|
Here's something you don't see everyday: a look at Germany's
Reichsbank during the 1920s and 1930s. The German mark was nominally
stable vs. gold throughout the interwar period, but that was
achieved with heavy capital controls especially after 1931 I think.
This continues our look at some major central banks during the
1914-1941 period.
July
27, 2014: The Bank of France, 1914-1941
July
20, 2014: The Bank of England, 1914-1941
January
...
26, 2014: The Federal Reserve in the 1930s #2: Interest Rates
target="_blank" January
...
19, 2014: The Federal Reserve in the 1930s
target="_blank" July
18, 2014: Foreign Exchange Rates 1913-1941 #8: A Brief Summary
target="_blank" December
...
23, 2012: The Federal Reserve in the 1920s 4: The Historical
Record
target="_blank" December
...
16, 2012: The Federal Reserve in the 1920s 3: Balance Sheet and
Base Money
November
...
25, 2012: The Federal Reserve in the 1920s 2: Interest Rates target="_blank"
November
...
18, 2012: The Federal Reserve in the 1920s
The source of our data is the Federal Reserve Banking and
Monetary Statistics, 1914-19 target="_blank"41.
http://fraser.stlouisfed.org/publication/?pid=38
After the famous hyperinflation in the early 1920s, Germany
maintained the mark's link to gold until WWII, at least in a nominal
or official basis. The 1923 gold parity was the same as the pre-WWI
parity, although it didn't have to be. Just tradition.
We see here a big drop in gold bullion holdings after 1931, and of
course a giant rise later in government Treasury bills. It looks
like there was some printing-press finance for the war beginning
around 1938 or so.
Liabilities consisted mostly of banknotes, with a little bit of
deposits (bank reserves).
Let's look at just the period to 1937, skipping for now the big rise
toward the end of the 1930s.
Again, we see that big drop in gold holdings. However, the fact that
it continues until 1934 indicates that it was still possible to
somehow acquire gold; or, perhaps the government itself was using it
to obtain foreign imports.
Base money makes a big contraction beginning in 1931. There was a
lot going on around that time, including some bankruptcies of big
banks and also major sovereign defaults. Germany had a major
sovereign default in 1932; I think Austria was in 1931. I would not
consider this reduction in base money supply "contractionary" unless
the value of the mark rose; but there was hardly any reason for
that, and the mark was actually stable in value. So, it was a
reduction in supply in reaction to a reduction in demand, and there
certainly were a lot of reasons that people would perhaps not really
want to hold marks. This reduction in supply, in the context of
maintaining a gold parity value, doesn't really have many broader
effects, although short-term interest rates can be affected for a
short while.
What if, for example, the Bank of France asked for its
mark-denominated assets (if indeed it had any; most foreign holdings
were British pound and U.S. dollar assets I think) to be redeemed in
gold bullion at the Reichsbank? Actually, a government bond is not
redeemable for gold under a gold standard system; only the
liabilities of the currency manager (Reichsbank), which are
basically banknotes and domestic commercial bank deposits at the
Reichsbank, or base money. But, let's say that the Bank of France
sold the German government bonds for cash (actually a bank deposit
at a commercial bank, which is a form of debt liability of the
commercial bank), and then asked the commercial bank to redeem that
for gold. The commercial bank could default, in essence saying that
it would not pay back its deposit in the form of base money.
However, let's say that, one way or another, the commercial bank
does ask for its base money (bank deposits) at the Reichsbank to be
redeemed in gold. The Reichsbank could, conceivably, refuse to do
so, arguing (plausibly) that it would be overly disruptive given the
very large size of the order, or perhaps demand that it be spread
out over some time period. The Bank of France is not without options
here; they can just sell their bonds for cash, and then use the cash
to buy gold bullion on the open market (from miners for example, or
anyone wishing to sell gold bullion), thus accomplishing the same
thing as if they had acquired gold bullion directly from the
Reichsbank. They could even engage in forward contracts with the
miners, in essence buying future production. The main reason they
might not do this is if the market price of gold in marks was higher
than the parity value; let's say, 55 marks/ounce instead of parity
at 50. In that case, the mark is weak compared to its gold parity,
or that marks are oversupplied, and thus that a reduction in base
money supply (resulting from gold redemption) is exactly what was
needed to return the mark to its gold parity value.
But, let's say that the Reichsbank does indeed deliver gold to the
commercial bank, and the commercial bank does indeed deliver gold to
the Bank of France, and that the German base money supply does
indeed contract by the amount of the gold redemption, at least in
the first instance. Actually, that did NOT happen, as the increase
in Treasury bills effectively offset the initial outflow of gold.
But, in this scenario, one of two things might happen: the value of
the mark might not rise, in which case the gold redemption
represented a genuine net reduction in demand, and the reduction in
base money supply was exactly correct to accommodate this decrease
in demand. Or, the value of the mark might rise, in which case
arbitrageurs would step in. Let's say the mark/gold parity was 50
marks/ounce, and the market value of the mark was 45 marks/ounce.
Arbitrageurs would come in and buy gold with marks at 45 marks/ounce
in the open market, and then give the gold to the Reichsbank and
receive 50 marks in return. The Reichsbank's assets would thus
expand by one ounce of gold bullion and base money would expand by
50 marks. Arbitrageurs would make 5 marks of risk-free profit. This
would continue until there was no more profit to be made; in other
words, the market value of the mark was at the gold parity of 50
marks/ounce. Or, the value of the mark might rise against some other
currency (the US dollar) by some little margin, in which case the
Reichsbank could step in and buy Treasury bills in the open market
to expand the base money supply, and reduce the value of the mark
until it returned to its official gold parity (and implied foreign
exchange rate). Or, the Reichsbank could buy dollars and sell marks,
and the asset side of the balance sheet would ultimately reflect an
increase not in German government bills, but U.S. government bills,
which would be recorded as an increase in "foreign exchange."
Another potential process is that, as the commercial bank requires
more base money to meet deposit redemptions into gold bullion, it
must effectively borrow these bank reserves (note the rather low
amount of bank reserves throughout this time period). This could
cause an increase in short-term interest rates; and in any case, the
bank can then discount bills at the Reichsbank, thus increasing the
Reichsbank's bill holdings. Under the principles of "19th century
central banking," these bank loans could be "short-term,
self-cancelling loans," allowed to roll off as the bills mature.
Thus, base money naturally contracts again, but spread out over a
longer time period. The ultimate result is that the effects of a
sudden gold redemption are spread out. If the effect of the rolloff
of bills is that base money is insufficient, then gold inflows
increase to offset the bill rolloff. Or, if the contraction of base
money is warranted over a longer time period, the bills roll off but
the value of the mark does not rise sufficiently to cause bullion
inflows. You can see that there are a lot of mechanisms in place
that would self-adjust to keep the supply of base money exactly what
it should be to maintain the gold parity, no matter what the Bank of
France or others might do.
Actually, the proximate cause of the decline in base money beginning
in 1931 was not the decrease in gold bullion, as that was
immediately offset by an increase in holdings of Treasury bills.
Rather, it was the decline in holdings of Treasury bills thereafter.
Why should Treasury bills decline? Since these can only increase or
decrease via open-market operations (assuming automatic rollovers of
maturing bills), changes are thus due to the decisions of the
Reichsbank itself, not the Bank of France or anyone else. Probably,
they were reacting to weakness of the mark in the forex market and
also compared to the gold parity, shrinking the monetary base in
response exactly as is required to maintain the gold parity value
for the mark. In other words, the contraction in base money
1931-1933 most probably represent adjustments necessary to maintain
the mark at its parity value in response to declining demand for
marks.
If this is confusing, then please see my book Gold: the Monetary
Polaris, where these scenarios are described in detail.
Indeed, the decline in base money from about 5 billion marks to
about 4 billion marks is exactly the kind of "20% reduction in base
money supply" that I mention is usually about right to react to a
currency crisis. What a coincidence. Not really--it's just that I've
seen this before, and make the example of Russia in 2009 in my book.
A similar reduction in base money supply (probably less than 20% in
those cases) would have allowed Britain to avoid devaluation in
1931, or the U.S. in 1971.
We can see from the value of the mark vs. gold at the top (actually
the value of the mark vs. the dollar, translated into gold), that
the mark indeed had a sag in 1931 below its parity value, and that
this sag was indeed corrected. The "sag" in 1933 might just be a
factor of translating the then-declining value of the dollar vs.
gold into a mark/gold value, a complicated way of saying it is
perhaps statistical noise that should be ignored.
In any case, unlike the central banks of the U.S., Britain and
France, where base money was largely unchanged through the 1929-1935
period, the Reichsbank's base money supply had some ups and downs.
This was quite an eventful time, and a review of historical works
would be necessary to get an idea of all the things that were going
on then. Simultaneous bank and sovereign default has a way of making
a mess of everything.
| |
