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Source link: http://archive.mises.org/10347/how-that-nasty-gold-caused-the-depression/

How That Nasty Gold Caused the Depression

July 25, 2009 by

One of the many myths today receiving retrospective support from today’s servants of power is that adherence to the gold standard caused the economy in countries that did so in the 1930s to recover more slowly from the Depression.

Probably the leading proponent of this apology is Barry Eichengreen, author of the very-successful “Golden Fetters.” As this article in the Economist reports, he has now produced a paper showing that, with one enormous exception, countries “clinging” to the gold standard too long adopted protectionist policies more than did countries that did not. Duh…

So, we’re tacitly invited to consider the proposition that countries that enacted protectionist trade policies recovered more-slowly from the Depression than did those that kept their borders more open to trade.

I buy that!

{ 12 comments }

jason4liberty July 25, 2009 at 10:29 am

It is very interesting that they say exactly what the problem was: inflation during the Great War, allowed by jettisoning the gold standard. “When the gold standard was revived in the 1920s, it was a more fragile entity. Despite high inflation in the meantime, many countries restored their pre-war gold parities.” When the governments tried to avoid the consequences of their actions (by returning to gold at pre-war parities, and lying to their constituencies about the fiduciary issue during the war), the market forced the realization that 1 does not equal 2. Of course monetary chaos resulted. You can not base a system on a fallacy, eventually reality will exert itself.

They were so close to the right answer…

ABOM July 25, 2009 at 10:38 am

Do these propagandists realize that the internet is killing them? That we know they are contributing to the demise of civilization?

The old shameless ploy of publishing propaganda in “respected” mainstream journals to propogate myths works no longer.

As the Mogambo Guru says, these idiots are guaranteeing that we are “freaking doomed” as an economy and as a civilization.

Toby July 25, 2009 at 1:16 pm

The main problem was, that countries like Great Britain and others suspended the Gold Standard during WW I ans slipped back to it afterwards. The “gold rush”, which was created by those countries made the gold price rise to ever new heights, which caused deflation.

So, not the gold standard itself was to blame, but the flip-flop monetary policy of the major economies.

Current July 25, 2009 at 1:31 pm

Toby makes a very good point.

One of the few things J.M.Keynes and Mises agreed upon was that Britain should not have returned to the gold standard in the way it did. Britain returned to gold in ~1923 at it’s pre-war parity. This caused a sharp increase in the rate of interest and a consequent depression.

The cause of this was changes during WWI. Businesses and workers had become accustomed to the price increases brought upon by the inflation the state created during that war. When it undid that inflation by deflation it caused more problems. As Mises once said the idea that deflation undos the damage of inflation is similar to saying that after a person has been run over by a bus the best treatment it to reverse back over him.

So, when Britain left the gold standard it recovered faster. But, that was not due to the alleged benefits of fiat money, but due to the problems caused by misapplying the gold standard.

Michael Orlowski July 25, 2009 at 5:54 pm

Price-fixing anything is never a good idea, especially overvaluing gold.

newson July 26, 2009 at 12:36 am

mises was against a “deflationary policy” (ie. government-inspired), but was not for intervening in a deflation caused by voluntary redemption of fiduciary media. see bagus’ paper:
http://mises.org/journals/qjae/pdf/qjae6_4_3.pdf

i think mises’ bus metaphor is graphic but wrong. deflation is the coronary bypass, painful, but necessary to restore some semblance of monetary health after years of loose-living.

maybe keynes and hayek should have been pointing the finger at the british labour unions who aggressively resisted any downward movement in nominal wages, necessary to avoid unemployment in a deflation.

Toby July 26, 2009 at 4:07 am

Dear newson,

You are right, that deflation is necessary, as long as it is caused voluntarily by market participants.
But deflation caused by the government’s shrinking the money supply will shock the economy further and create a huge recession.
I think, Mises, when using the bus metaphor, thought of government-created deflation.

alan July 26, 2009 at 5:48 am

re: newson – it was partly becauase of the labour union hoohaas that Keynes was in favour of an inflationist policy. The necessary downward adjustment would not take place.

I was hoping for a more detailed response to this “gold -> nasty depression” assertion.

J. Cuttance July 26, 2009 at 6:58 am

Having just read Forty Centuries of Wage and Price Controls, I wonder how finance ministers or equivalents could go about returning to sound money.

Could they simply increase the fraction of the currency backed by bullion each year based on producivity gains?

Rob Thorpe July 26, 2009 at 12:52 pm

Newson: “i think mises’ bus metaphor is graphic but wrong. deflation is the coronary bypass, painful, but necessary to restore some semblance of monetary health after years of loose-living.”

Deflation is not needed to undo the harm of inflation. But it may be the inevitable outcome of a bust and preventing it may do more harm than good.

This is a complicated problem and in my view one that Austrian economists need to pay more attention to. That said, the main challenge is the understanding of artificial booms, since they are what leads to the busts.

Newson: “maybe keynes and hayek should have been pointing the finger at the british labour unions who aggressively resisted any downward movement in nominal wages, necessary to avoid unemployment in a deflation.”

Hayek did. However, although the unions exacerbated Britains 20s depression they didn’t cause it. The revaluation caused it. Even Churchill, who was the Chancellor who enacted the revaluation later came to regret it and considered it his worst blunder.

Current July 26, 2009 at 1:01 pm

I accidentally used my real name there. To avoid confusion Rob = Current.

alan July 26, 2009 at 9:27 pm

I’m interested in Hayek’s idea of a secondary deflation. I think the discussion of both sides of the economic aisle have been fairly limited regarding the crisis.

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