Home Page Forums Discuss Austrian Economics, Step by Step Depression, gold standard

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  • #7651
    jthomp76
    Participant

    What do we think of the theory that US insistence on defending the gold standard in 1931 caused a worldwide depression? The theory is that by refusing the revalue gold we caused deflation… and by raising interest rates we forced other countries to abandon the gold standard, causing a depression. Does this theory conflict with Austrian theory?

    #7658
    Jeff Herbener
    Participant

    Take a look at chapter 16 in Joe Salerno’s book, Money, Sound and Unsound:

    http://mises.org/books/sound_money_salerno.pdf

    #7661
    jthomp76
    Participant

    I read the chapter and while interesting Im not sure it answers my question. The theory I just learned (Perry Mehrling’s online class: https://class.coursera.org/money2-001/lecture/61) states that as more countries went on the gold standard after WWI, demand for gold increased dramatically. These pressures were deflationary and Rather than revaluing, the US kept the price parity causing prices to fall. Additionally their rate hikes in 1931 caused massive gold inflows causing other countries to go off the GS, thus collapsing the GS system. These two factors caused the Great Depression according to the theory. Do Austrians agree with this?

    #7662
    Jeff Herbener
    Participant

    As Salerno points out in chapter 16 of his book, the inter-war period monetary system was not a gold standard. The classic gold standard was destroyed by the belligerent countries in the First World War. Read Salerno’s chapter 23, “The Role of Gold in the Great Depression” for his analysis of the arguments that the “gold standard” caused the Great Depression. He cites Murray Rothbard’s books, America’s Great Depression and A History of Money and Banking in the United States for further analysis.

    http://library.mises.org/books/Joseph%20T%20Salerno/Money,%20Sound%20and%20Unsound.pdf

    To see how a true international gold standard would work, take a look at Salerno’s chapters 13 and 15.

    #7672
    jthomp76
    Participant

    Ill definitely read chapter 23 but I think the argument is that the US forced all the major currencies off the gold standard causing the depression. Mehrling says many countries went back on the gold standard after WWI. Is this wrong?

    #7675
    Jeff Herbener
    Participant

    Yes, this is wrong. The pre-World War I classic gold standard was destroyed. No country ever returned to it. The gold exchange standard of the interwar period was pegged exchange rate system in which each country pegged its exchange rate to the pound. the pound was no longer redeemable for gold coin, but only for bullion bars. Thus, it was effectively no longer redeemable for gold for the average person. Look at Part 4 in Rothbard’s book, A History of Money and Banking in the United States:

    http://library.mises.org/books/Murray%20N%20Rothbard/History%20of%20Money%20and%20Banking%20in%20the%20United%20States%20The%20Colonial%20Era%20to%20World%20War%20II.pdf

    It is true that after FDR devalued the dollar from $20.67 an ounce to $35 an ounce, that gold, which remained redeemable in the U.S. for foreigners, began to flow into the U.S. At the time, it was called the “golden avalanche.” But this steady, significant gold inflow began in 1934, too late to explain the downturn of the Great Depression which occurred from 1929-1933.

    http://www.fee.org/the_freeman/detail/money-and-gold-in-the-1920s-and-1930s-an-austrian-view/#axzz2pkQnDlyD

    #7678
    jthomp76
    Participant

    Mehrling says the fed raised rates in 1931 during a deflationary period causing gold inflows. Is this true?

    #7679
    jthomp76
    Participant

    Also, I don’t even understand the argument even if it were true. Why would and inflow of gold be bad for an economy?

    #7680
    jthomp76
    Participant

    Also, I don’t even understand the argument even if it were true. Why would an inflow of gold be bad for an economy?

    #7684
    Jeff Herbener
    Participant

    The U.S. gold stock was $4,356 million in January 1931. It rose to $4,708 million in August and then fell $4,173 million in December 1931.

    Here are the figures:

    January 1931 – $4,356 million
    January 1932 – $4,129 million
    January 1933 – $4,265 million
    January 1934 – $4,033 million

    The data is in Table No. 156, page 537:

    http://fraser.stlouisfed.org/docs/publications/bms/1914-1941/section14.pdf

    After the gold stock was revalued at $35 an ounce in February 1934, the figures are:

    February 1934 – $7,438 million
    January 1935 – $8,391 million
    January 1936 – $10,182 million
    January 1937 – $11,538 million
    January 1938 – $12,756 million
    January 1939 – $14,682 million
    January 1940 – $17,931 million

    The argument is that the outflow of gold was bad for the European countries because, under the rules of the classic gold standard (which as pointed out already didn’t exist after WWI), it would have forced them to deflate their money stocks leading to price deflation. Allegedly this deflationary effect was not counter-balanced by an inflation in the U.S. because the Treasury was sterilizing the gold inflow, i.e., offsetting the additional gold with a decline in other forms of money.

    But the gold sterilization program of the Treasury did not occur until 1937:

    http://www.dartmouth.edu/~dirwin/1937.pdf

    http://economics.yale.edu/sites/default/files/files/Workshops-Seminars/Economic-History/irwin-110926.pdf

    #7690
    jthomp76
    Participant

    So did the gold inflows have anything to do with our troubles?

    #7691
    Jeff Herbener
    Participant

    The gold inflows, which occurred after the beginning of 1934, fed monetary inflation and credit expansion which caused the boom of 1934-1937 which led to the bust in 1937-1938.

    Here is a chart of the DJIA from 1920-1940:

    http://stockcharts.com/freecharts/historical/djia19201940.html

    #7705
    Samgheb
    Participant

    How did foreigners get gold?

    Are we talking about central banks and governments or does this include commercial banks as well, what about corporations?

    I have always assumed that it was just central banks+governments when I read reference to foreigners getting gold but I wonder.

    #7707
    Jeff Herbener
    Participant

    Prior to the Fed, commercial banks still held some gold as reserve in the U.S. The Fed centralized the banking gold stock during WWI. But Americans could still own gold legally until 1933-34. The statistics, however, are for gold held by the government.

    The typical economic analysis uses government gold stocks or, when appropriate, the gold stock used as monetary reserves and not the total gold stocks owned by everyone in the country. Governments and banks obtain gold reserves through international trade.

    Take a look at the Figure 1 World Gold Reserves 1925-1932 in this paper by Doug Irwin:

    http://www.dartmouth.edu/~dirwin/Did%20France%20Cause%20the%20Great%20Depression.pdf

    This chart gives the lie to the claim that gold flowed into the U.S. and caused the Great Depression because the Fed and Treasury sterilized the inflow. The chart clearly shows that the U.S. gold stock remained roughly the same, $4 billion, from 1925-1932. Gold did, however, flow into France. Also, the world gold reserves steadily increased from around $9 billion in 1925 to nearly $12 billion in 1932.

    #7708
    Samgheb
    Participant

    Sorry I should have said that I meant in the Bretton Woods era. As the system was designed was there any way for non-government entities to get part of the American governments gold stock?

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