The "Giant Rise in the Value of Gold" Narrative
This theory is commonly ascribed to Gustav Cassell, who really
developed it in reaction to the commodity price declines of the 1880s
and 1890s. The basic idea was that central bank demand for gold
reserves was driving up the value of gold, creating "monetary
deflation" for all currencies linked to gold. Central banks indeed
accumulated gold bullion continuously from 1850 to about 1960. None of
this caused any appreciable rise in the value of gold. In 1928 -- after
nearly eighty years of central bank bullion accumulation -- commodity
prices were actually rather high vs. gold, compared to their long-term
history, and economies were generally healthy. (A rising value of gold
would imply low nominal commodity prices and a moribund economy.) In
1950, after a century of this gold accumulation, and when central bank
bullion reserves, as a percentage of aboveground gold, hit their
all-time high, commodity prices were again high vs. gold.
There was no change in central bank behaviour in the 1929-1933 period
that would cause any different outcome than what had been the case for
the 110 years 1850-1960 -- which is to say, no meaningful effect.
September
11, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s
September
18, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 2:
Never Happened Before
September
25, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 3:
Supply and Demand
Conclusions
I said once that "the gold standard guys are their own worst enemies."
The Keynesians were basically giving them a free pass -- saying that
there was no particular problem with the gold standard of the 1920s,
except that it prevented them from applying their funny-money
devaluation solutions. The idea that the gold standard didn't work --
that it actually allowed, or even caused, one of the biggest monetary
disasters ever -- has been invented, more or less from nothing, by the
gold standard advocates themselves.
March
20, 2014: The Gold Standard Guys Are Their Own Worst Enemies
I tossed out some ideas to explain this "Freaky Friday" role-switching.
June
19, 2014: Explaining "Freaky Friday" -- How the Gold Guys Became Their
Own Worst Enemies
A lot of it had to do with the incredible blindness that characterized
economists at the time -- across the board, whether "Keynesian" or
"Classical." They really didn't have any framework to understand any
kind of nonmonetary disaster at all, so it naturally followed that if
you had a disaster, it was a monetary disaster.
July
10, 2016: The Tyranny of Prices, Interest, and Money
In their efforts to invent a monetary cause where one did not exist,
the Classical economists engaged in all sorts of contortions, which
basically rendered them incapable of making sense not only of
nonmonetary cause and effect, but monetary cause and effect as well.
This is dangerously close to being "good for nothing." For the
Monetarist branch, this meant abandoning all Stable Money principles
and embracing Funny Money along with the Keynesians, although with a
little different framework that emphasized quantity measures of credit
instead of interest rates. For the Austrians, they continued to be
"gold standard advocates," but their proposals contorted into bizarre
new forms. If your conclusion was that the gold standard systems of the
1920s somehow caused or allowed a gigantic money/credit catastrophe
caused by the Federal Reserve, then you would naturally be drawn toward
systems that did not resemble those of the 1920s at all. The Austrians
(notably Rothbard) tended to become hard-money extremists, focused on
gold coinage, "100% reserve" systems, and the elimination of
"fractional reserve banking," willfully ignoring that gold standard
systems had existed in the U.S. and Britain with banknotes, reserves of
20% or less, and "fractional reserve banking," throughout the entirety
of the 19th century without incident. In the 1960s, they actually
became devaluationists: Rothbard notes that a clique around Ludwig von
Mises actually advocated a devaluation of the U.S. dollar to $70/oz.
from $35/oz. Jacques Rueff shared similar views. When even the gold
standard guys are recommending a devaluation, it should be no surprise
that a devaluation/floating of the dollar indeed took place in 1971.
September
1, 2016: Are the Gold Guys Ready For Prime Time?
These problems extend elsewhere: people who are not able to make sense
of the 1920s and 1930s -- and I think I have shown that the mistakes of
the Monetarists, Austrians and others are not really very subtle, but
rather amount to willful ignorance of the most basic principles, and
the crudest and most obvious economic facts of the time -- are really
not going to be capable of making sense of anything today and in the
future either. Certainly they will not be able to either establish nor
manage a new gold standard system. They probably wouldn't even be given
the chance, as people will sense that giving them the car keys would
most likely result in a crash.
Part of the path forward will have to be the recognition that
nonmonetary elements can be important. This should not be a big leap.
Seriously -- the entirety of everything outside of the central bank
office is irrelevant? Maybe it is relevant. Maybe it is often the most
important thing. This is basically the "supply side revolution" that
began in the 1970s, but which is still not very well appreciated among
the Keynesian academics, or the "Austrians" or other Classical-themed
groups.
August
11, 2016: The Gigantic Importance of "Supply Side Economics"
Once we are able to embrace the idea that things other than money can
cause big problems, then we will no longer be left with a choice
between "finding" (inventing) some kind of monetary explanation, or
accepting the distasteful idea that economies can just blow up
"autonomously;" that is, for no reason at all. I think that once people
no longer feel the need to blame some kind of monetary cause -- once
that agenda is off the table, and they actually look at what was really
going on, to their own satisfaction -- it will become fairly obvious to
them, as it is to me, that there was no world-economy-destroying
monetary problem in the late 1920s or early 1930s, at least before the
British devaluation of 1931 made a mess of things.
I think that, in the near future, I will try to devote a little more
time to the idea that the Keynesians basically did not find any
monetary problem of the time; that this was conventional wisdom until
the 1960s; and remained the preferred stance of many to the present
day. Here is a little taster:
“For at least a quarter-century after the Depression’s nadir, the
prevailing interpretation concluded that monetary factors, specifically
the actions of the Federal Reserve, were quite simply unable to stem
the decline,” concluded Frank Steindl, in Monetary Interpretations of the Great Depression (1995)
. Anna Schwartz, Friedman’s collaborator, explained: “In the ’30s,
‘40s, and ‘50s, the prevailing explanation of 1929-1933 was essentially
modeled on Keynesian income-expenditure lines. A collapse in investment
as a result of earlier overinvestment, the stock market crash, and the
subsequent revision of expectations induced through the multiplier
process a steep decline in output and employment. ... Try as the
Federal Reserve System might, its easy money policies ... did not
stabilize the economy.” Montagu Norman, head of the Bank of
England, when asked by the Macmillan Committee in 1931 what the Bank of
England could have done to address the soaring unemployment, Norman
answered: “We have done nothing. There is nothing we could do.”
In the future I will also address a few more variants on the "blame money" theme, again from supposed gold standard advocates.
Perhaps there are only a dozen or so people who have followed this
discussion this far, in all of its details. Who actually click on the
links. But, they may be the most important dozen people.
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