Economic myth explained: the gold standard caused/contributed to the severity of the Great Depression.

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by LeonidasSpartan2

Economic myth: the gold standard caused/contributed to the severity of the Great Depression.
Reality: the great depression was largely caused by central banks & govts. They’ve largely succeeded in absolving themselves of responsibility by rewriting history books.

Thanks to the Fed, we were not actually on a gold or silver standard after 1914. In an actual gold or silver standard precious metal is used for day to day payment and the value of this metal changes based on the amount of goods and services in the economy vs the amount of metal in circulation. Because precious metal (PM) is rare, in a growing economy usually this means the value of everyone’s money goes up over time. In such a system, a growing economy benefits everyone.

After 1914 we were on a “gold exchange standard”. This meant federal reserve promissory notes were used for payment but had some limited convertability to PM. Nations began to use both each others notes as well as gold as reserve assets. Debt settlement and import/export deficits would often be settled via gold between nations. To complete these settlements, a currency would be “pegged” to a certain amount of gold.

Because everyday people rarely redeemed their currency for bullion, the “gold exchange standard” meant governments and banks had more power than before to manipulate currency. They could create inflation ie new currency units via govt deficit spending and new loans to funnel money to their interests in a non transparent way. “Money printer go brrrr”

Enter war. Modern war is near impossible without massive debt. In WWI every powerful nation spent more than they had. They debauched their currencies and stole wealth from common people to pay for bloodletting. The piper must be paid. After the war, nearly every nation adjusted their “peg” to gold. This was a mere acknowledgement of reality: the amount of currency units in circulation far exceeded the amount of gold available for redemption. As such, the price of gold in those currencies must go up – or rather, priced in gold those currencies are worth less.

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Virtually every nation did this, except the UK & US. Both these nations stuck to their pre-war peg. For the US this was $20.67 per oz of gold. Because the mechanisms for international redemption in gold were still in play, what this meant is that over time the inverse came into effect: if a govt would not acknowledge that they had inflated their currency, then over time the market would force that currency to deflate until real equilibrium with gold was again reached.

Deflation means contraction of the currency supply. A forced contraction of units in circulation means less credit, harder to get loans, more bankruptcies. Furthermore, by refusing to change their pegs with the rest of the world this meant the UK & US had unnaturally strong currencies compared to trading partners. While this allows for easy imports, it kills exports. To other countries, our exports seemed unnaturally expensive: because to purchase them they had to convert their currencies to a USD/pound sterling at an unnaturally high peg. Lower exports means more businesses and manufacturing losing money.

Add on top of this that the US Federal Reserve had instituted a loose monetary policy during the WWI. Low interest rates = easy lending = growth of currency units in circulation. This contributed to a post-war asset bubble, especially in the stock market. There was too much currency chasing too few goods and it found an outlet in stocks. The Fed tried to manipulate this back to equilibrium by raising rates in 1929, but this was too little too late and added more fuel to the now accelerating deflationary fire.

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In 1931 the UK finally adjusted the “gold peg” of the sterling. In 1933 the US also adjusted the USD “gold peg” from $20.67 to $35. But *before* doing so, in a singular act of unconstitutional thievery, FDR confiscated the gold of all US citizens via executive order.

Both artificial inflation & deflation are a phenomenon caused by central banks and governments. Both rob wealth from ordinary people and redistribute it to powerful interests.

See any similarities to today?? (yes!)


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