Is the Gold Standard Is Antiquated?
Opponents of the gold standard use the events of the 1920s when the leading countries of the world returned to a pseudo gold standard. They use these events to prove that the gold standard is antiquated, a barbaric relic, and unworkable and needs to be abandoned for a managed currency, i.e., fiat money.
Like most major wars, World War I was fought with credit money. Withdrawal of this credit money led to the depression of 1920-21. Again, banks expanded credit money during the 1920s, which caused the Roaring Twenties. When they withdrew the credit money, the Great Depression followed. However, the gold standard received the blame.
By 1928 most countries had returned to the gold standard or more correctly, a bastardized gold-exchange standard. (The United States had maintained their gold-coin gold standard except about two years at the end of World War I when exportation of gold was prohibited. Domestically, paper money remained redeemable in gold until 1933.) Beginning in 1931, countries began abandoning the gold standard. By the end of the year, most countries were off the gold standard. In 1933, the United Stats finally left it.
Many things contributed to the failure to maintain the gold standard after World War I. They include:
1. interference with or not facilitating the movement of gold;
2. war debts and reparations and how they were paid (large payments had to be paid at specified times to specific countries despite exchange rates among other problems);
3. interference with the natural movement of goods, such as tariffs;
4. imprudent foreign lending, which allowed foreign countries, especially Germany, to buy goods on credit and enable Germany to pay its reparations;
5, inflexibility in prices caused by international cartels and governmental price fixing and inflexibility in the system of wages (strong resistance by workers to a reduction in pay);
6. abandonment of the real bills doctrine so that international trade could be controlled; and
7. a lack of confidence that caused large sums of money to be transferred from place to place based on emotions rather than economic factors.
The problems that lead to the fall of the gold standard had nothing to do with the gold standard itself. Defects in the gold standard did not cause it to fall. Defects in the political situation did.
The gold standard only functions under proper conditions. As the above list illustrates, the belligerent powers refused to allow the conditions under which the gold standard flourishes that exist before the War to return. About the demise of the gold standard, Frederick Bradford comments, “The gold standard itself is no more a failure than an automobile which refuses to run smoothly because there is dirt in the carburetor and the front wheels have been detached from the steering gear. The really surprising thing is that the gold standard was able to function at all under the circumstances.”
A real problem with the gold standard is that paper money and other credit money promising to pay in specie soon accompanies it. Before long the government becomes involved in the name of protecting the people from counterfeiting and failure to redeem notes. Such protection is a legitimate function. However, the government does not stop here unless the people remain vigilant. The next step is to require bank notes to be secured by government debt — thus, ending their issuance for economic needs. At this point, if the government has not usurped the authority to issue notes or granted a bank such a monopoly, it soon will. Fiat money adherents like this attribute because they can now get the government to end convertibility and change the paper money into a fiat currency.
After governments, i.e., the elite who really controls the governments, had tasted the power and wealth that fiat paper money brought them, they were reluctant to relinquish such a monetary system. Being unable to bend the gold standard to their will, they abandoned it. To them it was an antiquated system.
Copyright © 2015 by Thomas Coley Allen.