Return to Gold Standard and price per ounce

Opinions are like noses, everybody has one, that has at least two holes in it.

 

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Much more important is the ability to distinguish between fact and opinion.

 

I thought the Gold Standard Act wasn't passed until 1900.

 

Yes - like the Fact that the gold standard is a failed economic policy that drove the country into unneeded recessions multiple times and would be impossible to implement today because there isn't enough gold in the world to represent all the value of money which is being used.

Opinion - We need need a Gold Standard or higher inflation will destroy this country.

Falsohood - Fiat currency is bad and destroys the economy, and represses the common man.

More falsehood - National debt is bad.

 

Ruben, you're the poster boy for opinion masquerading as fact. But if you insist that fiat is the magic elixer to prevent recession, we've had recessions since gold was withdrawn from circulation in:

1937
1945
1949
1953
1958
1960-61
1969-70
1973-75
1980
1981-82
1990-91
2001
2008-09

You may resume your tantrum.

 

What? And the money hasn't become worthless with all those recessions?

Wow

 

The money has declined somewhat in purchasing power since 1937. I just wanted to debunk your OPINION that gold caused recessions by demonstrating that recessions occur on a pretty regular basis with or without gold.

 

http://www.econbrowser.com/archives/2005/12/the_gold_standa.html

The gold standard and the Great Depression

How the gold standard contributed to the Great Depression.

There always seem to be voices raising the possibility that a return to a monetary gold standard could solve all our problems. Among those championing this meme this week were Chris Mayer at Daily Reckoning, Robert Blumen at Mises Economics Blog, and some of my fellow blogjammers.

Under a pure gold standard, the government would stand ready to trade dollars for gold at a fixed rate. Under such a monetary rule, it seems the dollar is "as good as gold."

Except that it really isn't-- the dollar is only as good as the government's credibility to stick with the standard. If a government can go on a gold standard, it can go off, and historically countries have done exactly that all the time. The fact that speculators know this means that any currency adhering to a gold standard (or, in more modern times, a fixed exchange rate) may be subject to a speculative attack.

After suspending gold convertibility in World War I, many countries stayed off gold and experienced chaotic fiscal and monetary policies in the early 1920's. Many observers reasoned then, just as many observers reason today, that the only way to restore fiscal and monetary responsibility would be to go back on gold, and by the end of the 1920's, most countries had returned to the gold standard.

I argued in a paper titled, "The Role of the International Gold Standard in Propagating the Great Depression," published in Contemporary Policy Issues in 1988, that counting on a gold standard to enforce monetary and fiscal discipline in an environment in which speculators had great doubts about governments' ability to adhere to that discipline was a recipe for disaster. International capital flows became more erratic, not less, as doubts were raised about whether first the pound would be devalued and then the dollar. Britain gave in to the speculative attacks and abandoned gold in 1931, whereas the U.S. toughed it out by deliberately raising interest rates in 1931 at a time when the economy was already near free fall.

Because of this uncertainty, there was a big increase in demand for gold, the one safe asset in this setting, which meant the relative price of gold must rise. If everybody is trying to hoard more gold, you're going to have to pay more potatoes to get an ounce of gold. Since the U.S. insisted on holding the dollar price of gold fixed, this meant that the dollar price of potatoes had to fall. The longer a country stayed on the gold standard, the more overall deflation it experienced. Many of us are persuaded that this deflation greatly added to the economic difficulties of those countries that insisted on sticking with a fixed value of their currency in terms of gold.
gold_effects.gif

Ben Bernanke and Harold James, in a paper called "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison" published in 1991 (NBER working paper version here), noted that 13 other countries besides the U.K. had decided to abandon their currencies' gold parity in 1931. Bernanke and James' data for the average growth rate of industrial production for these countries (plotted in the top panel above) was positive in every year from 1932 on. Countries that stayed on gold, by contrast, experienced an average output decline of 15% in 1932. The U.S. abandoned gold in 1933, after which its dramatic recovery immediately began. The same happened after Italy dropped the gold standard in 1934, and for Belgium when it went off in 1935. On the other hand, the three countries that stuck with gold through 1936 (France, Netherlands, and Poland) saw a 6% drop in industrial production in 1935, while the rest of the world was experiencing solid growth.

A gold standard only works when everybody believes in the overall fiscal and monetary responsibility of the major world governments and the relative price of gold is fairly stable. And yet a lack of such faith was the precise reason the world returned to gold in the late 1920's and the reason many argue for a return to gold today. Saying you're on a gold standard does not suddenly make you credible. But it does set you up for some ferocious problems if people still doubt whether you've set your house in order.

Nevertheless, I'm willing to grant Tim Iacono that the stuff is pretty.
GoldCoinFront.jpg

 

http://www.amatecon.com/gd/gdcandc.html


Introduction
It should be noted that all of the cures have been tried and while we seem to be free of Depressions, it's not clear that business cycles have been eliminated.


Causes
The Stock Market Crash
The Stock Market Crash in October of 1929 is often cited as the beginning of the Great Depression, but did it actually cause it? The answer is no. First, the stock price for a particular company merely reflects current information about the future income stream of that company. Thus, it is a change in available information that changes the stock price. When the Fed began to raise interest rates in early 1929, this began the tumble.

However, a stock market crash could cause people to increase their liquidity preference which might lead them to hoard money.
In the August 1990 issue of The Quarterly Journal of Economics, Christine D. Romer writes that "the negative effect of stock market variability is more than strong enough to account for the entire decline in real consumer spending on durables that occurred in late 1929 and 1930."
Hoarding Money
People hoard money because they have a liquidity preference. I.e., people want to have their assets in a readily convertible form, such as money. There are several misconceptions about hoarding money. First hoarding is not the same thing as saving. If I put my money into a savings account, that money is lent out to someone else who then spends it. Second, hoarding, by itself, cannot cause a recession or depression. As long as prices and wages drop instantly to reflect the lower amount of money in the economy, then hoarding causes no problems. Indeed, hoarding can even be seen as beneficial to those who don't hoard, since their money will be able to buy more goods as a result of the lower prices.

If a country has a gold standard, then hoarding money can make the money supply drop dramatically since a gold standard makes the quantity of money difficult for the government to control.
The Gold Standard
At the time of the Great Depression,America had a 100% gold standard for its money. This meant that all cash was backed by a government promise to redeem it in a specific amount of gold (at the time, one ounce of gold was redeemable for twenty dollars). Because the amount of money circulating in the economy is wholly dependent on the amount of gold available, the money supply is very rigid. If people start to hoard money (see above) the money supply can drop drastically. As noted in the previous section on hoarding, this is not a problem as long as prices and wages drop instantly to reflect the lower amount of money circulating.

Hall and Ferguson write:

The existence of the gold standard linked economic conditions across countries to a much greater extent than is currently the case, and it is because of this linkage that the Depression was a worldwide event.

and:

Except for minor adjustments, and the temporary suspensions of gold payments during wartimes, the price of gold was held standard from the establishment of the new United States of America in 1791 until gold was revalued in 1933.

In "Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy" (PDF), professor Richard Timberlake argues that the gold standard was not responsible for the Great Depression, since the Federal Reserve had not been following a strict gold standard prior to the onset of the Depression.

 

BTW - should we cover the demise of the Spanish Empire?

 

Main article: Causes of the Great Depression

There were multiple causes for the first downturn in 1929, including the structural weaknesses and specific events that turned it into a major depression and the way in which the downturn spread from country to country. In relation to the 1929 downturn, historians emphasize structural factors like massive bank failures and the stock market crash, while economists (such as Barry Eichengreen, Milton Friedman and Peter Temin) point to monetary factors such as actions by the US Federal Reserve that contracted the money supply, and Britain's decision to return to the Gold Standard at pre-World War I parities (US$4.86:£1).

 

US industrial production (1928–39).

Current theories may be broadly classified into three main points of view. First, there are demand-driven theories, most importantly Keynesian economics, but also including those who point to the breakdown of international trade, and Institutional economists who point to underconsumption and over-investment (causing an economic bubble), malfeasance by bankers and industrialists, or incompetence by government officials. The consensus viewpoint is that there was a large-scale loss of confidence that led to a sudden reduction in consumption and investment spending. Once panic and deflation set in, many people believed they could make more money by keeping clear of the markets as prices dropped lower and a given amount of money bought ever more goods, exacerbating the drop in demand.

Second, there are the monetarists, who believe that the Great Depression started as an ordinary recession, but that significant policy mistakes by monetary authorities (especially the Federal Reserve), caused a shrinking of the money supply which greatly exacerbated the economic situation, causing a recession to descend into the Great Depression. Related to this explanation are those who point to debt deflation causing those who borrow to owe ever more in real terms.

 

Not so fast, Mr. Greenspan.

A gold standard tends to have a recessionary bias. When speculators and others attack a country’s currency, the burden usually falls on that nation to adjust by contracting its economy and increasing unemployment. The system places no matching requirement on countries with “strong” currencies to adjust.

The inflexibility of the gold standard makes it difficult for governments to adopt policies best suited to their domestic economic needs.

Take South Korea. Its currency, the won, has fallen 29 percent against the dollar in the past six months. Such a depreciation wouldn’t have been permitted under a gold standard. Korea would have been required to support its currency by raising interest rates to maintain the won’s parity with bullion, exacerbating an already virulent recession.


~~Bloomberg

 

Gold and Depression

In a parable with relevance to today’s economic environment, “attachment to the gold standard played a major part in keeping governments from fighting the Great Depression, and was a major factor turning the recession of 1929-1931 into the Great Depression of 1931-1941,” Bradford DeLong, an economist at the University of California, Berkeley, wrote several years ago.

Commitment to the gold standard prevented the Fed from expanding the money supply in 1930 and 1931, forcing President Herbert Hoover “into destructive attempts at budget-balancing in order to avoid a gold-standard generated run on the dollar,” DeLong said.

China, the U.S., South Africa, Australia, Russia and Peru make up the six biggest gold producers. If their mining operations were interrupted by, say, political upheaval, it could lead to deflation and rising unemployment. In contrast, major improvements in mining technology could ignite inflation.

 

As the above excerpt shows, not even your hand-picked articles agree about gold causing the Depression. It is only your OPINION. I've read many reasons for the Depression ranging from the stock market crash to tariffs to Fed liquidity withdrawals and even to the demonetization of silver by the British in India. It’s an interesting academic exercise, but hardly a FACT.

 

Buy Sand.

 

Once again, I see that "mrbrklyn" is incessantly spamming his opinion and forcing it upon us by simply dominating every page of the thread. Thank god all I see is as follows;

 

A fiat system has an inflationary bias and eventually a hyper-inflationary cycle will develop. Seven Years MAX and you'll see.

Buy sand. You can bury your head in it all you want.

 

Population’s Willingness

What’s more, a gold standard isn’t the panacea its advocates claim. A central bank’s ability to adhere to it is only as strong as the population’s willingness to endure the pain associated with enforcing the system.

Countries periodically abandoned the gold standard during times of war -- Britain during World War I, for example -- and free-spending Latin American countries were repeatedly forced to exit the system in the late 19th century. The Bretton Woods System collapsed in 1971 when the costs associated with fighting the Vietnam War forced President Richard Nixon to suspend the convertibility of dollars into gold.

If you don’t have faith in central bankers or politicians to ride herd over inflation, why would you trust them to keep a country on a gold standard for more than a short period of time?

(Michael R. Sesit is a Bloomberg News columnist. The opinions expressed are his own.)

To contact the writer of this column: Michael R. Sesit in Paris at at msesit@bloomberg.net

 

Any of us could perform a google search on our opinion and cut and past the links from there to here. There is an enormous amount of "research" to support just about every point of view imaginable. Just to let you know, each of the postings is a summary of someone's OPINION that happens to agree with Ruben. But there are no FACTS anywhere.