1 MIN READ - From the Cautious Optimism Correspondent for Economic
Affairs and other Egghead Stuff... to those who have followed his series on the
Federal Reserve System and monetary policy during the Great Depression:
A beautiful summary from Friedman and Schwartz
on the effects of sterilization of gold inflows by the Federal Reserve in the
early 1930's:
"The international effects [of deflation] were severe
and the transmission rapid, not only because the gold-exchange standard had
rendered the international financial system more vulnerable to disturbances,
but also because the United States did not follow the gold-standard rules. We
did not permit the inflow of gold to expand the U.S. money stock. We not only
sterilized it, we went much further. Our money stock moved perversely, going
down as the gold stock went up... ... The result was that other countries not
only had to bear the whole burden of adjustment [due to suppression of the Hume
Price-Specie Flow Mechanism that would normally allow international prices to
readjust upwards] but also were faced with continued disturbances in the same
direction, to which they had to adjust. As [New York Fed Governor George]
Harrison noted in early 1931, foreign commentators were particularly critical
of the monetary policy of the United States..."
-Milton Friedman and Anna Jacobson Schwartz, "The Great
Contraction" (1963, p. 109)
Yet 56 years later modern Neoclassical and Keynesian
economists and historians continue to blame "the gold standard," not
interference in its automatic workings by central banks, for the tragic 1930's
deflation.
As George Mason University's Lawrence H. White has
perceptively reminded his profession:
"The interwar period shows us a case where central
banks—not the gold standard—ran the show.”
...and...
“Several authors identify genuine historical problems that
they blame on the gold standard, when they should instead blame central banks
for having contravened the gold standard.”
-"Recent Arguments Against the Gold Standard"
(2013 Cato Policy Analysis)
The Economics Correspondent's detailed and running series on
Federal Reserve policy during the early 1930's can be read at:
Parts 3 and 4 will be forthcoming.
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