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Strategies & Market Trends : The Epic American Credit and Bond Bubble Laboratory -- Ignore unavailable to you. Want to Upgrade?

To: regli who wrote (27900)	3/5/2005 6:54:19 PM
From: Elroy Jetson	Read Replies (2) \| Respond to of 110194

Prior to, and during the Great Depression, the United States produced far more gold than was required for monetary gold reserves. The U.K. had insufficient gold reserves, made worse when the Bank of England, under Montague Norman, over-valued the Pound Sterling when re-adopting the gold standard. Fed Chairman Benjamin Strong, for reasons that are not clear to me, decided it was in the Fed's best interest to support the Pound by trading gold and US dollars for pounds - in essence trading US wealth for paper worth far less. Charles Rist always said he assumed this was due to, "some misguided sense of Anglo-Saxon solidarity" where "a common language made nonsense seem more valid." As our Fed recently urged on Japan, and Japan adopted, Norman and Strong laid out a proposed series of monetary expansions where each central bank would purchase currency from the other three central banks. France and the United States had a surplus of gold while England and Germany were entirely deficient in gold stocks. With a free flow of gold redemptions, this scheme of currency inflation would facilitate a transfer of gold from France and the United States to England and Germany. Charles Rist saw no compelling reason for France to join what amounted to a "monetary suicide pact" along the lines always proposed by Currency Cranks. It would seem that Schact and the Wiemar bank would have delighted in this plan, but rejected this "solution." Rist believed this was partly out of principle but more out of an extreme distrust of Strong and Norman. The United States and England proceeded with this plan alone. In the process they devastated the value of their currencies and impoverished their citizens. One might suppose that England and the United States could have provided significant job creation with their devaluation scheme, but the Great Depression was accompanied by world-wide tariff regimes designed to halt the flow of imports, especially from nations whose currencies had devalued relative to the home nation. Although long know for fine wines, linens and luxury goods, France's reputation along these lines became an icon during the 1930s as the value of French currency soared relative to England and America. The French government provided significant support to expand these exports which were still in demand at higher prices. In fact most of these goods acted in a manner known to economists as "Giffen Goods" where the demand actually increases as prices rise (at least over a relevant range). The very wealthy in the US and UK made an ostentatious display of serving French Champagne on tables covered in the finest French linens and a legacy was born. Charles Rist and the other governors of the Bank of France insisted that the government maintain a balanced budget, leaving many war veterans without the pensions the government had rashly promised them during the war. Yet in spite of this and a strong currency, France largely avoided much of the pain brought by the depression. One more point arises in your question. Lack of confidence in banks led to "runs on the bank" by depositors who wanted their paper money back. But this in no way reflected a lack of confidence in the dollar, which is precisely what the panicked depositors were seeking. The value of the dollar declined as gold was earmarked for the UK. The UK and US re-valued the price of gold upward to make up for the shortage. But seen from a true perspective, increasing the number of Pounds or Dollars given in exchange for an ounce of gold is really just a currency devaluation where gold is given the job as Master-of-Ceremony. .