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Below is an
extract from the transcript of the hearings before the
Committee on Banking and Currency about the Gold Reserve Act of 1934.
(emphasis mine) [my
comment]
MONETARY
DEMAND FOR GOLD
There appears to be no escape from the conclusion that prices in pro war gold
currencies cannot be expected to be higher than pre-war unless this situation
is brought about by some unusual and spectacular decrease in the demand for
monetary gold relative to business. This is the real problem on the gold side
of the price question.
It is, of course, possible that some important countries will definitely
discontinue the use of gold as money and definitely discontinue their efforts
to maintain gold reserves. This might be done by the remonetization of silver
or the adoption of a paper standard [the fiat dollar…]. While there is
discussion of continuing off-gold, there is as yet no indication of any
discontinuance of the demand for gold by any important country. In fact, gold
is the most popular subject of discussion in nearly every country.
It is also proposed that coinage be discontinued and that gold be kept in
bars that are so costly as to make it difficult to own one, and that these
bars be used only in international transactions. Discontinuance of coinage is
probably desirable and provision should be made for preventing a run on the
gold supply, but too much should not be expected from this. Gold must be
released for industrial uses and it will be difficult to have all the
second-hand gold returned to the mint, difficult to compel the turning in of
all new gold, difficult to prevent persons from following the age-old
tradition of purchasing jewelry and plate as a storehouse of wealth. Nations
and individuals desire some concentrated nonperishable product which they can
hold. It is true that this desire is less prevalent in America, but by this
fact there is less to be gained by trying to overcome it. In the more
prosperous countries, savings are more likely to be invested in homes,
savings banks, bonds, and life insurance; but a large part of the
world's population still desires to store its savings in precious metals.
[important point >>] It is probable that after such a period of
monetary chaos as the world has recently experienced, nations
and individuals will bid more vigorously for the privilege of having gold.
At the present time, the world looks on France and the United States as
the champion hoarders.
Nations have experienced war as well as monetary chaos. They found
their metallic reserves to be of great value for war purposes.
It is highly probable that the desire to build up these reserves will
continue to be very keen. There are many factors tending to cause
inefficiency in the use of gold. Many communities are without banks. It will
take time to establish these. Many individuals have lost their savings in
banks, and may prefer to be their own bankers. Charges for the use of checks
and discontinuance of the payment of interest on deposits check the growth of
the use of banks. For some years, bankers will favor the maintenance of
high bank reserves. All these things point to a probable check in the former
rate of expansion of bank credit per dollar of gold.
For many years before the war there was a steady growth of bank credit per
dollar of gold in the United States and a steady decline in the monetary
circulation per dollar of gold. The sum of the two showed a gradual increase.
For the 5 years preceding the establishment of the Federal Reserve System,
monetary circulation and bank deposits per dollar of gold averaged $11.01.
For the 5 years 1923 to 1927, the average was $11.56. In 1920, the
overexpansion of credit brought the figure to $14.92 and in 1929 it reached
$13.39. Apparently, it is unsafe to build up too great a pyramid of credit.
Credit as well as paper money may be fiat.
The arguments that are now used to indicate that the gold supply is
sufficient to restore the price level are the same arguments that were used
to indicate that prices in gold would not fall.
WHY WERE PRICES HIGH?
We find no statistical basis in efficiency in the use of gold or in the
world supply of gold to call for prices above pre-war in the period from 1914
to 1929. Why then were prices so high? Apparently, the reason for this was
low demand for gold. On this point, there is an interesting historical parallel.
When the French Revolution broke out. France drifted into paper inflation.
The wild, inflation of this period frequently has been described. The
influence on prices in other countries is less well known. Being no
longer in demand for monetary uses, both gold and silver lost value and
drifted elsewhere. Prices on a metallic basis rose 46 percent from
1790 to 1795 in the United States and rose 34 percent in England. Ultimately
a large part of Europe was involved, and prices in the United States and
England rose still higher.
The United States was off the metallic standard for a short period during
the War of 1812, but the currency returned to par in March 1817. Prices
remained more than 50 percent above the level of 1790 until England attempted
to return to the gold standard, a process which was completed in 1821. Prices
in both countries fell precipitously nearly to the price level of 1790.
In the similar situation this time, the continent of Europe discontinue
bidding actively for gold [during WWI], and prices of commodities in the
United States more than doubled. They remained at 40 to 50 percent above
pre-war until England, France, and other countries returned to the gold
standard.
There is one significant difference. In the Napoleonic war period, Europe
used both gold and silver as money, and prices in neutral countries in both
gold and silver rose.
In the World War period, only gold-using countries were involved and
only gold-using countries had inflation and deflation. Prices in
China [the only country in the world on the silver standard] continued their
long-time gradual upward course. They showed no indication of the inflation
of 1920. They rose rapidly from 1922 to 1931. Since that time, they have
fallen nearly to the 1926 level. The writers believe that the major
factor in the rise in prices was the reduced demand for monetary gold and
that the major factor in the decline in prices was the return of demand.
Merely being off the gold standard does not necessarily mean low
demand. Thirty-four countries are off the gold standard now, but most
of them are vigorous bidders for gold. Europe was not actively
bidding for gold during the war period.
The writers have anticipated that gold would acquire more than its pre-war
value with the attempts to return to the gold standard, and for 15 years have
been stating the conclusion that prices would return to pre-war or lower. The
arguments now being presented to indicate that a given quantity of gold with
a given volume of business can support a price level 50 percent higher than
the same gold would have supported before the war, are the same arguments
that were used to indicate that prices would not fall. We think them equally
unsound in both cases.
The conclusion so frequently stated in the past we believe still
holds—that provided the former gold-using world returns to the
gold standard, prices expressed in any pre-war gold currency will be below
pre-war for the next decade or longer, unless unforeseen phenomenal
gold discoveries are made.
…
PRICES OF GOLD
The prices of gold in various countries are shown in table 6, which is
reproduced at the beginning of this hearing. Throughout the world there is a
strong movement to raise the price of gold. A number of the countries off
gold have taken definite steps to raise its price.
Thirty-four countries are now off gold and only two are attempting to
maintain their pre-war gold currencies. A world-wide movement of this sort cannot
be attributed to the acts of any one country. Such a movement must have back
of it a driving force which is beyond the power of any nation to stop. The
United States was the last of the 34 countries to succumb to this force.
The world gold situation did not arise from a change in the world gold
supply relative to world business, but resulted from a change in the world
price level in gold compared with the world gold supply. It might be
expressed as "too much price " rather than " too little
gold." The only possible corrections are to reduce the whole price and
debt structure or reduce the gold content of gold currencies. Apparently the
gold-using world must follow the latter procedure.
THE FUTURE VALUE OF GOLD
Gold, like every other commodity, has always been unstable in value. The
most stable period in the English experience was from 1840 to 1914, but
violent fluctuations occurred during this period. From 1840 to 1849 the
purchasing power of gold for commodities in England rose 38 percent. From
1849 to 1873 its purchasing power fell 33 percent. From 1873 to 1896 its
purchasing power rose 80 percent. From 1896 to 1914 it fell 29 percent.
…
It is to be expected that gold will continue to have a high value for some
years. Whether or not this forecast continues to be true, it is practically
certain that its value will fluctuate violently. The best that can be
expected from the various control measures is to prevent the fluctuation from
being as erratic as they might otherwise be.
With 34 countries off gold, and several others that are likely to go off with
the scramble to acquire gold; with the possibilities of sudden movement of
gold from one country to another; with the great development of foreign
investments which at any time may be shifted; with the shift of some of the
densely populated countries of Europe from a creditor to a debtor position;
and with war uncertainties and desires for gold for military purposes,
decided fluctuations in the value of gold are to be expected; and it is to be
expected that these fluctuations will be around a high value.
Some Americans think that being on gold regardless of the rate is all that
is required. They seem to have forgotten our experience from 1929 to February
1933. To set any figure that is to hold for a generation certainly involves a
considerable element of risk, both to our prosperity and to the future of the
gold standard. The gold standard might be unable to survive another
unsuccessful world attempt to reestablish it [it didn’t]. A
proposal to provide some method for 10 Prices of gold for the United States
are London prices in dollars because these are the effective prices. They
apply when commodities are purchased or gold. making future necessary changes
in the price of gold without the necessity of long years of economic distress
and political agitation would seem to be a conservative proposal. If the
gold standard is to have a fair chance for survival, it requires some kind of
a safety valve.
The Global Times
reports about hard lessons from China's silver standard.
Hard
lessons from China's silver standard
Source:
Caijing.com.cn
[08:30 July 15 2009]
…
In 1867, an international monetary conference in Paris included a push for
a shift from bimetallism (gold-silver) toward gold as the international
standard. This policy was promoted by Britain and France. And by 1910, every
major country was on gold -- except China. As countries went to a gold
standard, silver prices began to depreciate. This devaluation
actually gave China an export advantage. But by borrowing in sterling silver
or gold, China suffered because silver's value continued to fall against
gold. Under these circumstances, the country had to export more to pay debt.
Between 1890 and 1930, China had a current account surplus in terms of an
inflow of silver, as silver devalued against gold. This led to the
industrialization of the Yangtze River Delta. During this period, domestic
and international banks began to flourish by financing trade as well as
trading in silver. When there was an export surplus and silver inflow,
banks could lend to finance trade as well as real estate, thus expanding the
money supply.
However, in times of silver outflow, banks had to contract credit, putting
real estate prices under pressure. Bank credit multipliers depended on the
state of global silver prices. In other words, Chinese monetary policy was
at the mercy of international forces, beyond the control of the government,
whose leaders did not understand modern monetary policy.
From 1929-'31, while the rest of the world was suffering from the Great
Depression, China initially escaped deflation by using the silver
standard. Other countries went (wrongly) [tried to go] back to
the gold standard. After September 1931, when everyone abandoned the
gold standard and devalued their currencies, China suffered for
remaining on the silver standard, which rose sharply against other currencies.
The result was a sharp net outflow of silver, a trade deficit and domestic
deflation.
The American Silver Purchase Act was implemented in 1934 to protect
domestic U.S. silver prices. This worsened conditions for China. The silver
outflow meant banks had to liquidate their loans to finance the outflow. This
“deleveraging” of paper credit due to an outflow exacerbated the
crisis, in exactly the way the world suffers today from the current crisis.
Shanghai suffered a real estate crisis and, consequently, a banking crisis.
In other words, by sticking to silver, China suffered more than necessary
from the Great Depression. This was because the international supply and
demand of silver was beyond the control of the Chinese government, and its
domestic economic growth and investment were completely at the mercy of
international silver prices.
After the banking crisis of 1934, China's Nationalist government had no
alternative but to reform the currency. On November 4, 1935, China abandoned
the silver standard and created a central bank. But it did not link the
yuan to the British pound, U.S. dollar or yen (the currencies of the most
important powers in Asia at that time). More importantly, China did not
introduce exchange controls. This was probably a mistake, because once war
with Japan broke out and fiscal expenditures got out of control, currency
stability could not be maintained, and inflation soared, ultimately
destroying the government's credibility.
My reaction:
1) This shows the true cause of the great depression: England, France, and
other countries trying to returned to the gold standard boosted value of
gold, creating deflation in gold standard countries.
2) Debt deflation (the most common explanation for what happened in the
1930s) was only a secondary, less important, cause of the Great Depression.
(note: of course there were a number of other lessor factors which helped
create the Great Depression)
3) This also
shows the major problem with the gold standard: countries
establishing/leaving gold standard create deflation/inflation in other
countries on the gold standard.
4) After a period
of monetary chaos (and we are about to enter the mother of all periods of
monetary chaos), nations and individuals will bid more vigorously for the
privilege of having gold.
Eric
de Carbonnel
Market Skeptics
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