|
| quote: | Originally posted by DOOMBOT
Link/Source please. |
| quote: |
economic historians began to broaden their focus, shifting from a heavy emphasis on events in the United States during the 1930s to an increased attention to developments around the world. Moreover, rather than studying countries individually, this new scholarship took a comparative approach, asking specifically why some countries fared better than others in the 1930s. As I will explain, this research uncovered an important role for international monetary forces, as well as domestic monetary policies, in explaining the Depression. Specifically, the new research found that a complete understanding of the Depression requires attention to the operation of the international gold standard, the international monetary system of the time.
...
First, the existence of the gold standard helps to explain why the world economic decline was both deep and broadly international. Under the gold standard, the need to maintain a fixed exchange rate among currencies forces countries to adopt similar monetary policies. In particular, a central bank with limited gold reserves has no option but to raise its own interest rates when interest rates are being raised abroad; if it did not do so, it would quickly lose gold reserves as financial investors transferred their funds to countries where returns were higher. Hence, when the Federal Reserve raised interest rates in 1928 to fight stock market speculation, it inadvertently forced tightening of monetary policy in many other countries as well. This tightening abroad weakened the global economy, with effects that fed back to the U.S. economy and financial system.
Other countries' policies also contributed to a global monetary tightening during 1928 and 1929. For example, after France returned to the gold standard in 1928, it built up its gold reserves significantly, at the expense of other countries. The outflows of gold to France forced other countries to reduce their money supplies and to raise interest rates. Speculative attacks on currencies also became frequent as the Depression worsened, leading central banks to raise interest rates, much like the Federal Reserve did in 1931. Leadership from the Federal Reserve might possibly have produced better international cooperation and a more appropriate set of monetary policies. However, in the absence of that leadership, the worldwide monetary contraction proceeded apace. The result was a global economic decline that reinforced the effects of tight monetary policies in individual countries.
The transmission of monetary tightening through the gold standard also addresses the question of whether changes in the money supply helped cause the Depression or were simply a passive response to the declines in income and prices. Countries on the gold standard were often forced to contract their money supplies because of policy developments in other countries, not because of domestic events. The fact that these contractions in money supplies were invariably followed by declines in output and prices suggests that money was more a cause than an effect of the economic collapse in those countries.
Perhaps the most fascinating discovery arising from researchers' broader international focus is that the extent to which a country adhered to the gold standard and the severity of its depression were closely linked. In particular, the longer that a country remained committed to gold, the deeper its depression and the later its recovery (Choudhri and Kochin, 1980; Eichengreen and Sachs, 1985).
The willingness or ability of countries to remain on the gold standard despite the adverse developments of the 1930s varied quite a bit. A few countries did not join the gold standard system at all; these included Spain (which was embroiled in domestic political upheaval, eventually leading to civil war) and China (which used a silver monetary standard rather than a gold standard). A number of countries adopted the gold standard in the 1920s but left or were forced off gold relatively early, typically in 1931. Countries in this category included Great Britain, Japan, and several Scandinavian countries. Some countries, such as Italy and the United States, remained on the gold standard into 1932 or 1933. And a few diehards, notably the so-called gold bloc, led by France and including Poland, Belgium, and Switzerland, remained on gold into 1935 or 1936.
If declines in the money supply induced by adherence to the gold standard were a principal reason for economic depression, then countries leaving gold earlier should have been able to avoid the worst of the Depression and begin an earlier process of recovery. The evidence strongly supports this implication. For example, Great Britain and Scandinavia, which left the gold standard in 1931, recovered much earlier than France and Belgium, which stubbornly remained on gold. As Friedman and Schwartz noted in their book, countries such as China--which used a silver standard rather than a gold standard--avoided the Depression almost entirely. The finding that the time at which a country left the gold standard is the key determinant of the severity of its depression and the timing of its recovery has been shown to hold for literally dozens of countries, including developing countries. This intriguing result not only provides additional evidence for the importance of monetary factors in the Depression, it also explains why the timing of recovery from the Depression differed across countries.
The finding that leaving the gold standard was the key to recovery from the Great Depression was certainly confirmed by the U.S. experience. One of the first actions of President Roosevelt was to eliminate the constraint on U.S. monetary policy created by the gold standard, first by allowing the dollar to float and then by resetting its value at a significantly lower level. The new President also addressed another major source of monetary contraction, the ongoing banking crisis. Within days of his inauguration, Roosevelt declared a "bank holiday," shutting down all the banks in the country. Banks were allowed to reopen only when certified to be in sound financial condition. Roosevelt pursued other measures to stabilize the banking system as well, such as the creation of a deposit insurance program. With the gold standard constraint removed and the banking system stabilized, the money supply and the price level began to rise. Between Roosevelt's coming to power in 1933 and the recession of 1937-38, the economy grew strongly.
I have only scratched the surface of the fascinating literature on the causes of the Great Depression, but it is time that I conclude. Economists have made a great deal of progress in understanding the Great Depression. Milton Friedman and Anna Schwartz deserve enormous credit for bringing the role of monetary factors to the fore in their Monetary History. However, expanding the research focus to include the experiences of a wide range of countries has both provided additional support for the role of monetary factors (including the international gold standard) and enriched our understanding of the causes of the Depression. |
Remarks by Governor Ben S. Bernanke
At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia
March 2, 2004
Money, Gold, and the Great Depression
http://www.federalreserve.gov/board...022/default.htm
| quote: |
Thanks in large part to the hype surrounding Ron Paul's candidacy within the Republican Party, the notion of a US return to the Gold Standard has enjoyed renewed popularity as of late. Mr Paul supports the dissolution of the United States Federal Reserve and a return to the Gold Standard. Others in his ideological camp would take the matter yet further, and some have gone so far as to suggest that the United States do away with paper currency altogether and return to the practice of using coins minted from actual precious metals as currency.
Like many of the solutions seized upon by hobbiest libertarians, these monetary policies are concise, simplistic, and - unfortunately - completely wrong. A return to the Gold Standard is not only profoundly inadvisable for the United States, but also impractical, unnecessary, and unrepresentative of the problems and solutions put forth by the dicitfuls of Dr. Paul. In an effort to inject some sanity into the debate, this article will address the first of three myths and misunderstandings upon which the Gold Standard movement is based.
Myth: Gold Ensures A Stable Currency
Take a dollar bill out of your wallet or purse and look just to the right of George Washington's head. Printed in small black letters should be the phrase "This note is legal tender for all debts public and private." These words, and the guarantee of the United States Government, are the only things that give the US Dollar weight as a currency, either domestically or on the international currency markets.
Some 30 years ago, in 1972, this was not the case. Under a system called Bretton Woods, the US Dollar was, for some time, pegged at $35/ounce of gold, meaning that one dollar was worth, by decree of the United States Federal Government, 1/35 of an ounce of gold. The Bretton Woods system was brought to an end in 1972 as the unequal market pressures forced a rapid movement of dollars (and thus liabilities for the sale of gold at $35/ounce) out of the United States. Since that time the United States has operated on a fiat currency, meaning that the dollar is no longer pegged to the price of gold nor guaranteed by it. Rather, dollars have value because the government of the United States says that they have value.
Such a notion is troubling to many as the notion of a government controlling anything, much less money, through an exercise in self restraint seems a joke at best and a recipe for financial disaster at worst. Critics of the fiat system question what motive such a government has that would compel it not to simply print money as it sees fit, thus inadvertently destroying overnight the value of its own currency. Gold or silver, by comparison, can not be simply produced, and thus acts as a natural check upon this assumed tendency to expand the money supply without consideration for the hyper-inflationary pressures such a move would have.
The problem with this argument is not one of its accuracy, but rather a matter of degree. A fiat system is more prone to governmental expansion of the money supply, but such expansion is neither unique to it nor a probable course of action for its economic governors. A gold based system is less prone to hyper-inflationary tendencies, but by no means immune from them and, as demonstrated under Bretton Woods, is less able to respond to rapid changes in the market. As such, the opposition between Gold Standard and Fiat is neither a binary one nor nearly so clear cut in its costs and benefits as laid out by critics of the existing system.
Gold's value comes primarily from its high demand and low supply. There are many uses and applications for gold in the modern world and a limited supply of it. Currencies pegged to or backed by gold will remain stable provided these two economic realities remain true. Such monetary systems are, however, at the mercy of the global gold market. History teaches that, should demand for gold drop significantly or if world-wide gold production suddenly increased, gold backed currencies would immediately and irrevocably collapse.
This is exactly the fate suffered by the Spanish (and by extension European) economy during the early era of New World Colonialism. As Spanish galleons hauled tons of silver and gold across the Atlantic, the European precious metals markets went into hyper-inflation. Dutch traders, then profoundly concerned for the long term stability of the European continent, bought and buried gold and silver en masse in a desperate attempt to keep the entire European continent from slipping into a depression, but their economic sacrifice was neither large nor timely enough to save Spain herself, which suffered the brunt of the economic consequences of her wealth. Even Spain's gold standard could not save her economy from the massive influx of gold and silver brought about by her exploitation of the Americas. Indeed, Spain still suffers some of the consequences of that economic collapse today.
The risk of a Spanish style collapse can be mitigated by allowing a government to re-adjust the rate at which gold is pegged to a currency. A US gold standard would, by Constitutional mandate, incorporate such a safeguard as Article I, Section 8 clearly states:[Congress shall have the power] To coin money, regulate the value thereof, and of foreign coin, and fix the standard of weights and measures.
(Emphasis added) This safeguard and power, however, nullifies the initial advantages listed for a gold-standard system: namely the difficulty of devaluation and political stability.
In short, the constraints and limitations placed upon monetary governance by a gold standard system serve as little more than speed bumps should government seek to actively set about the devaluation of currency. In actuality, a gold standard offers only ineffectual protection for the money supply against incompetence and malice while profoundly limiting the ability of well informed and well meaning governments to enact substantive and beneficial monetary policy.
Far from ensuring a stable currency, a gold standard is a primitive relic serving only to hamper modern monetary regulation.
http://www.nowpublic.com/debunking_..._myth_stability
---
The popular children's television network Nickelodeon derives its name from the early movie theaters that appeared across the United States near the turn of the 20th Century. For the price of a shiny nickel, patrons could take in news reels and catch the latest film entertainment on the silver screen. By the time the Baby Boomers were flocking to theaters the price of admission had gone up nearly five times and the Atomic Horror films of the early Cold War brought a quarter for every seat sold. Today, nation wide, movie tickets sell for about $6.55, 131 times what audiences payed to see Charlie Chaplin in Modern Times and 26 times the cost of admission for The Bells of St. Mary's in 1945. The notion that prices go up over time is fairly foundational to economic theory yet one of the most persistent critiques of a fiat based monetary system is the loss of purchasing power over time.
Since Uncle Tom's Cabin debuted in 1914, the American Dollar has lost the overwhelming majority of its purchasing power. Alongside 5 cent movie tickets, the America of 1914 saw milk at eight cents a quart and flour at 3 cents a pound. This represents an inflation rate approaching 2,000% for the intervening 93 year period --meaning that were one to find a dollar bill from 1914, its buying power today would be just 0.0005% of its real value when it was printed. By all accounts, this is a staggering drop in value and Gold Standard advocates point to it as a ready and obvious example of the dangers of a fiat currency.
But then again, who keeps 93 year old money around anyway?
The key assumption is all of this debate is that inflation is a bad thing. It is not. Inflationary pressures spur economic growth, encourage investment, and allow for the massive development, infrastructure, and expansion that the United States has enjoyed since 1914. Alongside inflation comes growth, and without this companion, the scales seem unbalanced indeed.
Inflation creates, in a word, risk. The sequestration of capital is a risk-free enterprise in a world with no inflation. Inflation deters hording and encourages the rapid deployment of that capital. As inflationary pressures increase, so also does the velocity of money which itself relates directly to the propensity of an economy to both consume and invest. The converse is also true, as inflationary pressures approach zero individuals are more likely to horde capital than they are to invest it. This results in deflationary pressures which themselves reinforce the impetus to horde.
Inflation and deflation are both natural aspects of market economics, and though inflation is exacerbated somewhat by the dominance of a fiat currency, it is not eliminated in its absence. The Federal Reserve, created in the early 20th century, serves and served to regulate and to some degree mitigate the fluctuations of international monetary markets. Though the Fed was created to help defend the US Dollar on the international stage, it proved unequal to the task after the collapse of the stock market in 1929.
In the aftermath of the 1929 collapse, a banking crisis struck the United States. With a run on the banks came a halt to lending. The money supply, tied firmly to the price of gold, dried up and massive deflation set in. Prices dropped and profits and wages drooped with them. As Jeffry Frieden explains in Global Capitalism, the Federal Reserve's hands were tied:
Governments searching for alternatives to deflationary paralysis and financial ruin ran into an apparently immovable international object, gold. Attempts to halt deflation and raise prices were blocked by government commitments to the gold values of their currencies. As two economic historians put it, the gold standard's "rhetoric was deflation and its mentality was one of inaction."
While gold standard economies experience constant oscillation between inflation and deflation, resulting in long term stability but short term immobility, fiat based systems experience deflation only under very unusual circumstances but retain extensive flexibility as a consequence. As a result fiat based systems, though subject to the hypothetical malice and incompetence of government, are better prepared to to maximize growth and innovation, spur investment, and generate wealth. Moreover, it is through the ebb and flow of this constant inflation that fiat currencies are regulated and through this constant inflationary pressure that their economies grow. As Berry Eichengreen, economist and historian, wrote in Golden Fetters:
The gold standard is the key to understanding the Depression. The gold standard of the 1920s set the stage of the Depression of the 1930s by heightening the fragility of the international financial system. The gold standard was the mechanism transmitting the destabilizing impulse from the United States to the rest of the world. The gold standard magnified that initial destabilizing shock. It was the principal obstacle to offsetting action. It was the binding constraint preventing policymakers from averting the failure of banks and containing the spread of financial panic. For all these reasons, the international gold standard was a central factor in the worldwide Depression. Recovery proved possible, for these same reasons, only after abandoning the gold standard. |
http://www.nowpublic.com/debunking_..._myth_inflation
___________________
|
