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We've been looking into the idea that there was some kind of sudden and
very large rise in the value of gold, beginning in late 1929, that was
a major contributor to the Great Depression.
September
11, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s
September
18, 2016: The "Giant Rise in the Value of Gold" Theory of the 1930s 2:
Never Happened Before
Some of the conclusions we've come to so far:
1) There is no evidence of any similar
event in the previous 500 years.
2) The magnitude of the rise in gold's value would have to be in excess
of 100% (i.e., a doubling), perhaps far in excess, over a relatively
short period of time of less than five years.
3) Commodity prices vs. gold were actually rather high in the 1920s,
compared to historical norms, indicating that there was no long-term
tendency for a "rise in gold's value" (implying low nominal commodity
prices) prior to late 1929.
4) Because aboveground gold ("supply") is much larger than annual
mining production, variation in mining production has little effect on
gold's value. Even a 10x increase in production, in the 1840s and
1850s, did not produce much noticeable effect.
Certainly any kind of gigantic and unprecedented rise in gold's value
must be related to some kind of change in supply/demand conditions --
of a sort not seen in at least 500 years. Let's keep looking at the
supply and production side of things.
Here is aboveground supply, as estimated by GFMS. This smooth curve
represents the gradual accumulation of gold from mining production.
Here is mining production.
Here is production as a percentage of aboveground gold. We see that
there was indeed some falloff in production during the 1920s, but from
peak levels to levels that were still relatively high.
Here's a closer look at the 1920s and
1930s. Production stepped up in the second half of the 1920s, and
actually made a new all-time high in 1932.
It's hard to find anything particularly
dramatic happening from the side of mining supply.
Now we will look at "demand," in particular, demand from central banks
for reserve holdings -- the core of Gustav Cassel's arguments. We've
looked at this before, but we can go over some of the data again.
Beginning around 1850, central banks spread around the world, and with
them, paper banknotes. These central banks held a considerable amount
of bullion in reserve. The increase in central bank holdings of bullion
was fingered for falling commodity prices in the 1880s and 1890s --
although, I again will point out that these prices also reflected the
supply glut of many commodities at the time. It was a time when people
were scratching around for any kind of excuse to devalue currencies
using various "free coinage of silver" arguments, not only in the U.S.
but around the world.
The following data comes from Timothy Green's 1999 paper, "Central Bank
Gold Reserves: an Historical Perspective Since 1845", available here:
Here we can see that big rise in central bank gold holdings, which
continued to about 1950. Before 1925 or so, much of the increase in
central bank gold reserves came about via the reduction in circulating
gold coinage -- people "deposited" their coins for banknotes.
This is what it looks like as a percentage of estimated total
aboveground gold, using the GFMS estimates.
What do we see here?
First, we see that by 1895, central banks didn't really hold all that
much gold -- a little less than 10% of aboveground gold, by this chart.
I find it very difficult to ascribe any effect at all
to gold "demand" from central banks, or other monetary uses, to some
kind of rise in gold's value in the 1880-1895 period. That is one
reason why I think that the decline in commodity prices worldwide
1880-1895 was primarily, and perhaps entirely, a matter of a supply
glut of commodities.
We get a little more of a rise between 1925 and 1935, but it is still
pretty small. Remember, even by early 1929 commodity prices were
highish, and economies were generally doing quite well, so there was
little evidence that all the accumulation of gold by central banks in
the
84 years between 1845 and 1929 created any kind of rise in gold's
value. Also, the continuing accumulation 1935-1950 (which is much more
dramatic) also did not cause any noticeable evidence of a rise in
gold's value -- commodity prices after WWII were again toward the
highish end of their long-term range. If gold did rise
in value 1929-1933, then it would have had to fall again 1935-1950 to
cause commodity prices to return to around their 1920s levels vs. gold.
So, if you are going to argue that the increase in central bank gold
reserves 1929-1933 had some kind of catastrophic effect, then you also
would have to argue that the much larger increase in reserves 1935-1950
not only had no effect, but actually the opposite effect!
As you can see, these arguments are quickly becoming rather silly.
Also note the dramatic decline in circulating gold coinage throughout
the world, by 1930. You might expect that there would have been some
kind of dramatic rush towards gold coinage, as people withdrew their
bank deposits for fear of bank failure. This indeed happened, but the
magnitude was very small. Also, by the end of 1931, many countries were
already off the gold standard. There is no evidence here of any
private-sector surge in gold demand, at least in the form of coinage.
Green's data is nice because it includes both gold coinage worldwide
and central bank reserves. Now, let's take a little closer look with
annual data. Unfortunately, we now have to give up our worldwide data
on circulating coinage.
Here are central bank gold reserves, 1913-2010, in terms of tonnage and
also as a percentage of aboveground gold. We see the rise in reserves
until the late 1960s, after which it flatlines.
What do we see here? The increase in central bank gold reserves was
very smooth during this period. This is a surprising result. The
outbreak of World War I, the floating of currencies worldwide, the
return to gold in the 1920s, the Great Depression and the breakdown of
gold standard systems, and even World War II, did not seem to alter
this trend of accumulation much at all.
Rather pointedly, we see absolutely nothing happening around 1929-1933.
All of the central bank bullion accumulation between 1845 and 1929 did
not cause any noticeable increase in gold's value -- commodity prices
in the 1920s were rather high. Nor did all of the bullion accumulation
after 1935, which resulted in highish commodity prices vs. gold again
after WWII. There was absolutely no change in central bank bullion
accumulation behavior at all around 1929-1933. So how did some kind of
catastrophe occur during those four years, which did not happen in the
other hundred years of gold accumulation between 1850 and 1950?
Anyone claiming some first-time-in-500-years explosion of gold's
value beginning around 1929 -- of catastrophic Great Depression-causing
magnitude -- has, to my eyes, nothing to go on from either
the supply side or the demand side. Not even a little wiggle.
Here's a closer look at annual data, for the 1913-1927 period. This is
from the Federal Reserve's Banking
and Monetary Statistics.
Once again, we see surprisingly little going on here, despite all the
turmoil of war, floating currencies, and the return to gold in the
1920s.
Here's monthly data, for the key time period of 1928-1938. Remember, we
are looking for evidence of some kind of catastrophic supply/demand
imbalance beginning around the second half of 1929. It has to be big
enough to cause a rise in gold's value sufficient to blow up the world
economy.
Look closely. Look very, very closely.
Nothing, right? France did accumulate some gold, but this was offset by
moderation elsewhere. Total central bank gold reserves have a smooth
trend of accumulation, with nary a ripply despite all the turmoil of
the time.
We've been beating this horse a long time now, but it is not quite
dead, so let's continue with another thought:
Let's say that there really was some kind of dramatic rise in gold's
value 1929-1933. What would we expect to see in that case?
Central banks would have had to force their currencies higher in
response, to "catch up" to the rising gold value. This would have
probably involved some kind of monetary base contraction -- at least,
some kind of change in behavior, in reaction to the once-in-500-years
Great-Depression-causing dislocation supposedly taking place. A similar
sort of thing happened in Argentina and Hong Kong in 1997-1998, where
currency boards had to keep up with a rising value of the U.S. dollar,
their "standard of value" at the time. A similar thing also happened in
the 1919-1922 period, when a weak dollar following the printing-press
finance of WWI (causing gold outflows once the gold embargo was lifted)
was corrected by a large monetary base contraction.
But, there was no such monetary base contraction, among major central
banks, in the 1929-1930 period.
July
31, 2016: Blame France 2: Balance Sheet Peeping
We see nothing here that indicates a response to some kind
of powerful rise in gold's value beginning in late 1929. Everything is
about as placid as can be until after the disruptive British
devaluation of September 1931. There is no contraction of the monetary
base, but rather, a rise.
Nothing at the Bank of England either.
And nothing at the Bank of France, where we find a substantial monetary
base expansion.
So again, nothing here to support the hypothesis of some kind of
catastrophic rise in gold's value.
Here's a look at gold coinage in circulation in the U.S.:
Also, there is nothing at all in 1929, 1930 and 1931.We see a peak of
gold coinage in circulation in 1899, and a steady decline afterwards --
mirroring the worldwide data we saw earlier. There was indeed a rise in
gold coinage in 1932, probably representing a flight from failing banks
and the potential for dollar devaluation, which indeed happened in
1933. But, it was rather minor in the scheme of things. You could
extend this to gold demand for "safe haven investment" as a whole --
that there was, strangely as it may sound given what we know, hardly
any such demand in 1929-1931. It is hard to imagine some kind of
powerful demand for large bullion bars, and no demand for gold coins.
To summarize all of this, here's what I see: very little evidence of
any supply-demand imbalance that led to a rise in gold's value during
the 1880-1895 period; and certainly no evidence of some kind of
supply/demand imbalance causing world-economy-destroying effects in
1929-1933. Thus, I conclude that in both cases, gold served as it
always had, as a stable measure of value, the "monetary polaris." The
decline in commodity prices in the 1929-1933 period was due to a
collapse in demand, caused by a worldwide economic breakdown due to
nonmonetary reasons -- primarily a global tariff war and domestic tax
increases, plus "systemic" issues including bank failure and sovereign
default, often an anti-business regulatory attack, and political
instability. After the British devaluation of 1931, monetary effects
also enter the picture.
Today, I'm mostly addressing the arguments of Gustav Cassell, and those
who reference Cassell while making similar arguments today. Cassell
formed his notions in response to the decline in commodity prices in
the 1880-1895 period -- a time when central bank bullion accumulation
was still quite low. By the late 1920s, there was ample evidence that
all the bullion accumulation by central banks over the decades up to
that date had little effect on gold's value. Cassell nevertheless
wanted to apply his notions also to the breakdown of the early 1930s.
In part, it was much like the 1890s in some respects -- people were
just hunting around for any excuse to devalue currencies, and would
grab whatever was at hand, no matter how silly.
Actually, my conclusion -- that there was no great monetary disaster,
at least before the big currency devaluations -- was the standard
opinion until about 1960, and remains a dominant opinion to the present
time. So, I am not exactly an outlier here.
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