ON THE GOLD STANDARD

thelivyjr
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Re: ON THE GOLD STANDARD

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The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...

The New Monetary Regime

In January 1934, the United States relegated gold to a subordinate role in monetary policy.

On January 15, the Roosevelt Administration sent legislation to the Congress vesting title of all monetary gold in the United States in the Treasury and giving the President the authority to lower the gold content of the dollar to between 50 percent and 60 percent of its earlier level and to change the value of the dollar within this 10 percent range at any time.

On January 16, the Federal Reserve took over the gold-purchasing program from the RFC and began buying gold at $34.45 per ounce.

Finally, on January 30, 1934, the Congress gave Roosevelt what he wanted: the Gold Reserve Act.

The act transferred title of gold from the Federal Reserve to the United States government, prohibited gold coinage, and banned gold from circulation.

By proclamation, on January 31, 1934, Roosevelt fixed the price of gold at $35 per ounce, a devaluation of the dollar to 59.06 percent of the par instituted in 1879 under the Resumption Act; this action increased the official value of the monetary gold stock from $4,033 million to $7,438 million.

Because all gold had been nationalized, the government gained a $3 billion paper profit.


When it flourished, the international gold standard facilitated the flow of goods and capital among countries and promoted international price stability over the long run.

When it floundered, the international gold standard became a weapon for large countries to wield in the advancement of domestic objectives.

After the United States fixed the price of gold in 1934, the world's gold poured into the United States Treasury, and the already disquieted world markets fell into a frenzy.

Gold imports for February totaled $454 million, of which $239 million flowed from London and $124 million from France.

In 1934, the United States imported $1.22 billion in gold; in 1935, $1.74 billion.

The term competitive devaluation understates the magnitude of the monetary metamorphosis.

In 1934, the United States registered surpluses in the international accounts of commodity trade ($478 million) and of interest and dividends ($93 million), while it imported both short-term capital ($184 million) and long-term capital ($202 million).

The decline of the dollar set back the efforts of countries that were off the gold standard to contrive domestic recovery through export growth.

The dollar-pound rate averaged more than $4.88 in every year from 1934 until 1939.

Dollar devaluation forced gold-bloc countries to abandon the gold standard, to devalue their currencies, or to suffer through more deflation.

The French franc eventually succumbed to devaluation in 1936.

The shift in the focus of U.S. monetary policy toward domestic objectives culminated with the Gold Reserve Act, which greatly diminished the influence of the gold standard.

While the act restored the commitment by the United States to buy gold at a fixed price, it restricted sales to those involving international settlements.

Americans could no longer redeem dollars for gold.

The act allowed the President to change the gold content of the dollar at any time.

As a result of the act, concern about the level of gold reserves was all but completely obviated.

The institutional framework that ensued defies easy description.

Friedman and Schwartz named it a "discretionary fiduciary standard," and Brown coined the term "administrative international gold bullion standard." 15

The Federal Reserve called it "our modified gold standard." 16

Without doubt, the United States did more than devalue the dollar in 1934.

It changed its monetary regime.


15. Friedman and Schwartz, Monetary History, p. 474; and Brown, International Gold Standard, vol. 2, p. 1303.

16. Board of Governors of the Federal Reserve System, The Federal Reserve System: Purposes and Functions (Board of Governors, 1963), p. 166.

TO BE CONTINUED ...
thelivyjr
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Re: ON THE GOLD STANDARD

Post by thelivyjr »

The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...

THE GOLD STANDARD: DESCRIPTIONS AND DEFINITIONS

Fixing the value of a country's monetary unit in terms of a specific weight of gold constituted the essence of the gold standard.

For example, the United States went back on the gold standard in 1879 by defining a dollar to equal 23.22 fine grains of gold or, equivalently, by setting a price of $20.67 for one troy ounce of gold.

Before the First World War, most countries were on a form of the gold coin standard.

These countries minted gold coins that circulated, along with notes that were fractionally backed by gold reserves, in the payments system as legal tender.

To economize on gold reserves after the war, many countries, including Britain but not the United States, stopped circulating gold coins.

Instead, these countries instituted a gold bullion standard, under which notes could be exchanged for gold bars.

Under the international gold standard, currencies that were fixed in terms of gold were, necessarily, tied together by a system of fixed exchange rates.

The fixed relative quantity of gold between two currencies in the system was known as the parity.

The prewar parity between the dollar and the pound sterling was $4.8665 to 1 pound, but the dollar-pound exchange rate could move in either direction away from the parity benchmark by a small amount to the gold export point, where it became profitable to ship gold to the country with the stronger currency.

Before the First World War, many central banks held pounds as a reserve asset, and the pound usually served in lieu of gold in international transactions; this system was known as the sterling exchange standard.

At the Genoa Conference of 1922, all European governments declared the reestablishment of the international gold standard to be their ultimate and common financial objective and, to economize further on gold reserves, resolved to adopt a gold exchange standard under which gold-based assets would serve as reserve assets.

This goal was achieved by the mid-1920s.

However, the extensive holdings of foreign exchange reserves (primarily dollar- and pound-denominated deposit balances) under the gold exchange standard went beyond what the participants at the conference had envisioned.

In the ten years before World War I, total foreign exchange reserves in European central banks fluctuated between $250 million and $400 million.

In contrast, at the end of 1924, foreign exchange holdings totaled $844 million; at the end of 1928, they were $2.513 billion.

TO BE CONTINUED ...
thelivyjr
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Re: ON THE GOLD STANDARD

Post by thelivyjr »

The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...

BIBLIOGRAPHY

Barro, Robert J. "Money and the Price Level under the Gold Standard," Economic Journal, vol. 89 (March 1979), pp. 13-33.

Board of Governors of the Federal Reserve System. The Federal Reserve System: Purposes and Functions. Washington: Board of Governors, 1963.

Banking and Monetary Statistics, 1914-1941. Washington: Board of Governors, 1943.

Annual Report, for the years 1914-34. Washington: Board of Governors, 1915-35.

Bordo, Michael D. "The Gold Standard: Myths and Realities," in Barry N. Siegel, ed., Money in Crisis. Cambridge, Mass.: Ballinger Publishing Company, 1984.

Brown, William Adams, Jr. The International Gold Standard Reinterpreted, 1914-1934, 2 vols. New York: National Bureau of Economic Research, 1940.

Burgess, W. Randolph, ed. Interpretations of Federal Reserve Policy in the Speeches and Writing of Benjamin Strong. New York: Harper & Brothers, 1930.

Cagan, Phillip. Determinants and Effects of Changes in the Stock of Money: 1875-1960. New York: Columbia University Press for the National Bureau of Economic Research, 1965.

Crabbe, Leland. "Three Empirical Essays on Interest Rates and Inflation under Alternative Monetary Regimes." Ph.D. dissertation, University of California, Los Angeles, 1988.

Department of Employment and Productivity. British Labor Statistics: Historical Abstract,1886-1968. London: Her Majesty's Stationery Office, 1971.

Friedman, Milton, and Anna Jacobson Schwartz. A Monetary History of the United States, 1867-1960. Princeton: Princeton University Press for the National Bureau of Economic Research, 1963.

Great Britain. Committee on Currency and Foreign Exchanges after the War. Final Report. London: His Majesty's Stationery Office, 1919.15.

Committee on Currency and Foreign Exchanges after the War. First Interim Report. London: His Majesty's Stationery Office, 1918.

Committee on Finance and Industry. Report. London: His Majesty's Stationery Office, 1931.

Hawtrey, Ralph George. The Gold Standard in Theory and Practice, 4th ed. New York: Longmans, Green and Co., 1939.

A Century of the Bank Rate. New York: Longmans, Green and Co., 1938.

Keynes, John Maynard. The Economic Consequences of the Peace. New York: Harcourt, Brace and Howe, Inc., 1920.

Kindleberger, Charles P. The World in Depression, 1929-1939, 2d ed. Los Angeles: University of California Press, 1986.

Lafore, Laurence. The End of Glory: An Interpretation of the Origins of World War II. New York: J.B. Lippincott Company, 1970.

Leijonhufvud, Axel. "Monetary Policy and the Business Cycle under 'Loose' Convertibility." Working Paper, University of California, Los Angeles, 1988.

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Macaulay, Frederick R. The Movements of Interest Rates, Bond Yields and Stock Prices in the United States since 1856. New York: National Bureau of Economic Research,1938.

Manchester, William. "The Great Bank Holiday," in Don Condon, ed., The Thirties: A Time to Remember. New York: Simon and Schuster, 1960.

New York Times, various issues, 1914, 1933, and1934.

Nurkse, Ragnar. "The Gold Exchange Standard," in Barry Eichengreen, ed., The Gold Standard in Theory and History. New York: Methuen Inc, 1985.

Sargent, Thomas J. Rational Expectations and Inflation. New York: Harper & Row, 1986.

Schwartz, Anna J. "Alternative Monetary Regimes: The Gold Standard," in Colin D. Campbell and William R. Dougan, eds., Alternative Monetary Regimes. Baltimore: The Johns Hopkins Press Ltd., 1986.

Sprague, O.M.W. "The Crisis of 1914 in the United States," American Economic Review, vol. 5 (September 1915), pp. 499-533.

Temin, Peter. Did Monetary Forces Cause the Great Depression? New York: W.W. Norton & Company, 1976.

U.S. Congress. Federal Reserve Act. Public Law No. 43. 63 Cong. 2 Sess. 38 Stat. 251. Washington: Government Printing Office, 1913.

Warren, George F., and Frank A. Pearson. Gold and Prices. New York: John Wiley, 1935.

Wicker, Elmus R. "A Reconsideration of Federal Reserve Policy during the 1920-21 Depression," Journal of Economic History, vol. 26 (June 1966), pp. 223-38.

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