The True Gold Standard (Second Edition)
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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Key Monetary Writings
THE most disturbing aspect of the current financial crisis is that no U.S. official has correctly identified its primary cause.
Why the Gold Standard?