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Strategies & Market Trends : Booms, Busts, and Recoveries -- Ignore unavailable to you. Want to Upgrade?

To: Box-By-The-Riviera™ who wrote (5764)	7/14/2001 9:22:06 PM
From: yard_man	Read Replies (1) \| Respond to of 74559

I believe the excerpt below is really revisionist -- I need to dig a little more into the history of this period to find out. I do not think it is true that falling prices must => a contraction in economic activity, though they have been seen simultaneously. Also >>domestic disturbances such as a banking panic or a stock market crash<< this refers to symptoms and not to root causes. Just the fact that such happened under a gold standard does not => that a gold standard was the cause. Implicit in the statement, I think, is a complete acceptance of what Milton Friedaman said would have rescued the country in 1929. >>But the gold standard had significant limitations in the short and intermediate terms. First, while the gold standard anchored the price level over the very long run, it nonetheless allowed it to drift upward and downward by significant amounts over fairly long periods. For example, slow growth in the world gold supply caused the price level to decline at over 1 percent per year from 1879 to 1897, which provoked William Jennings Bryan's famous plea not to crucify mankind on a cross of gold. Subsequently, new gold discoveries and improved mining techniques caused the metal's supply to increase rapidly in the late 1890s and early 1900s. Consequently, the price level rose at over 2 percent per year from about 1897 to 1914. A second limitation was that the strict discipline of the gold standard did not allow the money supply to increase rapidly in response to domestic disturbances such as a banking panic or a stock market crash. << Also, notice the langauage here in the following paragraph -- these "bank runs" are taken to be almost as natural as a thunderstorm or the cycle of the seasons -- just a fact of life with fractional reserve banking and a gold standard. No exploration or references to cause. And spikes in interest rates, corrective though they might be, are just viewed as a secondary cause of a natural event. A gold standard, then is easily portayed as something shackling the bankers who really know better than the participants (those who would withdraw in order to convert their demand deposit to "real" money or goods). >>Let me expand just a little on that last point and shift the focus temporarily from prices to interest rates, since it was really a concern about financial problems and sharp interest rate movements under the gold standard that led to the Federal Reserve Act. Because the nation's monetary gold stock was relatively unresponsive to domestic economic conditions in the short run, the National Banking Era was characterized by considerable short-term interest rate variability. Sudden sustained short-term interest rate spikes of over 10 percentage points occurred on eight occasions during this period. Some, though not all, of these spikes were associated with banking panics, which involved a loss of confidence in the banking system and a rush to convert bank deposits into currency. Since banks held only a fractional reserve of coin and currency in their vaults, "bank runs'' generated a scramble for liquidity that could not be satisfied in the short run. Major banking panics occurred in 1873, 1884, 1890, 1893 and 1907. In addition to the recurring interest rate spikes, there was a pronounced seasonal pattern in short-term interest rates. <<