Anti-Gold Standard Myth #2: The Gold Standard Caused the Great Depression

Repeat something often enough and it becomes accepted as truth, even though false. “It’s all but universally accepted that the interwar gold standard made the Great Depression worse,” wrote David Beckworth and Ramesh Ponnuru in National Review earlier this year. Universally accepted, one presumes, by those who don’t know better. As Lewis E. Lehrman has written: “Led by Ben Bernanke and Milton Friedman, economists have mistakenly blamed the Great Depression on the gold standard, instead of on the liquidation of the gold-exchange system and the official reserve currency system established at Genoa in 1922-40.”

The conventional argument was argued by economist Barry Eichengreen in Golden Fetters: “The gold standard....is conventionally portrayed as synonymous with financial stability. Its downfall starting in 1929 is implicated in global financial crisis and the worldwide depression. A central message of this book is that precisely the opposite is true. Far from being synonymous with stability, the gold standard was itself the principal threat to financial stability and economic prosperity between the wars.”

The problem, began at the outset of World War I, when countries abandoned the classical gold standard. It continued when the classical gold standard failed to be restored after the war and instead a reserve currency system established. Financial journalist James Grant wrote in Money of the Mind: “Except for World War I, the ersatz gold-exchange standard might not have displaced the genuine article; if so, the 1929 stock-market panic might have been as short-lived and as economically inconsequential as the Panic of 1907. Except for the Smoot-Hawley Tariff of 1930, the recession of 1929 might not have become the Great Depression of 1929-33. Except for Britain’s sudden abrogation of gold, the international monetary crisis of 1931-32 might not have erupted. Finally, with a little bit of luck and even a modicum of cooperation between the incoming and outgoing American Presidents, the bank holiday of March 1933 might not have broken what little remained of the nation’s financial spirit.”

Lehrman has written that it was at the “little known but pivotal Monetary Conference of Genoa, that the unstable gold-exchange standard had been officially embraced by the European financial authorities. It was here that the dollar and the pound were first confirmed as official reserve currencies to supplement what was said to be a scarcity of gold.” Lehrman noted that French economist “Jacques Rueff warned in the 1920s of the dangers of the Genoa gold-exchange system and, again, predicted in 1960-61 that the Bretton Woods system, a post-World War II gold-exchange standard, flawed as it was by the same official reserve currency contagion of the 1902s, would soon groaned under the flood weight of excess American dollars going abroad.”

In an interview with the Economist in 1865, Rueff himself explained what happened to bring on the Great Depression: “In 1930 I was financial attaché in the French Embassy in London, and in that capacity I was responsible for the deposits of the French Treasury with British banks. They were the direct result of eight years of the gold-exchange standard, because we had kept the pounds sterling in London, as my colleagues in New York had kept in the American market the dollars that had been pouring into the French Treasury from 1927 onward. Then, in 1931, the failure of the Austrian Creditanstalt caused successive waves of repatriations; and it was this collapse of the gold-exchange standard that, without any possible doubt, transformed the depression of 1929 into the Great Depression of 1931.”

So, don’t blame the gold standard. Blame the flawed gold-exchange standard and the reserve currencies it embraced. And blame those who perpetuate the myth.

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The Most Important Thing Holding Up the US Dollar

by Ron Paul

Today’s economic conditions reflect a fiat monetary system held together by many tricks and luck over the past 40 years. The world has been awash in paper money since removal of the last vestige of the gold standard by Richard Nixon when he buried the Bretton Woods agreement — the gold exchange standard — on August 15, 1971.

Since then we’ve been on a worldwide paper dollar standard. Quite possibly we are seeing the beginning of the end of that system. If so, tough times are ahead for the United States and the world economy.

Yellen’s Missing Jobs

March 31, 2014

The new Federal Reserve chairman, Janet Yellen, gave a policy speech today at Chicago, where, in a startling gesture, she mentioned three working individuals by name — Jermaine Brownlee, Vicki Lira, and Doreen Poole. They lost their jobs the Great Recession and have been struggling ever since. It was a refreshing, even affecting demarche by Mrs. Yellen, who has made a return to full employment a public priority. She underscored her sincerity by telephoning Mr. Brownlee and Ms. Lira and Ms. Poole before delivering her speech.

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The Rueffian SynthesisJohn D. Mueller

Publisher's Note: Originally released in June/July of 1991, this detailed report discusses Jacques Rueff's economic theories and applies them to modern economic events.

By John D. Mueller

Who Was Jacques Rueff?

... Trained in science and mathematics at the Ecole Polytechnique, Rueff devoted his first theoretical work to showing that the same scientific method applies to “moral” or “social” sciences like economics as to the physical sciences (Des Sciences Physiques aux Sciences Morales, 1922). In both cases, he pointed out, individual acts can be “indeterminate,” but the pattern of large numbers of individual acts can be predicted as a matter of probability. And so in economics no less than physics, as he later wrote, “A scientific theory is considered correct only if it makes forecasting possible.”

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Excerpts From:


by Lewis E. Lehrman

"Forerunners of man lived upon the planet several million years ago. But the unique, modern, social order of man – civilization – emerged only four to five thousand years ago. Historical and archaeological evidence suggests that the institution of money evolved coterminously with civilization. From the standpoint of the 100,000-year history of Homo sapiens, civilization and money are but young and fragile reeds. Today their very existence is threatened by financial disorder."

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Hostility toward gold has a long pedigree.  19th century depiction of Pliny the Elder courtesy of the Library of Congress Gaius Plinius Secundus, commonly known as Pliny the Elder, in his The Natural History, Book 33, section 3, writes: Would that gold could have been banished for ever from the earth, accursed by...

Passing Pesos

Kathleen Packard  |  Apr 16, 2014
The New York Times’ Jonathan Gilbert reported: “Argentines endured price rises of nearly 30 percent last year, according to an unofficial index published by opposition politicians; the government, which has been accused of manipulating economic data in the past, claims inflation reached only 10.9 percent in 2013. In 2014, inflation...
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Jacques Rueff, a key figure in European economic circles from the 1930s until the 1970s, was, first and foremost, an...
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Aug 07, 2013
Key Monetary Writings
John D. Mueller

Washington, Wall Street and the “Monetary Sin of the West”

Washington, Wall Street and the “Monetary Sin of the West” By John D. Mueller[1] Catholic Finance Association Panel, “Has the culture of Wall...
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Prosperity Through Gold
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