Subjective Invective v.4

NPR Planet Money on Gold

A recent story on NPR Planet Money, Why We Left the Gold Standard, is an amazing mixture of misunderstanding and tangential anecdotes without ever managing to answer the question in the title.

In the early part of the 20th century, all the world's key economies were on the gold standard.
But in 1931, the system began to unravel in the most powerful country in the world: England. When the Great Depression hit, the people in England panicked, and started trading in their paper money for gold. It got to the point where the Bank of England was in danger of running out of gold.

The article never tries to explain why the people wanted gold instead of paper, or why the Bank of England was in danger of running out of gold. It was because the Bank of England was on a fractional reserve gold standard and they issued too much paper to be supported by the gold reserves. Banking, as it grew out of original goldsmiths issuing paper receipts for gold deposits, was a fraud from the start. The goldsmiths could issue more receipts than the gold they had on deposits and as long as not too many people redeemed their receipts at the same time, no one was the wiser. Modern bankers lend out deposits while pretending that all their deposits are available to all depositors all the time. But just like the goldsmiths, if too many depositors want to redeem their paper money receipts, the bank fraud is exposed and the bank fails.

"Because of undermined confidence on the part of the public there was a general rush by a large portion of our population to turn bank deposits into currency or gold," Roosevelt said.
When he gave this speech, Roosevelt knew the gold standard was a problem. But he wasn't sure what to do about it.

The undermined confidence grew after large numbers of banks failed (eventually about half of all banks) and people lost their deposits. There was no FDIC insurance and people, at least some people, knew that banks didn't have enough gold or reserves to pay all depositors. Fractional reserve banking is inherently unstable by design.

"Most economists now agree 90% of the reason why the U.S. got out of the Great Depression was the break with gold," Ahamed says.
Going off the gold standard gave the government new tools to steer the economy. If you're not tied to gold, you can adjust the amount of money in the economy if you need to. You can adjust interest rates.

Most economists have been wrong about most everything, from the Great Depression through the Great Recession. The break with gold happened in 1933 and Depression raged on until after World War II. There was a powerful segment in "Inside Job" showing the duplicitous nature of academic economists. Their opinions and services are for sale and they are happy to offer up some kind of defense of any policy for which they are paid, without, of course, disclosing their financial arrangement. The U.S. got out of the Great Depression only when World War II created massive demand, 400,000 Americans were killed and the productive capacity of the rest of the world was destroyed, creating even more demand.

Being able to issue unlimited unbacked credit and change interest rates to benefit your friends is indeed a powerful tool. The Federal Reserve had all those tools long before the Great Depression, with the exception that their ability to issue credit was restricted by a 40% fractional reserve limit, part of the original Federal Reserve Act.

The author does not discuss why the banks were running out of gold, why FDR confiscated gold from citizens in 1933 then devalued the paper notes he forced them to take -- against the gold he took from them -- and made it illegal to own gold, which remained in effect until 1975. The author does not talk about the fact that the U.S. only went off the gold standard domestically, but continued to redeem dollars for gold with foreign governments until 1971 when Nixon broke the final ties between the dollar and gold. Gold was used to settle international trade balances at the IMF until 1978. The author seems to imply that the US went off the gold standard because it gave the government new tools for central planning of the economy. In fact the only new tool it gave the government was the ability to issue unlimited unbacked credit. The government could devalue people's savings at will. The author seems to have no understanding of monetary history.