[pat]

How did the Fed produce loose money policies in the 1920s under the gold standard?

[jmherbener]

The classical gold standard was destroyed by the belligerent governments during the First World War. The gold exchange standard of the 1920s permitted more monetary inflation by centralizing gold reserves in Great Britain and the U.S. and allowing other countries to hold pounds and dollars as reserves against their own domestic currencies. Take a look at Murray Rothbard’s book, A History of Money and Banking in the U.S.

https://mises.org/library/history-money-and-banking-united-states-colonial-era-world-war-ii

[pat]

Ok Thanks Professor Herbener, I started reading the book tonight.

[rob.wells]

Hi Jeff,

To what extent can the U.S. be said to really be on a gold or silver standard in the 100 years up to WW1. Although gold and silver were used widely in exchange (either as coin or warehouse receipts) I understand that there was widespread fractional reserve banking and at times extensive use of fiat currency not redeemable in gold or silver.

Thanks in advance

[jmherbener]

You’re correct to note that the U.S. was never on a pure commodity standard. The various monetary regimes under the U.S. Constitution, the bimetallic standard, the classical gold standard, the gold exchange standard and so on were all influenced by government intervention, including legal privileges supporting fractional-reserve banking. This is the reason that booms and busts have occurred throughout U.S. history.

It is worth pointing out, however, that the inflationary potential of the different monetary regimes has been steadily increasing, which has been the intention of the federal government in bringing about the monetary regime transition.

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