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

To: mishedlo who wrote (53873)	2/15/2006 6:03:22 AM
From: Elroy Jetson	Read Replies (1) \| Respond to of 110194

It wasn't the U.S. returning to the Gold Standard after WW-I, it was Great Britain. The UK over-priced their Pound relative to gold. The results were predictable -- those with Pounds and common sense redeemed their Pounds for gold, quickly exhausting UK gold reserves. Germany was also cleaned out due to WW-I reparation payments. America and France had greatly ample gold reserves. In response, Federal Reserve Chair Benjamin Strong and Bank of England's Montague Norman proposed a "solution" whereby the U.S. and France would provide gold to Germany and Great Britain in exchange for bonds from these nations. Charles Rist, Governor of the Bank of France (and my Granddad's cousin), told them the solution was for Great Britain to accept the obvious truth and lower the value of their Pound relative to gold -- and besides there was nothing in this proposal that would benefit France, and thus the Bank of France would never agree to anything so stupid. I have heard the various details of these events over time from Charles Rist's son, who spent his career at the World Bank. Strong and Norman were in many ways little more than confidence tricksters who sincerely believed their schemes would work, just like Monetarists do today. They think they can defy gravity by proclamation -- its not possible. Ironically, Hjalmar Schacht, head of the German central bank and whose Mother was American, absolutely refused the "solution". Unlike Rist's situation, this "solution" might have benefited Germany (gold for worthless paper), but he found Norman and Strong to be so untrustworthy that he suspected an ulterior motive. As Great Britain's over-priced Pound eliminated their exports, they slid into economic depression. Benjamin Strong of the Federal Reserve took many actions which impoverished America in an effort to assist Great Britain from needing to face the truth. These actions, in no small way, brought the economic depression to America's economy. .

To: mishedlo who wrote (53873)	2/15/2006 12:01:13 PM
From: gpowell	Read Replies (1) \| Respond to of 110194

“the major reason for the Great Depression was the expansion of credit by the Federal Reserve during the 1920's boom… There simply is not enough evidence to support this view, and I have looked. if a recall correctly, the US officially WAS on a gold standard throughout the period in question. it didn't need to 'return' to it. of course the official gold standard had become a farce in the face of fractional reserve banking under the Fed system. The seeds of the Great Depression lay ultimately with the pretense to knowledge embodied within the central banks of the major nations. Most of the belligerent European nations took themselves off the gold standard during WW1, and consequently gold flooded the US, which was monetized and doubled the price level. After the War the Federal Reserve engineered a deflation (1920-21), which brought the price level 60% of the way back to pre-war levels. At this time the European nations retuned to the gold standard, but also at a level 40% too high. This made the real value of gold reserves proportionally smaller. With half the World's gold stock in the US, uncertainty over reparations, and exchange rates, the demand for gold reserves were higher than at anytime in history. A few economists including Rist, Mises, and Cassel predicted that this was a recipe for depression. This quote from Cassel, in 1928, illustrates the point: “The great problem before us is how to meet the growing scarcity of gold which threatens the world both from increased demand and from diminished supply. We must solve this problem by a systematic restriction of the monetary demand for gold. Only if we succeed in doing this can we hope to prevent a permanent fall of the general price level and a prolonged and world-wide depression which would inevitably be connected with such a fall in prices.” It was after the deflationary recession set in and gold began to leave the US, that the Federal Reserve made the fatal mistake and that was to defend the gold standard by raising the discount window from 1.5% to 3.5% in Oct 1931. This resulted in a series of bank failures in the already vulnerable US banking system, leading to monetary deflation, which added to and exacerbated the fiscal deflation of the Smoot-Hawley tariff act, raised taxes, and price fixing. what's all this sudden harping about the 'short run' about? in a truly free market, there will NEVER be 'short run stability', whatever that is actually supposed to mean. As Hayek has said, it is necessary to show how the market ever gets it right before you can show how something might be wrong. Beyond that, if you want to compare the performance of a fiat system as currently practiced to a free market then one must know how a free market in money would operate, as well as the characteristic features. the major difference between a free market money regime and a fiat regime is that in the former, malinvestments get liquidated much quicker, and as a result, economic imbalances do not tend to cumulate. furthermore, since non-wealth generating activities are not supported, long term economic growth is far more solid, as fewer resources are wasted. in a fiat regime, market attempts to liquidate malinvestments are frequently 'papered over' A fiat regime is entirely consistent with a free market in money. You really should address your points to central control and pretense to knowledge. in the end, such periods as the Great Depression result - huge, long lasting busts that occur when the fiat credit expansion eventually stops and goes into reverse. I think you have revealed your own pretense to knowledge, i.e. credit and debt are bad, and gold is good. The fact is you do not favor a free market in money, if that free market is based on anything other than a commodity standard. And that occurs because you don’t really know how the market ever gets it right. in reference to Fekete - i agree, i completely forgot that i had already rejected Fekete's argument after at first accepting it. Feteke is clearly a crank. actually, the correct view is that the marginal utility of exchange value goods such as money tends to decline at a much slower rate than that of subjective use value goods That is a direct quote form Don Lloyd.

To: mishedlo who wrote (53873)	2/15/2006 12:48:30 PM
From: gpowell	Respond to of 110194

in view of the money supply expansion that has taken place in concert with exploding deficits since the abandonment of the final vestiges of the gold standard in the early 70's Government spending as a percentage of GDP has been remarkable constant for over 50 years. Gold standard countries, in fact, had very dissimilar debt and government spending levels, revealing that deficits and spending are for the most part a choice made by the citizens of a country about how to finance any particular level of government participation in a pure market. under a gold standard the willingness of the public to lend the state money would indeed represent the limit to its ambitions to grow its debt. this is a major reason why the fiat money system should be rejected - it amounts to a 'hidden tax'. A fiat regime is not dependent upon buying government debt, i.e. there is no necessary connection between fiat money and government debt. who says the state must run a deficit? It is the choice of the citizens of any country; just as carrying debt is an individual choice. Why one would make that choice is usually dependent upon whether you see rationality as an organizing principle for interpreting behavior. i agree that state intervention played a role in those crises that have taken place, but it has absolutely nothing to do with a failure to expand the supply of money. the so-called 'inelastic currency' problem does simply not exist. Does not exist today, but was the major monetary issue of the 19th century, in the US. blame for the Great Depression does indeed lie with the Fed, but certainly not the 'socialist tendencies' of the period 1850-1890. this is ridiculous in the extreme. Ah… I said 1850 to 1980, giving the entire span of the rise and fall of socialist tendencies. there wasn't even an income tax in that period, no welfare state, etc. - the introduction of socialism to the United Sates happend under FDR in the period of 1931 - 1945 (to be fair, he only picked up where a previous interventionist, Hoover, left off). No free market ever proceeds in a straight line. The thought that government was the solution to all social problems and the path to pareto optimality sprung from just a handful of minds in the middle of the 19th century and found full flower after WWII. ….. and FDR's government began its socialist intervention program on a grand scale (a program that included such nonsense as burning entire harvests in a failed atempt to shore up prices of agricultuaral commodities!). Interesting, how can we square "FDR picked up where Hoover left off" with "FDR's government began its socialist intervention program?" FDR was simply part of the socialist mindset that dominated that era. Shostak (this is highly recommended fare regarding monetary theory): I’ve a read a few of Shostak’s articles. I was not impressed. BTW, no one claims that a falling money stock caused the depression. Some monetarists assert that wage and price controls in the face of a falling money stock prolonged and deepened the depression. I believe an objective review of history and the available record will show that the Rothbardian view is not supported by the data. In any case, I think you agree that such a depression would be extremely unlikely without state intervention.