The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
Britain's Slow Return to Parity
After the war, Britain and all European countries wanted to restore the legal gold-backing for their currencies.
However, wholesale prices in Britain had increased 115 percent from August 1914 to March 1919; and, after the British Treasury stopped pegging the pound in March 1919, the pound reeled to 69.5 percent of its prewar parity — to $3.38 — in February 1920.
Meanwhile, as the government removed wartime price controls, prices in Britain surged another 41 percent. 6
Although determined to restore the prewar gold parity, the British had to wait for price deflation and sterling appreciation.
While they waited, the formal embargo of exports on gold protected the Bank of England's gold reserve.
The restocking boom propelled deposits and note circulation upward in 1919, but when the Bank of England pushed the Bank rate to 7 percent in April 1920 and held it there for an unprecedented 54 weeks, prices began to fall, the credit expansion slowly ceased, and the economy entered a depression.
From 1920 through 1922, many of Europe's currencies were converging toward a fixed point of reference, but continental governments found it in their interest to have their currencies follow the world's main currency, the pound, in lieu of pegging to the dollar and gold.
Fluctuation in the dollar-pound rate, therefore, meant general fluctuation of European currencies in terms of gold.
By December 1922, Britain's decision to restore the prewar gold parity seemed sagacious and reasonable, as the dollar-pound exchange rate had reached $4.61, within grasp of the prewar parity of $4.8665.
Prices in Britain had fallen 50 percent since February 1920, and the monetary base and credit structure had stabilized.
Moreover, the British expected that recent additions to the U.S. monetary gold stock would increase U.S. prices and, consequently, ease the adjustment process in Britain.
Political and economic tensions on the continent combined with sterilization of gold imports by the Federal Reserve forced Britain to continue delaying restoration of the gold standard.
The London Ultimatum of May 1921 had set the German reparations at $33 billion (approximately $230 billion in 1989 dollars).
In January 1923, France and Belgium invaded the industrial Ruhr valley in Germany, offering the failure of Germany to meet reparation payments as justification.
The Germans responded with passive resistance, and output in the Ruhr fell two-thirds.
The German government printed money to support the unemployed in the Ruhr and thus launched the German mark on its famous hyperinflation.
The Ruhr occupation induced capital to flee from Britain and Europe to the United States, trifurcating the world currency structure into dollar, sterling, and French franc areas and causing the dollar-pound exchange rate to slip to $4.25 by January 1924.
The prospects of a restoration of the international gold standard seemed distant.
The United States emerged from isolationism in January 1924 with the Dawes Plan, which all but insured the success of the German currency reform of October 1923.
The plan rescheduled reparation payments and provided a loan to Germany, which allowed Germany to meet transfer payments and still have resources available for domestic industrial expansion.
From 1924 to1929, Germany borrowed $5 billion, half of it from the United States.
The World War I allies, in turn, used reparation funds to repay war debts to the United States.
The Dawes Plan, which had the commitment of the financial resources of the United States as its foundation, demonstrated the ability of international cooperative agreements to allay financial crises.
The continental governments with new currency systems had to choose between pegging to the gold-backed dollar or stabilizing in terms of sterling.
Uncertain leadership in the foreign exchange market in itself marked the waning power of the pound.
Pressure on Britain to restore the gold standard mounted in 1924 as membership in the dollar group waxed: Sweden restored the gold standard in March; Germany adhered to the dollar group after Dawes loans stabilized the Reichsmark; Australia and South Africa, tired of waiting for Britain, decided independently to return to the gold standard.
The pound sterling remained the predominant instrument in world trade and finance; yet the dollar, not sterling, gained respect for being as good as gold.
By the end of 1924, the group of twenty-five currencies that had stabilized in terms of the dollar included the pound sterling.
6. France's difficulties were even more serious than Britain's: French wholesale prices rose 249 percent from 1914 to 1919 and another 43 percent from 1919 to 1920. In February 1919, the French franc was at 95.1 percent of the prewar parity; by February 1920, it had fallen to 36.5 percent of the prewar parity.
TO BE CONTINUED ...
ON THE GOLD STANDARD
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
The Federal Reserve's Role in the Restoration of the Gold Standard in Britain
In the spring and summer of 1924, the Federal Reserve assisted Britain as it prepared to restore the gold standard.
Between May and August, the Federal Reserve Bank of New York cut the discount rate three times — overall, from 4.5 percent to 3 percent — and from the end of June through December 1924, Federal Reserve Bank credit outstanding rose from $831 million to $1,302 million, an unusually large increase even after accounting for seasonal movements.
The United States had imported gold in every month from September 1920 to November 1924 — a total of $1.47 billion — but from December 1924 through April 1925, U.S. gold exports totaled $172 million.
In January 1925, as Britain neared restoration, the Federal Reserve Banks agreed to sell the British Treasury up to $200 million in gold, and a banking syndicate led by J.P. Morgan and Company provided it with a $100-million line of credit.
Lower interest rates undoubtedly expedited Britain's return to the gold standard.
In the second half of 1924, this policy also stimulated the U.S. economy as it climbed out of a moderate recession.
In the first quarter of 1925, however, the Federal Reserve moved to check the over-heating domestic economy.
In particular, on February 27, the Federal Reserve Bank of New York increased its discount rate to 3.5 percent, a move that complicated Britain's return to the gold standard.
On March 5, 1925, the Bank of England increased the Bank rate from 4 percent to 5 percent to maintain the attractiveness of sterling assets.
On April 28, 1925, Winston Churchill, then Chancellor of the Exchequer, returned Britain to the gold standard by announcing that the Gold and Silver (Export Control) Act, which was due to expire at year-end, would not be renewed.
On May 13, Parliament passed the Gold Standard Act of 1925, which obligated the Bank of England to sell gold bullion in exchange for notes at the prewar par of 77s. 10.5d. per standard ounce.
At the end of 1925, thirty-nine countries had returned to par, had devalued their currency, or had achieved de facto stabilization with the dollar.
TO BE CONTINUED ...
The Federal Reserve's Role in the Restoration of the Gold Standard in Britain
In the spring and summer of 1924, the Federal Reserve assisted Britain as it prepared to restore the gold standard.
Between May and August, the Federal Reserve Bank of New York cut the discount rate three times — overall, from 4.5 percent to 3 percent — and from the end of June through December 1924, Federal Reserve Bank credit outstanding rose from $831 million to $1,302 million, an unusually large increase even after accounting for seasonal movements.
The United States had imported gold in every month from September 1920 to November 1924 — a total of $1.47 billion — but from December 1924 through April 1925, U.S. gold exports totaled $172 million.
In January 1925, as Britain neared restoration, the Federal Reserve Banks agreed to sell the British Treasury up to $200 million in gold, and a banking syndicate led by J.P. Morgan and Company provided it with a $100-million line of credit.
Lower interest rates undoubtedly expedited Britain's return to the gold standard.
In the second half of 1924, this policy also stimulated the U.S. economy as it climbed out of a moderate recession.
In the first quarter of 1925, however, the Federal Reserve moved to check the over-heating domestic economy.
In particular, on February 27, the Federal Reserve Bank of New York increased its discount rate to 3.5 percent, a move that complicated Britain's return to the gold standard.
On March 5, 1925, the Bank of England increased the Bank rate from 4 percent to 5 percent to maintain the attractiveness of sterling assets.
On April 28, 1925, Winston Churchill, then Chancellor of the Exchequer, returned Britain to the gold standard by announcing that the Gold and Silver (Export Control) Act, which was due to expire at year-end, would not be renewed.
On May 13, Parliament passed the Gold Standard Act of 1925, which obligated the Bank of England to sell gold bullion in exchange for notes at the prewar par of 77s. 10.5d. per standard ounce.
At the end of 1925, thirty-nine countries had returned to par, had devalued their currency, or had achieved de facto stabilization with the dollar.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
Fiscal Crisis and the Restoration of the Gold Standard in France
In the first half of the 1920s, the French government, already saddled with onerous debts incurred during the war, resorted to deficit financing in its campaign to rebuild the economy.
During this period, the French franc fluctuated with the misfortunes of the German mark, as the prospective, but improbable, flow of German reparation payments promised to mitigate the fiscal burden in France.
The German currency crisis thwarted French plans to collect reparations, and the franc depreciated from 14.97 francs per dollar in January 1923 to 22.63 francs per dollar in February 1924.
After the Dawes Plan, the franc stabilized, holding steady below 20 francs per dollar from March 1924 until June 1925.
But the stabilization did not last, as the French government continued to run large budget deficits, a situation that led to a confrontation between the nation's monetary and fiscal authorities.
Because the economy had a limited capacity to absorb more debt, the French government could not continue to float bonds without resorting to monetization.
The Bank of France acquiesced.
Advances to the state and the issuance of notes to purchase government securities rose rapidly, bumping against their ever-rising legal limits.
From the Ruhr invasion in January 1923 to the climax of the crisis in July 1926, wholesale prices in France surged 116 percent, and the franc-dollar rate soared to 49 francs per dollar.
Fearing a repetition of the hyperinflation that had swept across central Europe three years earlier, French investors poured their capital into gold-based assets.
In August, the Poincare government broke the crisis by raising taxes.
New legislation allowed the Bank of France to buy gold and foreign exchange at a premium and to issue notes against these assets without a legal limit.
The fiscal stabilization plan succeeded as prices stopped rising, and the franc recovered in the foreign exchange market.
In December, the French franc stabilized around 25 francs per dollar —an 80 percent devaluation from the 1914 parity.
The stabilization of the French franc at an undervalued rate largely completed the de facto establishment of the international gold exchange standard.
The restoration of the gold standard, however, provided only an illusion of stability to the international monetary system because exchange rates were misaligned.
As a result of that misalignment, first Britain and later the United States had to engage in costly struggles to maintain the gold backing of their currencies.
Following the stabilization, the franc rose in influence, phoenix-like, out of the crisis that ravaged it.
A substantial proportion of the flight capital of the summer of 1926 had landed in deposit balances in London and New York, where it lay, awaiting repatriation, capable of augmenting the strength of the undervalued franc in foreign exchange markets.
Britain settled into an uneasy stability.
Its restoration of the gold standard in 1925 had initiated a depression, but the unemployed could not rely on relief from the Bank of England, which had to keep interest rates competitive with those in New York.
In February 1927, the French government eased the appreciation of the franc by beginning to pay off war and foreign loans.
The overvalued pound, however, hovered around the gold export point during the first half of the year, as bids from France, Germany, Argentina, India, and the United States arrived in the London gold market.
Continuation of the gold standard in Britain appeared dubious after the Bank rate fell from 5 percent to 4.5 percent on April 27.
TO BE CONTINUED ...
Fiscal Crisis and the Restoration of the Gold Standard in France
In the first half of the 1920s, the French government, already saddled with onerous debts incurred during the war, resorted to deficit financing in its campaign to rebuild the economy.
During this period, the French franc fluctuated with the misfortunes of the German mark, as the prospective, but improbable, flow of German reparation payments promised to mitigate the fiscal burden in France.
The German currency crisis thwarted French plans to collect reparations, and the franc depreciated from 14.97 francs per dollar in January 1923 to 22.63 francs per dollar in February 1924.
After the Dawes Plan, the franc stabilized, holding steady below 20 francs per dollar from March 1924 until June 1925.
But the stabilization did not last, as the French government continued to run large budget deficits, a situation that led to a confrontation between the nation's monetary and fiscal authorities.
Because the economy had a limited capacity to absorb more debt, the French government could not continue to float bonds without resorting to monetization.
The Bank of France acquiesced.
Advances to the state and the issuance of notes to purchase government securities rose rapidly, bumping against their ever-rising legal limits.
From the Ruhr invasion in January 1923 to the climax of the crisis in July 1926, wholesale prices in France surged 116 percent, and the franc-dollar rate soared to 49 francs per dollar.
Fearing a repetition of the hyperinflation that had swept across central Europe three years earlier, French investors poured their capital into gold-based assets.
In August, the Poincare government broke the crisis by raising taxes.
New legislation allowed the Bank of France to buy gold and foreign exchange at a premium and to issue notes against these assets without a legal limit.
The fiscal stabilization plan succeeded as prices stopped rising, and the franc recovered in the foreign exchange market.
In December, the French franc stabilized around 25 francs per dollar —an 80 percent devaluation from the 1914 parity.
The stabilization of the French franc at an undervalued rate largely completed the de facto establishment of the international gold exchange standard.
The restoration of the gold standard, however, provided only an illusion of stability to the international monetary system because exchange rates were misaligned.
As a result of that misalignment, first Britain and later the United States had to engage in costly struggles to maintain the gold backing of their currencies.
Following the stabilization, the franc rose in influence, phoenix-like, out of the crisis that ravaged it.
A substantial proportion of the flight capital of the summer of 1926 had landed in deposit balances in London and New York, where it lay, awaiting repatriation, capable of augmenting the strength of the undervalued franc in foreign exchange markets.
Britain settled into an uneasy stability.
Its restoration of the gold standard in 1925 had initiated a depression, but the unemployed could not rely on relief from the Bank of England, which had to keep interest rates competitive with those in New York.
In February 1927, the French government eased the appreciation of the franc by beginning to pay off war and foreign loans.
The overvalued pound, however, hovered around the gold export point during the first half of the year, as bids from France, Germany, Argentina, India, and the United States arrived in the London gold market.
Continuation of the gold standard in Britain appeared dubious after the Bank rate fell from 5 percent to 4.5 percent on April 27.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
INSTABILITY UNDER THE GOLD EXCHANGE STANDARD
Under an inter-central-bank agreement in July 1927, the Federal Reserve relieved pressure on the pound by agreeing to lower interest rates, an action that diverted the French demand for reserves from Britain to the United States.
On August 5, the discount rate fell from 4 percent to 3.5 percent.
Larger-than-seasonal open market purchases from the end of July to the end of December supplemented the discount policy, raising Federal Reserve Bank credit outstanding $563 million to $1,655 million.
While the United States had imported $80 million in gold in the first half of 1927, gold exports totaled $234 million during the last half of the year.
The cooperative policy initiative achieved its aim as the pound rose steadily in the second half of 1927.
The Federal Reserve abandoned the inter-central-bank agreement in 1928.
A resurgence in stock prices followed the mild, thirteen-month recession (October 1926 to November 1927), compelling the Federal Reserve to reverse course.
From February to July 1928, the discount rate rose from 3.5 percent to 5 percent; the London-New York interest rate spread, which favored London in January, had turned to favor New York by June.
While exports of gold continued during the first half of 1928, by July high yields in New York had begun to draw gold back toward the United States, strengthening the dollar relative to the pound.
As chart 2 shows, throughout the last half of the 1920s the dollar-pound exchange rate displayed high sensitivity to the spread between interest rates in London and New York.
The policy of the Federal Reserve in 1927 and 1928 paralleled its policy in 1924 and 1925.
In both episodes, the Federal Reserve initially lowered the discount rate during the final stages of a recession.
The relaxation of credit also ameliorated the international situation.
In both episodes, the Federal Reserve pulled back as the U.S. economy showed signs of recovery.
In 1925, the moderate policy reversal slightly obstructed Britain's return to the gold standard.
In 1928, the severe reversal significantly disrupted Britain's struggle to retain gold.
When the Federal Reserve turned to manage the domestic economy in 1928, French investors began to repatriate capital en masse, and the Bank of France intervened to support the pound.
As table 2 indicates, foreign exchange reserves at the Bank of France ballooned more than tenfold from the end of 1926 to the end of 1928. 7
The monetary law of June 25, 1928, stabilizing the franc, obligated the Bank of France to buy and sell gold on demand but revoked its power to buy foreign exchange; before the de jure stabilization, the Bank purchased foreign exchange for delivery in the forward market in the second half of 1928.
Unfortunately, the accumulation of foreign exchange reserves only suppressed, and did not solve, the major problem of the restoration years, that is, a strong French franc and a weak British pound.
7. Foreign exchange reserves in the Bank of France averaged only $4 million from 1906 to 1913; see Brown, International Gold Standard, vol. 2, p. 748.
TO BE CONTINUED ...
INSTABILITY UNDER THE GOLD EXCHANGE STANDARD
Under an inter-central-bank agreement in July 1927, the Federal Reserve relieved pressure on the pound by agreeing to lower interest rates, an action that diverted the French demand for reserves from Britain to the United States.
On August 5, the discount rate fell from 4 percent to 3.5 percent.
Larger-than-seasonal open market purchases from the end of July to the end of December supplemented the discount policy, raising Federal Reserve Bank credit outstanding $563 million to $1,655 million.
While the United States had imported $80 million in gold in the first half of 1927, gold exports totaled $234 million during the last half of the year.
The cooperative policy initiative achieved its aim as the pound rose steadily in the second half of 1927.
The Federal Reserve abandoned the inter-central-bank agreement in 1928.
A resurgence in stock prices followed the mild, thirteen-month recession (October 1926 to November 1927), compelling the Federal Reserve to reverse course.
From February to July 1928, the discount rate rose from 3.5 percent to 5 percent; the London-New York interest rate spread, which favored London in January, had turned to favor New York by June.
While exports of gold continued during the first half of 1928, by July high yields in New York had begun to draw gold back toward the United States, strengthening the dollar relative to the pound.
As chart 2 shows, throughout the last half of the 1920s the dollar-pound exchange rate displayed high sensitivity to the spread between interest rates in London and New York.
The policy of the Federal Reserve in 1927 and 1928 paralleled its policy in 1924 and 1925.
In both episodes, the Federal Reserve initially lowered the discount rate during the final stages of a recession.
The relaxation of credit also ameliorated the international situation.
In both episodes, the Federal Reserve pulled back as the U.S. economy showed signs of recovery.
In 1925, the moderate policy reversal slightly obstructed Britain's return to the gold standard.
In 1928, the severe reversal significantly disrupted Britain's struggle to retain gold.
When the Federal Reserve turned to manage the domestic economy in 1928, French investors began to repatriate capital en masse, and the Bank of France intervened to support the pound.
As table 2 indicates, foreign exchange reserves at the Bank of France ballooned more than tenfold from the end of 1926 to the end of 1928. 7
The monetary law of June 25, 1928, stabilizing the franc, obligated the Bank of France to buy and sell gold on demand but revoked its power to buy foreign exchange; before the de jure stabilization, the Bank purchased foreign exchange for delivery in the forward market in the second half of 1928.
Unfortunately, the accumulation of foreign exchange reserves only suppressed, and did not solve, the major problem of the restoration years, that is, a strong French franc and a weak British pound.
7. Foreign exchange reserves in the Bank of France averaged only $4 million from 1906 to 1913; see Brown, International Gold Standard, vol. 2, p. 748.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
Abandonment of the Gold Standard by Britain
In 1929, European central banks, in general, became apprehensive about speculation in the U.S. stock market.
While the Bank of France and other European central banks began to reduce foreign exchange reserves and to import gold, the Bank of England endeavored to guard its dwindling gold reserves by increasing the Bank rate, from 4.5 percent to 5.5 percent in February and to 6.5 percent in September.
High as interest rates were in London, they were not high enough to attract funds from Wall Street during the final months of frenzy.
In a sense, the stock market crash rescued the beleaguered gold standard in Britain: after October 1929, foreign funds fled from New York, and sterling gained a respite.
In times of financial stress, funds generally flow toward the world's safest and strongest financial center.
Before the First World War, when this center was London, the world's financial markets were sensitive to changes in the Bank rate, which the Bank of England adjusted to sustain a normal level of gold reserves.
A drop in gold reserves significantly below normal would be followed by an increase in the Bank rate, a reduction of capital exports from Great Britain, a shift from long-term to short-term lending, a reflux of gold to London from country banks, and imports of gold as funds moved to high rates in London.
In 1929, however, two financial centers, London and New York, attracted gold.
Although gold in the Issue Department of the Bank of England rose in the final two months of 1929, Britain exported $74 million in gold for the year 1929, $41 million of which went to the United States.
In contrast, even though heavy exports of gold followed the crash on Wall Street, the United States imported a net of $120 million in gold for 1929.
The financial centers continued to attract gold in 1930: Britain imported $23.6 million in gold with little change in the Bank of England's reserve condition, while the United States imported $278 million in gold.
From the spring of 1925, when the gold standard was restored, to the fall of 1931, when it was abandoned, the Bank of England resisted forays on the exchange value of the pound sterling.
In May 1931, a run on the Kreditanstalt, the largest Austrian bank, initiated the final defense of the gold exchange standard in Britain.
From March to September 1931, the National Bank of Austria lost 55 percent of its large foreign exchange reserves as it tried to fight back capital flight.
In June 1931, panic spread from Austria to Germany, and German banks scrambled to exchange sterling deposits for gold in London.
From May 30 to June 30, the Reichsbank lost 34 percent of its gold and foreign exchange reserves.
In July, with foreigners storming its gold reserve, the Bank of England shielded the domestic credit system by purchasing securities on the open market, by arranging a £50 million credit with the Federal Reserve Bank of New York and the Bank of France, and by transferring securities from the Banking to the Issue Department to provide for new fiduciary issue.
With the exchange rate below the gold export point, the Bank of England barricaded its gold reserves by raising the Bank rate from 2.5 percent to 3.5 percent on July 23 and to 4.5 percent on July 30.
In spite of these protective efforts, gold reserves in the Issue Department shrank £30.9 million — 29percent — from June 24 to July 29.
Late in August, the Bank of England secured an additional £80 million in emergency credits, but the continental and American demand for gold continued to assault the London bullion market.
In the last two months of its defense of the gold standard, Britain exported £200 million in gold and foreign exchange.
On Wednesday, September 16, withdrawals from Britain totaled £5 million; on Thursday, £10 million; on Friday, £18million; on Saturday, a half day, more than £10 million.
On Monday, September 21, 1931, the British abandoned the gold standard.
On that day, the London Times provided the following analysis: The real crux of the present crisis is the unprecedented fall in prices which has driven most countries off the gold standard and left them in a position in which default upon their contractual obligations in gold is unavoidable.
World prices have fallen below the pre-War level.
Most countries are carrying much greater obligations in gold than before the War, and though they could easily meet these when prices were 50 percent or more above the pre-War level, they are unable to do so now.
The international economic crisis has played a large part in the temporary abandonment of the gold standard.
The responsibility for this belongs to those countries which have hoarded gold on an unprecedented scale.
Creditor countries which insist upon payment in gold are asking for the impossible.
Prohibitive tariffs keep out goods, and unless the creditor nations re-lend the credits due to them the debtor nations must pay in gold to the extent of their resources and then default.
The gold standard game can only be played according to its well-proven rules.
It cannot be played on the new rules practised since the War by France and the United States. 8
Britain had restored the gold standard but had not been able to restore the unchallenged supremacy of the pound sterling.
In the six years of the restoration, the unemployment rate among insured workers in Britain averaged 12.9 percent and never fell below 8.5 percent; in the first nine months of 1931, it averaged 21 percent.
So long as the Bank of England rendered gold bullion for notes, the unemployed in Britain were sentenced to serve time with deflation and high real interest rates.
8. "Gold Standard Suspension: Cause of the World Crisis," London Times, September 21, 1931.
TO BE CONTINUED ...
Abandonment of the Gold Standard by Britain
In 1929, European central banks, in general, became apprehensive about speculation in the U.S. stock market.
While the Bank of France and other European central banks began to reduce foreign exchange reserves and to import gold, the Bank of England endeavored to guard its dwindling gold reserves by increasing the Bank rate, from 4.5 percent to 5.5 percent in February and to 6.5 percent in September.
High as interest rates were in London, they were not high enough to attract funds from Wall Street during the final months of frenzy.
In a sense, the stock market crash rescued the beleaguered gold standard in Britain: after October 1929, foreign funds fled from New York, and sterling gained a respite.
In times of financial stress, funds generally flow toward the world's safest and strongest financial center.
Before the First World War, when this center was London, the world's financial markets were sensitive to changes in the Bank rate, which the Bank of England adjusted to sustain a normal level of gold reserves.
A drop in gold reserves significantly below normal would be followed by an increase in the Bank rate, a reduction of capital exports from Great Britain, a shift from long-term to short-term lending, a reflux of gold to London from country banks, and imports of gold as funds moved to high rates in London.
In 1929, however, two financial centers, London and New York, attracted gold.
Although gold in the Issue Department of the Bank of England rose in the final two months of 1929, Britain exported $74 million in gold for the year 1929, $41 million of which went to the United States.
In contrast, even though heavy exports of gold followed the crash on Wall Street, the United States imported a net of $120 million in gold for 1929.
The financial centers continued to attract gold in 1930: Britain imported $23.6 million in gold with little change in the Bank of England's reserve condition, while the United States imported $278 million in gold.
From the spring of 1925, when the gold standard was restored, to the fall of 1931, when it was abandoned, the Bank of England resisted forays on the exchange value of the pound sterling.
In May 1931, a run on the Kreditanstalt, the largest Austrian bank, initiated the final defense of the gold exchange standard in Britain.
From March to September 1931, the National Bank of Austria lost 55 percent of its large foreign exchange reserves as it tried to fight back capital flight.
In June 1931, panic spread from Austria to Germany, and German banks scrambled to exchange sterling deposits for gold in London.
From May 30 to June 30, the Reichsbank lost 34 percent of its gold and foreign exchange reserves.
In July, with foreigners storming its gold reserve, the Bank of England shielded the domestic credit system by purchasing securities on the open market, by arranging a £50 million credit with the Federal Reserve Bank of New York and the Bank of France, and by transferring securities from the Banking to the Issue Department to provide for new fiduciary issue.
With the exchange rate below the gold export point, the Bank of England barricaded its gold reserves by raising the Bank rate from 2.5 percent to 3.5 percent on July 23 and to 4.5 percent on July 30.
In spite of these protective efforts, gold reserves in the Issue Department shrank £30.9 million — 29percent — from June 24 to July 29.
Late in August, the Bank of England secured an additional £80 million in emergency credits, but the continental and American demand for gold continued to assault the London bullion market.
In the last two months of its defense of the gold standard, Britain exported £200 million in gold and foreign exchange.
On Wednesday, September 16, withdrawals from Britain totaled £5 million; on Thursday, £10 million; on Friday, £18million; on Saturday, a half day, more than £10 million.
On Monday, September 21, 1931, the British abandoned the gold standard.
On that day, the London Times provided the following analysis: The real crux of the present crisis is the unprecedented fall in prices which has driven most countries off the gold standard and left them in a position in which default upon their contractual obligations in gold is unavoidable.
World prices have fallen below the pre-War level.
Most countries are carrying much greater obligations in gold than before the War, and though they could easily meet these when prices were 50 percent or more above the pre-War level, they are unable to do so now.
The international economic crisis has played a large part in the temporary abandonment of the gold standard.
The responsibility for this belongs to those countries which have hoarded gold on an unprecedented scale.
Creditor countries which insist upon payment in gold are asking for the impossible.
Prohibitive tariffs keep out goods, and unless the creditor nations re-lend the credits due to them the debtor nations must pay in gold to the extent of their resources and then default.
The gold standard game can only be played according to its well-proven rules.
It cannot be played on the new rules practised since the War by France and the United States. 8
Britain had restored the gold standard but had not been able to restore the unchallenged supremacy of the pound sterling.
In the six years of the restoration, the unemployment rate among insured workers in Britain averaged 12.9 percent and never fell below 8.5 percent; in the first nine months of 1931, it averaged 21 percent.
So long as the Bank of England rendered gold bullion for notes, the unemployed in Britain were sentenced to serve time with deflation and high real interest rates.
8. "Gold Standard Suspension: Cause of the World Crisis," London Times, September 21, 1931.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
Federal Reserve Policy after Britain Abandoned the Gold Standard
Britain's abandonment of the gold standard created a conflict between domestic and international policy objectives at the Federal Reserve.
On the one hand, two years of uninterrupted deflation and mounting unemployment called for the Federal Reserve to stimulate the domestic economy with an expansion of the money supply.
On the other hand, international responsibilities and the threat of gold exports called for the Federal Reserve to tighten credit and demonstrate its commitment to the gold standard.
The abrupt depreciation of the pound — in October it plunged from the parity of $4.86 to $3.89, and by December it was at $3.37 — had inflicted capital losses on Europeans who held sterling assets.
With the pound no longer backed by gold, the dollar became the gold standard's major reserve currency just when European central banks desired to prevent further losses on foreign exchange reserves by discarding the gold exchange standard and adopting a gold bullion standard.
Even though foreign exchange reserves in European central banks fell 25 percent during the summer attack on sterling, foreign exchange still constituted a substantial percentage of total European reserves in September 1931.
The Bank of France, in particular, still held large foreign exchange reserves. 9
To prevent a wholesale liquidation of dollar reserves, the Federal Reserve needed to assure the Bank of France of the U.S. intention to remain on the gold standard.
Although these domestic and international objectives conflicted, they were not mutually exclusive: The Federal Reserve could have sterilized gold exports with open market purchases.
In the fourth quarter of 1931, however, the Federal Reserve bought only $75 million in government securities, while gold exports, including gold earmarked for export, totaled $294 million.
Moreover, the New York Federal Reserve Bank increased the discount rate from 1.5 percent to 2.5 percent on October 9 and to 3.5 percent on October 15.
These actions demonstrated the Federal Reserve's commitment to the international gold standard.
Nevertheless, European discontent with the gold exchange standard did not subside.
From late September 1931 to late June 1932, the combined foreign exchange holdings of twenty-two European central banks (not including the Bank of France) fell 42 percent; and foreign exchange reserves in the Bank of France plunged 73 percent.
Under pressure from the Congress, the Federal Reserve embarked on a program of open market purchases in the spring of 1932, by purchasing $912 million of government securities.
The net effect of monetary policy was only slightly expansionary, however, since the gold stock fell $417 million and the total of bills bought and bills discounted fell $199 million.
The Federal Reserve could have expanded the open market purchase program without threatening the gold standard: Although the gold reserve ratio had edged down to 56.3 percent in July 1932, it still remained well above the legal minimum.
Because the Federal Reserve was unable to reach a consensus on open market policy, the program faded in the summer of 1932.
In January 1933, the Federal Reserve voted to reduce its government bond portfolio. 10
Low nominal interest rates in the United States during the 1930s persuaded many political leaders and economists at the time of the impotence of monetary policy.
With the benefit of further analysis of the evidence, many economists now maintain that, although non-monetary and international shocks played a role, the contraction was substantially exacerbated by the policy of the Federal Reserve. 11
In particular, during the Great Depression, the Federal Reserve allowed the money supply to fall substantially.
After Britain abandoned the gold standard, that fall accelerated.
9. In September 1931, foreign exchange reserves as a percentage of total reserves totaled 27.7 percent in France, 35 percent in Italy, 51.6 percent in Danzig, 61.9 percent in Finland, 68.2 percent in Hungary, 71 percent in Latvia, 58.3 percent in Lithuania, 43.6 percent in Czechoslovakia, 79.1 percent in Greece, 73 percent in Portugal, and 24 percent for the combined balance sheet of twenty-three European central banks. See Brown, International Gold Standard, vol. 2, p. 748.
10. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States,1867-1960 (Princeton University Press for the National Bureau of Economic Research, 1963), chap. 7.
11. Ibid., Monetary History, chap. 7
TO BE CONTINUED ...
Federal Reserve Policy after Britain Abandoned the Gold Standard
Britain's abandonment of the gold standard created a conflict between domestic and international policy objectives at the Federal Reserve.
On the one hand, two years of uninterrupted deflation and mounting unemployment called for the Federal Reserve to stimulate the domestic economy with an expansion of the money supply.
On the other hand, international responsibilities and the threat of gold exports called for the Federal Reserve to tighten credit and demonstrate its commitment to the gold standard.
The abrupt depreciation of the pound — in October it plunged from the parity of $4.86 to $3.89, and by December it was at $3.37 — had inflicted capital losses on Europeans who held sterling assets.
With the pound no longer backed by gold, the dollar became the gold standard's major reserve currency just when European central banks desired to prevent further losses on foreign exchange reserves by discarding the gold exchange standard and adopting a gold bullion standard.
Even though foreign exchange reserves in European central banks fell 25 percent during the summer attack on sterling, foreign exchange still constituted a substantial percentage of total European reserves in September 1931.
The Bank of France, in particular, still held large foreign exchange reserves. 9
To prevent a wholesale liquidation of dollar reserves, the Federal Reserve needed to assure the Bank of France of the U.S. intention to remain on the gold standard.
Although these domestic and international objectives conflicted, they were not mutually exclusive: The Federal Reserve could have sterilized gold exports with open market purchases.
In the fourth quarter of 1931, however, the Federal Reserve bought only $75 million in government securities, while gold exports, including gold earmarked for export, totaled $294 million.
Moreover, the New York Federal Reserve Bank increased the discount rate from 1.5 percent to 2.5 percent on October 9 and to 3.5 percent on October 15.
These actions demonstrated the Federal Reserve's commitment to the international gold standard.
Nevertheless, European discontent with the gold exchange standard did not subside.
From late September 1931 to late June 1932, the combined foreign exchange holdings of twenty-two European central banks (not including the Bank of France) fell 42 percent; and foreign exchange reserves in the Bank of France plunged 73 percent.
Under pressure from the Congress, the Federal Reserve embarked on a program of open market purchases in the spring of 1932, by purchasing $912 million of government securities.
The net effect of monetary policy was only slightly expansionary, however, since the gold stock fell $417 million and the total of bills bought and bills discounted fell $199 million.
The Federal Reserve could have expanded the open market purchase program without threatening the gold standard: Although the gold reserve ratio had edged down to 56.3 percent in July 1932, it still remained well above the legal minimum.
Because the Federal Reserve was unable to reach a consensus on open market policy, the program faded in the summer of 1932.
In January 1933, the Federal Reserve voted to reduce its government bond portfolio. 10
Low nominal interest rates in the United States during the 1930s persuaded many political leaders and economists at the time of the impotence of monetary policy.
With the benefit of further analysis of the evidence, many economists now maintain that, although non-monetary and international shocks played a role, the contraction was substantially exacerbated by the policy of the Federal Reserve. 11
In particular, during the Great Depression, the Federal Reserve allowed the money supply to fall substantially.
After Britain abandoned the gold standard, that fall accelerated.
9. In September 1931, foreign exchange reserves as a percentage of total reserves totaled 27.7 percent in France, 35 percent in Italy, 51.6 percent in Danzig, 61.9 percent in Finland, 68.2 percent in Hungary, 71 percent in Latvia, 58.3 percent in Lithuania, 43.6 percent in Czechoslovakia, 79.1 percent in Greece, 73 percent in Portugal, and 24 percent for the combined balance sheet of twenty-three European central banks. See Brown, International Gold Standard, vol. 2, p. 748.
10. Milton Friedman and Anna Jacobson Schwartz, A Monetary History of the United States,1867-1960 (Princeton University Press for the National Bureau of Economic Research, 1963), chap. 7.
11. Ibid., Monetary History, chap. 7
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
SUSPENSION OF THE GOLD STANDARD IN THE UNITED STATES: 1933-34
From October 1929 to March 1933, wholesale prices in the United States fell 37 percent, and farm prices plummeted 65 percent.
The 30 percent devaluation of the pound after September 1931 undermined the competitiveness of the U.S. export sector and exacerbated deflationary pressures.
The 900 duties imposed under the Smoot-Hawley tariff of 1930 provoked retaliation, and both the value and the volume of international trade fell with each successive year.
Reparations had been abolished; and in the United States, the debt burden had reached the breaking point.
The money supply had fallen one-third since the stock market crash.
The annual number of bank suspensions, which had never exceeded 1,000 during the 1920s, totaled 1,350 in 1930; 2,293 in 1931; and 1,453 in 1932.
Stocks had decreased in value more than 50 percent since 1926 and more than 80 percent since the 1929 peak.
Real output languished at two-thirds of its 1929 level.
On Inauguration Day in 1933, more than 12 million people were unemployed.
An internal run on deposits and an external demand for gold combined to assault the gold standard in the United States after the abandonment of the gold standard in Britain.
Federal Reserve notes in circulation rose from $1.87 billion in October 1929 to $2.02 billion in September 1931.
Then, as a panicky public cashed in deposit balances, the total swelled to $4.04 billion in March 1933.
The Federal Reserve ratio of gold to note and deposit liabilities, which stood at 81.4 percent a month before Britain left the gold standard, slumped to 51.3 percent in March 1933, the lowest level since 1921.
In contrast to European governments, which had adopted the gold bullion standard in the restoration period, the government of the United States continued to mint and circulate gold coins in 1933.
In the first two years of the Great Depression, gold flowed to the United States, causing the monetary gold stock to increase from $4.10 billion in October 1929 to $4.45 billion in September 1931.
In the eighteen months after Britain's departure from the gold standard, the United States supplied the world demand for hoarding with gold exports, and the monetary gold stock fell to $3.99 billion.
Domestic hoarding of gold coins emerged in early 1933 as suspicion about banks devolved into distrust of paper money.
Gold reserves fell $300 million during the banking crisis in February and March.
By the day of Franklin D. Roosevelt's inauguration — Saturday, March 4, 1933 — all the leading domestic exchanges and the Federal Reserve banks had closed, and every state had wholly or partly suspended banking operations.
TO BE CONTINUED ...
SUSPENSION OF THE GOLD STANDARD IN THE UNITED STATES: 1933-34
From October 1929 to March 1933, wholesale prices in the United States fell 37 percent, and farm prices plummeted 65 percent.
The 30 percent devaluation of the pound after September 1931 undermined the competitiveness of the U.S. export sector and exacerbated deflationary pressures.
The 900 duties imposed under the Smoot-Hawley tariff of 1930 provoked retaliation, and both the value and the volume of international trade fell with each successive year.
Reparations had been abolished; and in the United States, the debt burden had reached the breaking point.
The money supply had fallen one-third since the stock market crash.
The annual number of bank suspensions, which had never exceeded 1,000 during the 1920s, totaled 1,350 in 1930; 2,293 in 1931; and 1,453 in 1932.
Stocks had decreased in value more than 50 percent since 1926 and more than 80 percent since the 1929 peak.
Real output languished at two-thirds of its 1929 level.
On Inauguration Day in 1933, more than 12 million people were unemployed.
An internal run on deposits and an external demand for gold combined to assault the gold standard in the United States after the abandonment of the gold standard in Britain.
Federal Reserve notes in circulation rose from $1.87 billion in October 1929 to $2.02 billion in September 1931.
Then, as a panicky public cashed in deposit balances, the total swelled to $4.04 billion in March 1933.
The Federal Reserve ratio of gold to note and deposit liabilities, which stood at 81.4 percent a month before Britain left the gold standard, slumped to 51.3 percent in March 1933, the lowest level since 1921.
In contrast to European governments, which had adopted the gold bullion standard in the restoration period, the government of the United States continued to mint and circulate gold coins in 1933.
In the first two years of the Great Depression, gold flowed to the United States, causing the monetary gold stock to increase from $4.10 billion in October 1929 to $4.45 billion in September 1931.
In the eighteen months after Britain's departure from the gold standard, the United States supplied the world demand for hoarding with gold exports, and the monetary gold stock fell to $3.99 billion.
Domestic hoarding of gold coins emerged in early 1933 as suspicion about banks devolved into distrust of paper money.
Gold reserves fell $300 million during the banking crisis in February and March.
By the day of Franklin D. Roosevelt's inauguration — Saturday, March 4, 1933 — all the leading domestic exchanges and the Federal Reserve banks had closed, and every state had wholly or partly suspended banking operations.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
President Roosevelt and the Suspension of the Gold Standard
President Roosevelt solved the dilemma of choosing between domestic and international objectives: He placed domestic objectives first.
On March 6, 1933, he proclaimed a bank holiday and suspended gold convertibility and gold exports, leaving the gold standard in limbo.
Four days later, an executive order authorized Secretary of the Treasury William Woodin to issue licenses to reopen sound member banks; nonmember banks could reopen with licenses from state banking authorities.
The Emergency Banking Act of March 9, 1933, boosted confidence in the banking system.
Between March 13 and March 15, nearly 70 percent of the commercial banks reopened, but an executive order still prohibited banks from paying out gold coin, bullion, or certificates, and gold exports were forbidden except under licenses issued by Secretary Woodin.
An executive order on April 5 quickened the reversal of the internal drain by requiring the rendering of gold coins, bullion, and certificates to Federal Reserve Banks on or before May 1.
By April, Federal Reserve notes in circulation had fallen to $3.53 billion, and the gold reserve ratio had rebounded to 61 percent.
On April 19, the Roosevelt Administration revealed that its list of principal objectives did not include the words "gold standard."
During the previous month, Secretary Woodin had freely granted gold export licenses; on April 18, however, he refused to do so.
On April 19, Roosevelt ordered a prohibition on gold exports, except for gold already earmarked to foreign governments.
On the same day, the President and his staff met with Senator Elmer Thomas for two hours and drafted an amendment that passed on May 12 as part of the Agricultural Adjustment Act.
The Thomas amendment, also known as the Inflation Bill, gave the President permission to reduce the gold content of the dollar 50 percent, granted him sweeping powers to purchase silver, and charged the Federal Reserve to issue green-backs and to purchase $3 billion in government securities.
In response to these developments, J.P. Morgan stated that "the effort to maintain the exchange value of the dollar at a premium as against depreciated foreign currencies was having a deflationary effect upon already severely deflated American prices and wages and employment" and gave his imprimatur to the suspension of the gold standard "as being the best possible course under existing circumstances." 12
The Administration's orchestrated suspension of the gold standard on April 19 incited a marked response in the markets.
The dollar sank 11.5 percent against gold standard currencies.
The dollar-pound rate leaped 23 cents to $3.85, the highest level since October 31, 1931.
Stock prices posted strong gains in a heavy volume of trading, and spot prices on the Chicago commodities exchanges soared.
The suspension of the gold standard in March and April 1933 resembled standard interludes in the ongoing historical drama, rather than an overture to devaluation.
The prohibition on gold hoarding freed the United States from its technical handicap of having gold circulate as a medium of exchange.
A simple resumption of convertibility would have restored the gold standard — a gold bullion standard — in the United States.
Restoration of the gold standard did not involve insurmountable problems: Legislative initiatives were rebuilding confidence in the banking system; notes were returning to deposit accounts; the gold reserve ratio was recovering; and the dollar was clinging near the gold export point throughout the period.
Had it so desired, the Roosevelt Administration could have preserved the gold parity.
President Roosevelt suspended the gold standard in April 1933 because it encumbered advancement toward the major domestic monetary objective: reflation.
Leaders in the White House, in the Senate, and on Wall Street expressed hope for the restoration of a metallic standard; however, they regarded it as a distant objective.
They voiced concern about the instability of exchange rates but designated export growth, which would be prompted by competitive devaluation, as a primary objective.
Relieving unemployment, instituting a massive public works program, and increasing domestic prices were foremost in the objectives of the New Deal.
The new administration saw the need to subordinate the gold standard to the pursuit of these domestic objectives.
The United States suspended the gold standard not out of necessity but out of a change of attitude. 13
12. "Morgan Praises Gold Embargo as the 'Best Possible Course,'" New York Times, April 20, 1933.
13. The United States was not the only country to become disillusioned with the gold standard. Between Britain's departure in September 1931 and the U.S. suspension in April 1933, twenty-six countries went off the gold standard.
TO BE CONTINUED ...
President Roosevelt and the Suspension of the Gold Standard
President Roosevelt solved the dilemma of choosing between domestic and international objectives: He placed domestic objectives first.
On March 6, 1933, he proclaimed a bank holiday and suspended gold convertibility and gold exports, leaving the gold standard in limbo.
Four days later, an executive order authorized Secretary of the Treasury William Woodin to issue licenses to reopen sound member banks; nonmember banks could reopen with licenses from state banking authorities.
The Emergency Banking Act of March 9, 1933, boosted confidence in the banking system.
Between March 13 and March 15, nearly 70 percent of the commercial banks reopened, but an executive order still prohibited banks from paying out gold coin, bullion, or certificates, and gold exports were forbidden except under licenses issued by Secretary Woodin.
An executive order on April 5 quickened the reversal of the internal drain by requiring the rendering of gold coins, bullion, and certificates to Federal Reserve Banks on or before May 1.
By April, Federal Reserve notes in circulation had fallen to $3.53 billion, and the gold reserve ratio had rebounded to 61 percent.
On April 19, the Roosevelt Administration revealed that its list of principal objectives did not include the words "gold standard."
During the previous month, Secretary Woodin had freely granted gold export licenses; on April 18, however, he refused to do so.
On April 19, Roosevelt ordered a prohibition on gold exports, except for gold already earmarked to foreign governments.
On the same day, the President and his staff met with Senator Elmer Thomas for two hours and drafted an amendment that passed on May 12 as part of the Agricultural Adjustment Act.
The Thomas amendment, also known as the Inflation Bill, gave the President permission to reduce the gold content of the dollar 50 percent, granted him sweeping powers to purchase silver, and charged the Federal Reserve to issue green-backs and to purchase $3 billion in government securities.
In response to these developments, J.P. Morgan stated that "the effort to maintain the exchange value of the dollar at a premium as against depreciated foreign currencies was having a deflationary effect upon already severely deflated American prices and wages and employment" and gave his imprimatur to the suspension of the gold standard "as being the best possible course under existing circumstances." 12
The Administration's orchestrated suspension of the gold standard on April 19 incited a marked response in the markets.
The dollar sank 11.5 percent against gold standard currencies.
The dollar-pound rate leaped 23 cents to $3.85, the highest level since October 31, 1931.
Stock prices posted strong gains in a heavy volume of trading, and spot prices on the Chicago commodities exchanges soared.
The suspension of the gold standard in March and April 1933 resembled standard interludes in the ongoing historical drama, rather than an overture to devaluation.
The prohibition on gold hoarding freed the United States from its technical handicap of having gold circulate as a medium of exchange.
A simple resumption of convertibility would have restored the gold standard — a gold bullion standard — in the United States.
Restoration of the gold standard did not involve insurmountable problems: Legislative initiatives were rebuilding confidence in the banking system; notes were returning to deposit accounts; the gold reserve ratio was recovering; and the dollar was clinging near the gold export point throughout the period.
Had it so desired, the Roosevelt Administration could have preserved the gold parity.
President Roosevelt suspended the gold standard in April 1933 because it encumbered advancement toward the major domestic monetary objective: reflation.
Leaders in the White House, in the Senate, and on Wall Street expressed hope for the restoration of a metallic standard; however, they regarded it as a distant objective.
They voiced concern about the instability of exchange rates but designated export growth, which would be prompted by competitive devaluation, as a primary objective.
Relieving unemployment, instituting a massive public works program, and increasing domestic prices were foremost in the objectives of the New Deal.
The new administration saw the need to subordinate the gold standard to the pursuit of these domestic objectives.
The United States suspended the gold standard not out of necessity but out of a change of attitude. 13
12. "Morgan Praises Gold Embargo as the 'Best Possible Course,'" New York Times, April 20, 1933.
13. The United States was not the only country to become disillusioned with the gold standard. Between Britain's departure in September 1931 and the U.S. suspension in April 1933, twenty-six countries went off the gold standard.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
The World Monetary and Economic Conference
On June 12, 1933, the World Monetary and Economic Conference convened in London to solve the problems of the Great Depression through international cooperation.
The participants recognized that retaliatory tariffs had significantly contributed to the worldwide crisis.
Any agreement, therefore, would have to build a framework for exchange rate stabilization and require credible pledges for abstention from competitive devaluations.
At the time, the world's financial leaders believed that the basis for international monetary stability would be gold.
The conference failed to achieve its goals because the United States refused to agree to anything that might endanger its domestic recovery.
In June 1933, spurred by the devaluation of the dollar, the U.S. economy was three months into the strongest peacetime expansion in the nation's history, albeit an uneven one that started from a low level.
From March to June 1933, wholesale prices in the United States rose 8 percent, and farm prices and stock prices jumped 36 percent and 73 percent respectively.
The dollar had depreciated, and the new administration in its reflation policy counted on further depreciation.
On June 5, 1933, the U.S. Congress undid the final link between the gold standard and the domestic economy when it abrogated the gold clause in government and private contracts.
In late June, the conference participants drew up a weak policy declaration, which called for a return to the international gold standard but which permitted each country to choose the time of restoration and the par value.
On July 3, Roosevelt issued this strongly worded rejection of the proposal:
The world will not long be lulled by the specious fallacy of achieving a temporary and probably an artificial stability in foreign exchange on the part of a few large countries only.
The sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other nations. . . .
Old fetishes of so-called international bankers are being replaced by efforts to plan national currencies with the objective of giving to those currencies a continuing purchasing power which does not greatly vary in term of the commodities and need of modern civilization. . . .
Our broad purpose is permanent stabilization of every nation's currency.
Gold or gold and silver can well continue to be a metallic reserve behind currencies, but this is not the time to dissipate gold reserves.
When the world works out concerted policies in the majority of nations to produce balanced budgets and living within their means, then we can properly discuss a better distribution of the world's gold and silver supply to act as a reserve base of national currencies.14
14. "Roosevelt Rebuke Stuns Gold Bloc, but Conference Likely To Go On; President Turns to Domestic Drive: Text of President's Statement," New York Times, July 4, 1933.
TO BE CONTINUED ...
The World Monetary and Economic Conference
On June 12, 1933, the World Monetary and Economic Conference convened in London to solve the problems of the Great Depression through international cooperation.
The participants recognized that retaliatory tariffs had significantly contributed to the worldwide crisis.
Any agreement, therefore, would have to build a framework for exchange rate stabilization and require credible pledges for abstention from competitive devaluations.
At the time, the world's financial leaders believed that the basis for international monetary stability would be gold.
The conference failed to achieve its goals because the United States refused to agree to anything that might endanger its domestic recovery.
In June 1933, spurred by the devaluation of the dollar, the U.S. economy was three months into the strongest peacetime expansion in the nation's history, albeit an uneven one that started from a low level.
From March to June 1933, wholesale prices in the United States rose 8 percent, and farm prices and stock prices jumped 36 percent and 73 percent respectively.
The dollar had depreciated, and the new administration in its reflation policy counted on further depreciation.
On June 5, 1933, the U.S. Congress undid the final link between the gold standard and the domestic economy when it abrogated the gold clause in government and private contracts.
In late June, the conference participants drew up a weak policy declaration, which called for a return to the international gold standard but which permitted each country to choose the time of restoration and the par value.
On July 3, Roosevelt issued this strongly worded rejection of the proposal:
The world will not long be lulled by the specious fallacy of achieving a temporary and probably an artificial stability in foreign exchange on the part of a few large countries only.
The sound internal economic system of a nation is a greater factor in its well-being than the price of its currency in changing terms of the currencies of other nations. . . .
Old fetishes of so-called international bankers are being replaced by efforts to plan national currencies with the objective of giving to those currencies a continuing purchasing power which does not greatly vary in term of the commodities and need of modern civilization. . . .
Our broad purpose is permanent stabilization of every nation's currency.
Gold or gold and silver can well continue to be a metallic reserve behind currencies, but this is not the time to dissipate gold reserves.
When the world works out concerted policies in the majority of nations to produce balanced budgets and living within their means, then we can properly discuss a better distribution of the world's gold and silver supply to act as a reserve base of national currencies.14
14. "Roosevelt Rebuke Stuns Gold Bloc, but Conference Likely To Go On; President Turns to Domestic Drive: Text of President's Statement," New York Times, July 4, 1933.
TO BE CONTINUED ...
Re: ON THE GOLD STANDARD
The International Gold Standard and U.S. Monetary Policy from World War I to the New Deal, continued ...
Gold Purchases and Devaluation
Throughout the last half of 1933, the Administration's policy of reflation raised the price of gold well above the par of $20.67 per ounce.
By early September, the dollar had depreciated 35 percent against the French franc, and by mid-September the dollar-pound rate had spiraled up to $4.80.
On October 22, with the price of gold at $29 an ounce, Roosevelt, hoping that the program would raise commodity prices, authorized the Reconstruction Finance Corporation to purchase gold newly mined in the United States and, if necessary, to buy gold in the world market.
On October 25, the RFC set its price for domestic gold purchases at $31.46, which was 27 cents above the world price.
After the RFC began purchasing gold in the world market, the price of gold rose almost daily — to $34.01 on December 1 — and the pound appreciated to $5.18.
From April to December 1933, the Federal Reserve increased its holdings of government securities from $1.84 billion to $2.43 billion.
During this interval, currency flowed into deposit balances, the money supply rose 4 percent, and the gold reserve ratio stayed above 60 percent.
The New York Federal Reserve Bank assisted the open market policy by lowering the discount rate from 3.5 percent in March to 3 percent in April, to 2.5 percent in May, and finally to 2 percent in October.
These expansionary policies communicated the Roosevelt Administration's goal of higher prices.
After the initial surge in the spring of 1933, however, the price level scarcely stirred from its position in June, and it tarried 26 percent below the 1929 level.
Disappointed, Roosevelt invoked a provision of the Thomas amendment in December 1933, instructing the U.S. mint to purchase newly mined silver at 64.65 cents per ounce, a 47 percent premium above the market price of 44 cents per ounce.
(Early in 1933, silver had traded at 25 cents per ounce.)
The Silver Purchase Act of June 1934 furthered the huge addition to the silver stock.
Because it enabled the Treasury to base an expansion of currency in circulation on silver, the silver purchase program legally elevated silver's status in monetary policy and, concomitantly, diminished the influence of gold.
TO BE CONTINUED ...
Gold Purchases and Devaluation
Throughout the last half of 1933, the Administration's policy of reflation raised the price of gold well above the par of $20.67 per ounce.
By early September, the dollar had depreciated 35 percent against the French franc, and by mid-September the dollar-pound rate had spiraled up to $4.80.
On October 22, with the price of gold at $29 an ounce, Roosevelt, hoping that the program would raise commodity prices, authorized the Reconstruction Finance Corporation to purchase gold newly mined in the United States and, if necessary, to buy gold in the world market.
On October 25, the RFC set its price for domestic gold purchases at $31.46, which was 27 cents above the world price.
After the RFC began purchasing gold in the world market, the price of gold rose almost daily — to $34.01 on December 1 — and the pound appreciated to $5.18.
From April to December 1933, the Federal Reserve increased its holdings of government securities from $1.84 billion to $2.43 billion.
During this interval, currency flowed into deposit balances, the money supply rose 4 percent, and the gold reserve ratio stayed above 60 percent.
The New York Federal Reserve Bank assisted the open market policy by lowering the discount rate from 3.5 percent in March to 3 percent in April, to 2.5 percent in May, and finally to 2 percent in October.
These expansionary policies communicated the Roosevelt Administration's goal of higher prices.
After the initial surge in the spring of 1933, however, the price level scarcely stirred from its position in June, and it tarried 26 percent below the 1929 level.
Disappointed, Roosevelt invoked a provision of the Thomas amendment in December 1933, instructing the U.S. mint to purchase newly mined silver at 64.65 cents per ounce, a 47 percent premium above the market price of 44 cents per ounce.
(Early in 1933, silver had traded at 25 cents per ounce.)
The Silver Purchase Act of June 1934 furthered the huge addition to the silver stock.
Because it enabled the Treasury to base an expansion of currency in circulation on silver, the silver purchase program legally elevated silver's status in monetary policy and, concomitantly, diminished the influence of gold.
TO BE CONTINUED ...