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I
noted before a rather strange oddity: that most
self-proclaimed “gold standard advocates” actually label the
monetary arrangements of the 1925-1931 period as a major cause of
the Great Depression.
Oddly enough, the Keynesian Mercantilists generally do not. They
claim an “inherent instability of capitalism” that requires
government oversight and intervention, including funny-money
currency manipulation by an unelected board of central bank
bureaucrats. A gold standard system prevents this. But, the
Keynesian Mercantilists generally do not lay blame on the gold
standard system itself.
Why is this so? Alas, economics is a field of study heavily polluted
by politics. One or another “explanation” for some past event is
typically a justification for present and future policy. This has
been as true of the Classical, right-leaning economists as it has
been for the Mercantilist, left-leaning economists.
Why bring this up now?
I think we are naturally trending towards the replacement of today’s
Mercantilist funny-money arrangement with a Classical hard-money
system, which in practice means one based on gold. Probably, this
will be accomplished with Russian, Chinese and perhaps German
leadership, along with the participation of a number of allied
states ranging from Iran to Brazil.
Unfortunately, there is still quite a lot of intellectual detritus
to clear away, in my opinion, to best facilitate this political
trend toward its natural conclusion. In other words: someone,
somewhere, actually has to know what they are doing.
Here are some hypotheses for why the “gold guys” became their own
worst enemies – actually inventing a series of rather fanciful
arguments why the existing gold standard arrangements of 1925-1931
didn’t work, and in fact helped cause one of the biggest economic
dislocations of the past two hundred years!
They don’t like “central banks.” What we call “central
banks” today generally emerged in the latter 19th century worldwide,
patterned on the model of the Bank of England. These were currency
monopolies, in contrast to the distributed system used by the United
States, which had a long history of opposition to currency monopoly.
Alas, even the U.S. succumbed to the trend toward currency monopoly,
enacting the Federal Reserve Act in 1913, under
rather curious circumstances. The Federal Reserve became
active in the 1920s, although the U.S. still used a competitive
currency environment via the National Bank System, which remained
viable until the late 1930s. Although the Federal Reserve certainly
is to blame for a great many things, especially after 1965 or so,
actually I find that it (and other central banks worldwide) adhered
to gold standard principles rather closely in the 1920s and 1930s.
The devaluation of 1933 was entirely due to executive order, and did
not involve the Federal Reserve directly.
They don’t like the “gold exchange standard.” The “gold
exchange standard” is a needlessly obscure term that simply refers
to a currency board-like arrangement that targets a major
international “reserve currency,” also based on gold, rather than
having a direct link to gold bullion itself. In practice, these
things tend to blur a bit, as many central banks had a somewhat
loose operating procedure that included both transactions in bullion
and also in foreign gold-linked currencies, and held both bullion
and foreign government bonds as reserve assets. In any case, the
“gold exchange standard,” when operated correctly, is little more
than a currency board, which we use today with no particular
problems, and which had been used in the late 19th century as well.
Sometimes, a “gold exchange standard” might not be operated
correctly, in which case it is simply a system that is not being
operated correctly, with the usual bad consequences.
However, a “gold exchange standard” does have an inherent weakness –
it is somewhat dependent on the quality of the reserve currency, in
practice either the British pound or U.S. dollar. If the pound or
dollar was itself devalued (as indeed happened in 1931 and 1933),
this would tend to put at risk all subsidiary currencies linked to
these “reserve currencies.” This indeed happened in the 1930s, and
again in the 1970s.
Also, “gold exchange standards” often do not have a direct provision
for “convertibility,” or the requirement that the currency issuer
(central bank) trade banknotes for bullion, and vice versa, on
demand. Although this is not a requirement for a properly
functioning gold standard system, the historical record shows that
the absence of such a requirement often leads fairly quickly to an
erosion of the system itself due to what amounts to political
corruption. In practice, the requirement to deliver a reliable
international reserve currency (such as British pounds) on demand
has served much the same purpose, but many think gold bullion
redeemability would be much better.
Unfortunately, these worthy criticisms of reserve-currency
currency-board-type systems tend to motivate the blaming of “gold
exchange standards” for a wide variety of things that they really
have nothing to do with.
They are inordinately attached to monetary explanations for
everything. You have probably heard of the “Austrian
explanation of the business cycle.” It is based entirely on
funny-money manipulation by central banks. By itself, there’s
nothing in particular wrong with it, and indeed variants of this
pattern do occur. However, plenty of other things happen in
economies also, and the self-proclaimed “Austrians” are forever
trying to pound their square peg into round, triangular, and
star-shaped holes. The formative experience in the actual
used-to-live-in-Austria “Austrians” was of course the Austrian
hyperinflation of the early 1920s, which was much like the
better-documented German hyperinflation of the same time period, but
which preceded the German example by about six months. So, there’s a
reason for this intense focus on monetary affairs, and the
consequent exclusion of everything else.
They have a blind spot for fiscal policy, in particular tax
policy. Over a thousand U.S. economists expressed the belief
that the U.S.’s Smoot-Hawley
Tariff, and the consequent worldwide trade war as many
governments passed retaliatory tariffs worldwide, would lead to an
economic downturn. The House passed the bill in May 1929, and the
Senate in March 1930. President Hoover signed the bill into law in
June 1930. Some historians have identified September 1929 as the
moment when the Senate moved from a majority in opposition to a
majority in favor, which was accomplished by a radical expansion of
the tariff to include many Senators’ home-state industries.
As the worldwide trade war ignited, trade and economies predictably
sagged. It was exactly as those thousand-plus economists said would
happen. Yet, oddly, nobody wants to lay blame on this as the initial
instigator (but not the only or even primary cause) of the Great
Depression, and would rather instead make up monetary fantasies.
This “blind spot” for influences such as tariff or tax policy in
fact goes back several decades in the Classical tradition. If you
read central texts such as Alfred Marshall’s Principles
of Economics of 1890, or Ludwig Von Mises’ Human Action
of 1949, there is hardly any discussion at all of tax policy.
They don’t want to accept the “capitalism is inherently unstable”
arguments of the Keynesian-Mercantilists. Once you decide
that capitalism is–in principle–inherently unstable, you are
immediately drawn to the big-government funny-money arguments that
the Keynesian-Mercantilists so enthusiastically embrace. In
practice, “capitalism” (a convenient word for present arrangements)
is in fact “unstable,” and does lead to things like the Great
Depression or today’s crony-fascist debt bubble. However, I
personally agree that capitalism in principle does work, and
doesn’t just blow up for no reason at all.
Most big problems in “capitalism” (i.e., real life) are due to big
mistakes–huge deviations from the principles of capitalism. Like a
worldwide tariff war. You can’t get much more obvious. Even a
thousand economists (no smarter then than today) could see it.
However, due to the “blind spot” regarding all forms of government
intervention and influence besides monetary affairs, the
Classical economists were pressed to explain the Great Depression as
some kind of deviation from the proper Classical monetary
principles. In other words, it was another attempt to get the square
peg to fit into a non-square hole.
Bizarrely, because they already signed on to the “capitalism is
inherently unstable” argument, the Keynesian-Mercantilists, despite
being lifelong haters of Classical gold-based monetary systems, did
not have a motivation to blame the monetary arrangements of the
time. So, they didn’t. They hated that the “golden fetters”
prevented the swift application of their funny-money solutions. They
had to wait all the way until September 1931, when devaluation by
Britain set off a chain of similar devaluations worldwide. It didn’t
work particularly well, and even Keynes himself signed on to the
Bretton Woods Agreement of 1944, which put the world gold standard
system back together.
They wanted to remain friendly with their political allies, who
were making a big mess of things. The modern Republican party
has long had a tension between the “austerity wing,” which often
recommends tax rate increases as a way to deal with deficits, and
the “growth and opportunity wing,” which often recommends tax rate
reductions as a way to allow a healthier economy, which is–in
practical terms–necessary for effective deficit reduction in any
case. Both of these can come into conflict with the
“protectionist/cartelist wing,” which has recommended protectionist
tariffs since pre-Civil War days.
In the 1929-1932 period, the “growth and opportunity wing,” as
represented by Treasury
Secretary Andrew Mellon, was brushed aside, and the
Republican/conservative/Classical political block was dominated by
the “austerity wing” and the “protectionist/cartelist wing.” Mellon
himself was marginalized by Hoover, who had acquiesced to the
“protectionist-cartelist” wing by passing the Smoot-Hawley Tariff
(which Hoover originally opposed). Mellon resigned in February 1932.
Hoover then immediately crumbled before the “austerity wing” of the
Republican Party, passing the Revenue
Act of 1932, which included an explosion of personal and
corporate income taxes, and a barrage of excise taxes (in effect, a
sales tax).
Being an economist is like being a poet: you
shouldn’t expect to get paid. Those who do seek remuneration
(even in academia) are inevitably drawn toward one or another
existing political bloc, where, if they expect to keep getting paid,
they inevitably start making justifications for what the politicians
wanted to do anyway. Even Andrew Mellon couldn’t keep his job, in
opposition to the “austerity and protectionism” Republicans of that
time. The message was clear–in the U.S., and also in other
countries, which had much the same pattern. Thus, the
Classical-leaning economists knew very well that there was no
sinecure available for them if they were going to oppose the
“austerity and protectionism” measures of the political
conservatives of that time. (The political liberals all wanted
big-government Keynesian-Mercantilists, and had no interest in
Classical-leaning economists.)
Remember, it was the Great Depression. Nobody wanted to lose their
job.
The "growth and opportunity wing" had a brief resurgence after WWII,
but this was quashed by Eisenhower. Except for that, the Republican
Party was dominated by the austerity-protectionist wings from 1929
to 1975. The Republican Party "growth and opportunity wing" didn't
make a comeback until Jack Kemp and Dick Armey led the tax-cutting
Reagan Revolution beginning in 1975. Coincidentally (or not), this
was also when Classical-leaning economists also began taking a
closer look at the role of government fiscal and other policy in the
Great Depression, abandoning the intense fixation on monetary
explanations that dominated the 1950s and 1960s.
The “conservative funny money” idea turned into a big seller.
The Classical ideals and principles of capitalism made a big
recovery after World War II, but in a mutated and contorted form.
All the small-government laissez-faire principles returned, but with
one big exception: the introduction of a funny-money fiat currency
element. This was exemplified most of all by Milton Friedman, whose
“monetarism” is just a slightly different flavor of Mercantilist
funny-money manipulation. Milton Friedman was a lifelong enemy of
Classical monetary principles, including gold-based money. Friedman
also blamed Fed negligence for the Great Depression, making
essentially no mention of the catastrophic errors by the
conservative “austerity wing” and “protectionist/cartelist wing” of
that time, or later for that matter.
This was a big seller. Friedman was popular. He reached the highest
levels of recognition and influence in the world of economic policy,
despite being something
of a ding-dong if you ask me. Those who wanted to make a
living selling their economic poetry noticed.
Contrast Friedman’s professional success to the career of
Ludwig Von Mises, who is acknowledged as one of the greatest
economists of the twentieth century even by those who don’t agree
with him. Mises couldn’t even get a regular job. He spent his
postwar career (1945-1969) as a visiting professor at New York
University, an unsalaried position that was funded by a friendly
private businessman. He was, like Andrew Mellon, unemployable. Fifty
years from now, I think Mises will still be recognized as one of the
twentieth century’s greats, and Friedman will be considered just
another Mercantilist nincompoop of the sort popular during that dark
period. But, Friedman got paid, and Mises did not.
These things are understood at a subconscious, even limbic level by
the vast majority of economic writers. They internalize it, churning
out volumes of whatever happens to be politically expedient at the
time, all the while remaining True Believers in everything they
write. (It becomes difficult if you are not a True Believer, and the
pay isn’t sufficient to tell lies all day.) This is simply the
expected behavior of monkeys with an oversized brain, and has little
to do with historical truth.
Thus, my personal conclusion is that the Keynesian-Mercantilist
writers mostly have it right: there was no particular
problem with the gold-based monetary system of the latter 1920s or
early 1930s.
If we are going to properly rebuild a world monetary system along
Classical lines in the future, it might help if others also took a
fresh look at these issues.
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