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View Full Version : One view of the Long Depression, Or: Why a gold standard isn't the panacea some think it is



c1ue
07-07-10, 12:17 PM
http://www.economicpopulist.org/content/austerity-and-class-war



Paul Krugman's latest article (http://www.nytimes.com/2010/06/28/opinion/28krugman.html) was surprisingly frank and honest.

We are now, I fear, in the early stages of a third depression. It will probably look more like the Long Depression than the much more severe Great Depression. But the cost — to the world economy and, above all, to the millions of lives blighted by the absence of jobs — will nonetheless be immense.
Most people focused on the first sentence of this paragraph, and for good reason. "Depression" is not a word that mainstream economists use very often. However, I'm a little weird, because I focused on the second sentence.

“coal-black steed named Panic” quickly “thundered riderless down Wall Street,” where “a monstrous yell went up and seemed to literally shake the building in which all these mad brokers were for the moment confined.”
- Robert Sobel, September 1873

Very few people know about, or are interested, in the history behind the Long Depression (http://en.wikipedia.org/wiki/Long_Depression) of the 1870's. Those that do know something about the era tend to focus on the Panic of 1873 (http://en.wikipedia.org/wiki/Panic_of_1873), which caused the closure of Wall Street for 10 days. The Long Depression was 65 months of economic contraction (even longer than during the Great Depression) and led to a 14.5% unemployment rate (http://www.historykb.com/Uwe/Forum.aspx/what-if/18560/The-Panic-of-1873-in-1874).

One element leading to the Long Depression was the extreme amounts of debt created by the easy credit of the Greenbacks (http://en.wikipedia.org/wiki/Greenback_%28money%29). But the ultimate cause of the Long Depression was the Coinage Act of 1873, or as it was known in the western states, the Crime of 1873 (http://www.micheloud.com/FXM/MH/crime/crime.htm).

The Crime of 1873

From 1792 until 1873, except for during the Civil War, America had been under the bimetallic standard, meaning that both gold and silver was money. The dollar was defined as consisting of either 22.5 grains of gold or 270 grains of silver. The country grew and prospered under a monetary standard specified in the U.S. Constitution.

Then in 1859 the Comstock Lode was discovered. Within a few years an enormous amount of silver was pouring out of Nevada, increasing the money supply. This was great news for debtors, the working class, and new entrepreneurs. What it wasn't good news for was Eastern Banks, who mostly held gold.


In February 1873, silver was demonetized. Now only gold would be money. The immediate effect of the law was the bankrutpcy of many western silver miners. But the long term effects were far more destructive (http://www.micheloud.com/FXM/MH/Crime/macro.htm).

The result was that the dollar (and so the American monetary mass and ultimately output and employment) was linked to a metal that was getting scarcer and scarcer, because between 1879 and 1897 the rate of increase in gold output slowed, and the demand increased at the same time. The monetary mass could not keep pace with the strongly expanding economy, and price measured in gold declined strongly.
We see between 1875 and 1896 a deflation of about 1% a year in the general CPI....On the monetary side, this deflation made many bank loans turn sour, as the debtors struggled to honor their obligations with rising real value of their debts.
The deflation that hindered general prosperity for working Americans for 23 years didn't end until the Witwatersrand Gold Rush in South Africa and the 1898-99 Klondike Gold Rush when the monetary supply began expanding again. On the other hand, those same 23 years saw the upper class in America expand both power and riches until they dominated every sector of society.
The lesson to be learned here is that deflation is a good thing if you already have lots of money. It's a bad thing if you work for a living.

Which brings us to present-day Toronto.

This is the point which many gold-standard bearers refuse to acknowledge either deliberately or demogogically:

A gold standard in periods of growth hinders growth via money supply restriction even as it beneficially hinders credit growth when said growth period stagnates.

A cry for a gold standard today is primarily a cry to preserve MY money because it is in gold - not specifically a prescription for fixing the myriad problems in the US and world economy.

Pandora's box is already open - a gold standard isn't going to close it again. What can be done, however, is to strengthen the government regulations which are the only real path to fixing the present problem and avoiding future ones.

vinoveri
07-07-10, 12:57 PM
I don't know the history behind this, but would be interested to know who/what was responsible for "In February 1873, silver was demonetized"; was it the banks, government, free market? The value of Ag relative to Au may have deflated due to the increase in silver supply, but did the free market "decide" to stop using silver, or was it by fiat of some other power? I think this is an important point to understand ... who decides what is money (medium of exchange) ... well we know that answer today with fiat currencies and legal tender laws.

Notwithstanding the fact of the limited supply of gold/silver vs the printing presses, I disagree that gold could not be used as a standard, as we could price gold per atom and revalue as needed to insure the requisite money supply growth consistent with economic expansion. After all, the U.S. consitution gives the Congress the power to coin money and regulate the value thereof, so if the gov wants to value gold at $42/oz in 1935 and $42/gram in 2010 then so be it. The devaluation of the "currency" would be clear for everyone to see, and I suspect would not be taken as ongoing policy b/c the theft of savings would be apparent to all, unlike in our current system where inflation, calculated and committed to as it is by the monetary authorities, is unobserved by many.

Fiat $ are not stores of value, and no CB can make them (in fact it's contrary to their stated policy of setting inflation targets). PM have always been stores of value and that IMO is one main reason I advocate a monetary standard based on them. If the gov could guarantee my fiat FRN would hold their purchasing power, I'd be fine with that.

Chomsky
07-07-10, 01:06 PM
I don't know the history behind this, but would be interested to know who/what was responsible for "In February 1873, silver was demonetized"; was it the banks, government, free market? The value of Ag relative to Au may have deflated due to the increase in silver supply, but did the free market "decide" to stop using silver, or was it by fiat of some other power? I think this is an important point to understand ... who decides what is money (medium of exchange) ... well we know that answer today with fiat currencies and legal tender laws.

Notwithstanding the fact of the limited supply of gold/silver vs the printing presses, I disagree that gold could not be used as a standard, as we could price gold per atom and revalue as needed to insure the requisite money supply growth consistent with economic expansion. After all, the U.S. consitution gives the Congress the power to coin money and regulate the value thereof, so if the gov wants to value gold at $42/oz in 1935 and $42/gram in 2010 then so be it. The devaluation of the "currency" would be clear for everyone to see, and I suspect would not be taken as ongoing policy b/c the theft of savings would be apparent to all, unlike in our current system where inflation, calculated and committed to as it is by the monetary authorities, is unobserved by many.

Fiat $ are not stores of value, and no CB can make them (in fact it's contrary to their stated policy of setting inflation targets). PM have always been stores of value and that IMO is one main reason I advocate a monetary standard based on them. If the gov could guarantee my fiat FRN would hold their purchasing power, I'd be fine with that.



http://en.wikipedia.org/wiki/Coinage_Act_of_1873

c1ue
07-07-10, 01:33 PM
I don't know the history behind this, but would be interested to know who/what was responsible for "In February 1873, silver was demonetized"; was it the banks, government, free market?

It was the existing powers who owned money - fighting and winning against those miners and speculators who were taking advantage of silver discoveries and other nations de-monetizing gold. The overall picture was a rising silver vs. gold ratio - and also note this was prior to many of the major industrial processes using silver today.


Notwithstanding the fact of the limited supply of gold/silver vs the printing presses, I disagree that gold could not be used as a standard, as we could price gold per atom and revalue as needed to insure the requisite money supply growth consistent with economic expansion.

This is correct, but what ultimately is the difference between a government freely able to revalue gold and a government able to print money?

Your desire to preserve the purchasing power of your money directly contradicts the ability of government to manipulate the money supply.

vinoveri
07-07-10, 02:08 PM
This is correct, but what ultimately is the difference between a government freely able to revalue gold and a government able to print money?

Your desire to preserve the purchasing power of your money directly contradicts the ability of government to manipulate the money supply.

I do not know of a perfect system, and am under no illusion that I can expect to maintain my purchasing power completely under a monetary system controlled by the gov, and don't see that changing. The purchasing power of the $ over the long term was relatively stable over the 19th century up until the establishment of the Fed (admitting of short term fluctuations e,g, Civil War when US went off gold).

In any case, a gold based system, even one that could be revalued, would be better than what we have now as revaluation would affect everyone simultaneously, as opposed to the way it works now: where the insiders (banks, broker dealers) get the money first e.g.,via Fed , lend it to others (e.g., large corporates, and governments) who then lend/buy/spend into the larger economy which drives prices up. The money circulates and ultimately reaches the hands of the wage earner, consumer, and small business person, but the prices/wages have already gone up by then, so the folks who get the fiat first, get to spend it at existing prices, while the average man watches prices rise and hopes to see his wages or pricing power keep up with this inflation which is due to money supply/circulation growth that the folks at the end of the chain experience; think of it as "trickle down fiat".

Also, under such a system, congress would revalue, and this would be for all the public to see and wouldn't occur in a surreptitious or back door manner. I think devaluing the currency would be more "restrained" under these conditions. Also, we don't have to pay the banksters for the privilege of creating money.

c1ue
07-07-10, 05:17 PM
In any case, a gold based system, even one that could be revalued, would be better than what we have now as revaluation would affect everyone simultaneously, as opposed to the way it works now: where the insiders (banks, broker dealers) get the money first e.g.,via Fed , lend it to others (e.g., large corporates, and governments) who then lend/buy/spend into the larger economy which drives prices up. The money circulates and ultimately reaches the hands of the wage earner, consumer, and small business person, but the prices/wages have already gone up by then, so the folks who get the fiat first, get to spend it at existing prices, while the average man watches prices rise and hopes to see his wages or pricing power keep up with this inflation which is due to money supply/circulation growth that the folks at the end of the chain experience; think of it as "trickle down fiat".

The reality is that the gold standard was common in the era when communications, economic growth, and trade were minimal.

As I've noted many times - in this era the vast majority of people simply didn't get involved with any cash whatsoever.

The errors of government intervention thus were largely confined to the rentier class.

It is not clear to me that having a gold standard means a trickle down effect. In fact, and especially given the present wealth inequality, what is far more likely to happen is a starvation of both growth and income by those who have the capital.

Poor and middle class people are far more in need of loans for survival or for business opportunity even as wealthier people can obtain loans more easily and in greater quantity. A gold standard would simply exaggerate this already pronounced disparity.


Also, under such a system, congress would revalue, and this would be for all the public to see and wouldn't occur in a surreptitious or back door manner. I think devaluing the currency would be more "restrained" under these conditions. Also, we don't have to pay the banksters for the privilege of creating money.

I don't see why any revaluation would have to be public, there are any number of ways a government or a bank can 'create' money despite a gold standard.

1) Accounting 'wink and nod' it: just allow more money to be backed by less gold via a change in the accounting standard. FASB mark to market is a fine example.
2) Ponzi it: Just don't enforce regulations as stringently, or as impartially
3) Lease out government gold reserves to banks

I'm sure there are literally dozens of additional methods.

The only reason FDR's confiscation was 'public' was that it was meant to be. By publicly forcing inflation, the goal was to scare the public into ceasing its deflationary ways.

If FDR had instead been in a position where the federal government needed to find more money, I'm sure one of the alternatives noted above would instead have been used.

Every single aspect of devaluation vs. purchasing power preservation comes down to the same thing: a government which actively strives for one thing or the other.

Polish_Silver
04-26-13, 07:39 AM
http://www.economicpopulist.org/content/austerity-and-class-war

A gold standard in periods of growth hinders growth via money supply restriction even as it beneficially hinders credit growth when said growth period stagnates.


Pandora's box is already open - a gold standard isn't going to close it again. What can be done, however, is to strengthen the government regulations which are the only real path to fixing the present problem and avoiding future ones.



A cry for a gold standard today is primarily a cry to preserve MY money because it is in gold - not specifically a prescription for fixing the myriad problems in the US and world economy.

People who own gold are preserving their savings whether a gold standard becomes public policy or not. The desire that cash savings retain purchasing power is perfectly legitimate. It is a great shame that the "best" public policy is to devalue the currency to ease the debt burden. It is very unfair to cash savers. In fact, I feel that debt repudiation would be a better policy.



A gold standard in periods of growth hinders growth via money supply restriction even as it beneficially hinders credit growth when said growth period stagnates.

I disagree. I think nations using a gold standard have had long term growth equal to or better than paper money. My examples: Britain 1700-1913 USA: 1790 -1913/1933/1971
POZ posted a big survey of global economic data, 1945+, and it turned out that growth was faster during Bretton Woods than after. There are a lot of factors affecting growth rates, but I have not seen convincing data that a gold standard hinders long term growth.

Germany's Erhard policies are an example of hard money under a fiat system. And their economic growth is strong, and the nation has large gold reserves.

You want a money system to restrict credit growth during booms. That is what will prevent big busts.

A gold standard without leveraged lending would do this.

The problem in the 1920's, was that the US had both a gold standard and leveraged lending. So, as the leverage increased, the debt level and price level increased. Then, during the bust, the price and wage level went down (deflation), but debt values had been established at the boom level ---resulting in widespread bankruptcy.

The preventive measure would have been to restrict credit growth, for example by raising rates. But the fed had been lowering rates to help the pound . . .