The end of gold

by Eric on March 21, 2013

I would have said “gradually,” rather than “secretly,” but over on Bloomberg I have a little piece on how FDR ended the US gold standard.

There’s widespread disagreement over when the US went off gold – was it with the end of domestic convertibility, which happened on March 6, though it wasn’t made clearly permanent until later? was it with the end of exports, on April 19? Scott Sumner just claimed the US didn’t permanently leave the gold standard at all in 1933, “just temporarily suspended it,” which is an answer Friedman and Schwartz sort of give, though they fudge it – “the gold standard to which the US returned was very different, both domestically and international, from the one it had left”. I myself like the answer given in one article, that the US went off gold “about crocus-daffodil time, 1933.”

Actually, I think the word “disagreement” isn’t quite right – it’s more lack of agreement; I’ve never seen anyone bother to pick apart who prefers which date and why. Obviously it depends on what you mean by “the gold standard,” and what it means to be on or off.

As the Bloomberg post indicates, I’ve been looking into Roosevelt’s intentions and expressed policies, and I’ve become persuaded that he knew pretty clearly what he was doing.

Two weeks before Roosevelt’s inauguration, Keynes wrote,

can it be possible today to forecast a respectable future for [gold], when in the meantime it has betrayed all the hopes of its friends? Yet it does not follow that the monetary system of the future will find no place for gold. A barbarous relic, to which a vast body of tradition and prestige attaches, may have a symbolic or conventional value if it can be fitted into the framework of a managed system of the new pattern. Such transformations are a regular feature of those constitutional changes which are effected without a revolution.

I predict, therefore, that central banks will continue in the future, as in the past, to keep gold reserves for the protection of their exchanges and as an emergency means of settling an adverse international balance.

That’s, in outline, the policy Roosevelt pursued – probably without having read Keynes, but who knows? – beginning with his inauguration. He wanted a managed currency, so he could influence commodity prices, but he also wanted enough gold in US vaults so he could fend off speculative attacks on his managed currency. That’s why he ended convertibility, but didn’t quite announce it. If he said convertibility was done for good and all, it would have been much harder to get hoarders to return their gold to the vaults.

It’s also, of course, the basis for the dollar that became the anchor of the Bretton Woods system, in which, Keynes would later say, reprising his language of 1933, gold had become a “’constitutional monarch’, so to speak, which would be subject to the constitution of the people and not able to exercise a tyrannical power over the nations of the world.”

FDR’s intentions matter because if he meant to do what he did, if he was carefully managing expectations, then the history of his monetary policy becomes a useful text applicable to modern affairs.

Meanwhile, in modern affairs, it’s not a good season to be a gold enthusiast. As usual, the answer to a headline that ends in a question mark is “no.”

{ 34 comments }

1

JW Mason 03.21.13 at 4:42 pm

I predict, therefore, that central banks will continue in the future, as in the past, to keep gold reserves for the protection of their exchanges and as an emergency means of settling an adverse international balance.

Surprisingly, gold continues to account for about 15 percent of the assets of the ECB.

2

Ben Alpers 03.21.13 at 5:46 pm

Thanks for introducing me to Betteridge’s Law of Headlines, Eric. I suspect it will come in handy.

3

dm 03.21.13 at 7:44 pm

If by new era, FT means a prolonged period of declining gold prices, at least that’s how I read the title, then the answer is yes.

4

Eric 03.22.13 at 12:51 am

Huh, I’d interpreted the FT title as asking whether there was a new role for gold after the 2008 “reset.” But perhaps not.

5

David 03.22.13 at 5:34 am

It’s really good for circuitry and stereo equipment.

6

James 03.22.13 at 9:19 am

“Surprisingly, gold continues to account for about 15 percent of the assets of the ECB.”

And more than 75% of the US’s and Eurozone’s (for historical and practical reasons)

7

bad Jim 03.22.13 at 9:27 am

There’s a primitive conviction that things need to be grounded: money must be backed by gold and morals must be rooted in scripture, even though, for most practical purposes, they’ve always been necessarily a matter of trust and consensus.

Having a pirate-obsessed five-year-old in the family leads one to unusual contemplations, like the second circumnavigation of the globe, in the process of which Drake captured enough of the gold the Spanish were extorting from the Aztecs to double the Queen’s income. Good fun for all, but what did the shipping of rare metals around the globe do to enhance productivity?

8

Matt 03.22.13 at 9:36 am

Gold will hold its value better than any fiat currency because it is finite by nature instead of by human whim. It will hold its value better than any other mineral commodity because Gold Is Money. Other rare metals are not magic like gold because shut up that’s why. Any apparent downward movements in gold’s value are tricks and lies from banksters and statists.

9

Mao Cheng Ji 03.22.13 at 10:19 am

What about the idea that by printing more money governments can easily make their economies flourish? Is that the mirror image, as stupid a theory as that of ‘goldbugs’? Or is that one the god’s honest truth?

10

Pete 03.22.13 at 10:44 am

@9: that depends on whether you’re printing the right amount or not, and what it’s spent on…

11

Mao Cheng Ji 03.22.13 at 11:17 am

http://usatoday30.usatoday.com/news/opinion/forum/story/2012-09-25/ben-bernake-inflation-money/57840674/1

“The Federal Reserve should give people free money. People would spend this money, increasing demand for goods and services, causing employers to hire additional workers to meet this increased demand and reducing unemployment in the economy overall.”

I mean, it’s a good story, but is it so obvious that “people would spend this money”? And to the extent that they would, is it so obvious that it’ll cause domestic “employers to hire additional workers”?

12

Peter T 03.22.13 at 11:32 am

bad Jim

My understanding is that Drake did not capture any great amount of Spanish gold. What he did do was pick up a load of spices in the East Indies and then sell them at great profit in England. A substantial part of that profit accrued to the Queen as a major shareholder in the enterprise.

13

Ciaran 03.22.13 at 11:42 am

Mao

The USA and the EU are largely closed economies though right ? So surely a good proportion of the money would circulate internally .

Anyway the slightly more nuanced version would see the printed money finance government expenditure/investment, which imvho seems like a good idea.

14

Random Lurker 03.22.13 at 11:59 am

And to the extent that they would, is it so obvious that it’ll cause domestic “employers to hire additional workers”?

I think that in a nultinational model a “hegemon” nation is supposed to be the “buyer of last resort” that stimulates the whole world economy by rising wages:

http://en.wikipedia.org/wiki/Charles_P._Kindleberger

15

Mao Cheng Ji 03.22.13 at 12:41 pm

“The USA and the EU are largely closed economies though right ? So surely a good proportion of the money would circulate internally.”

I don’t know, a lot of stuff I buy is produced in China.

More importantly, though: why would they start buying, necessarily? I have money in a bank, I don’t spend it, I try to add to it. Am I so different from everyone else?

Actually, the money being what it is, I might decide to buy something. Like an apartment, investment property. But that, by itself, is not going to add any jobs. In the end, there still will be one person with an apartment, and one person with money, just like it is now. Nothing produced.

“see the printed money finance government expenditure/investment”

But that’s a fiscal stimulus; the monetary part, the printing, is secondary, and it’s only one option.

16

Rob 03.22.13 at 2:12 pm

“More importantly, though: why would they start buying, necessarily? I have money in a bank, I don’t spend it, I try to add to it. Am I so different from everyone else? “

There must be some point at which extra income would translate into extra consumption. Maybe you would replace your laptop after four years instead of five, or spend that little bit extra on a nicer pair of shoes, or something? You must have some unmet needs, or do you think that we’re now at the point where people can reasonably claim that all of their needs are met by the current configuration of the economy?

17

Ciaran 03.22.13 at 2:47 pm

Clearly some people live quite different life’s than others

http://www.irishtimes.com/news/up-to-47-of-adults-have-less-than-100-a-month-after-bills-1.501974

Generally speaking I find the whole hard and fast distinction between monetary and fiscal policy a little confusing . Like QE is monetary policy but a lot of the money is used to buy government bonds (indirectly ) so surely in some sense the money is finding the government . And from what I’ve read a helicopter drop would be in some senses a fiscal operation since the fed itself would be legally empowered to mail out checks . It’s have to be the treasury or some other agency

18

Ciaran 03.22.13 at 2:48 pm

Finding = funding :)

19

Philip 03.22.13 at 2:51 pm

Mao Cheng Ji, if you want the money to be spent then give it poor people.

20

Mao Cheng Ji 03.22.13 at 2:58 pm

“You must have some unmet needs, or do you think that we’re now at the point where people can reasonably claim that all of their needs are met by the current configuration of the economy?”

Yes, I suppose that is my claim, in a sense. All their needs are met, within their current pattern of behavior.

So, you want to change the pattern, and you think giving away free money is going to do it. I doubt it. For me, at least, in order to change the pattern (to begin spending more), I would have to become more optimistic about the future, my long-term future. Or catastrophically pessimistic, but let’s leave that aside. The news that the government is so desperate that it’s giving money away is not going to help. In fact, I might decide to go buy some gold, or something.

21

Random Lurker 03.22.13 at 4:10 pm

“What about the idea that by printing more money governments can easily make their economies flourish? Is that the mirror image, as stupid a theory as that of ‘goldbugs’? Or is that one the god’s honest truth?”

Mao Cheng Ji @9

Sorry, I read just now the article you linked.
I think that the “helicopter money” described there is wrong.

During the New Deal and similar programs, the government did indeed hire a lot of people, who then could believe in a permanent increase in their lifestile, and then spent more.

The monetarist approach is to lower the interest rate that the central bank ask to the banks, on the expectation that the banks will then in turn be forced by competition to lower the interest rate they ask from borrowers.
Borrowers are “enterpreneurs” who realize that they can borrow 100 today at 2% to invest in some material business that they expect will have a profit rate of 3% (so that they can retain a net 1% of profit for themselves). Thus when rates are lower capital investiments that were deemed antieconomical at t0 because their profit rate was too low became economical, enterpreneurs build factories etc., and this again creates permanent jobs.

In both ways there is the creation of permanent jobs, expectation of a permanently higer lifestile for workers (who then spend more) and higher wages across the board (since there are more jobs and less competition among workers).

Now this part of the higer wages is the tricky part: the implicit logic of both theoryes is that the recession is caused by excessively low wages, although for some reason most economists refuse to come to this pretty evident conclusion.

BUT: while this model works if you think of a closed market, in a market composed by many nations, each with different standard wages and levels of technology, each nation has an incentive to lower her wage rate to “steal” market share and capital investiment from other nations; for example, it seems likely that Chinese success and industrialization were possible only because they repressed wages and allowed foreign companies to make big profits, luring foreign investiment into China. If they didn’t do this, they were likely to be stuck in a low tech ultra-low added value industry for many more years.

This means that we are speaking of two different concept of “equilibrium”:
The “full employment equilibrium wage” [ok I'm making up terms here] that takes us out of the recession is quite high (as in: higer than today);
But the “mercantilist equilibrium wage” that keeps the trade balance balanced (imports=exports) is often quite low, because many nations are purposefully trying to be net exporters (some of them with good reason) is quite low.

As a consequence we have schizophrenic policies that try to rise consumption without rising wages, of wich the idea to simply throw money from elicopters is an example.

22

Random Lurker 03.22.13 at 4:24 pm

As an addendum, this is really relevant to the “it’s all the fault of the euro” theory:

Many people think that european debtor countries should exit the €zone and devalue.
But, to the degree that this is a way to increase “competitiveness”, this is just a way to compress wages more and, even when it works, it’s likely to just dump the problem on some other nation. This kind of policy might well create a lot more mercantilism and aggravate the crisis.

Ideally, a “pan european new deal” would be better, and likely easier to achieve, but unfortunately european leaders are all affected by the “small nation syndrome”, they believe that demand for their exports is exogenous. But the EU is just too big to be managed as a small nation.

To be honest however the only nation I can think of that ran big trade deficits for a long time as a chosen policy is the USA, and there also it seems that politicians and voters are tired to run trade deficits.

Sigh…

23

Mao Cheng Ji 03.22.13 at 4:35 pm

Random Lurker, I understand that there are various sophisticated theories with the monetarist component in them, but “throwing money from helicopters” seems very common, and I was just wondering if that is the mirror image of “fiat money is the source of all evil”, that’s all.

“Mao Cheng Ji, if you want the money to be spent then give it poor people.”

When I was poor I was saving every penny. And I sure needed those savings, much more than I need them now, when I can deal with pretty much any emergency just from my monthly income. The poor save.

The pattern you’re thinking of is not just the poor, but a junkie, alcoholic, gambler. Those do spend, immediately. Yes, I’ll give you that.

24

burritoboy 03.22.13 at 4:35 pm

I’m confused by why you’re confused that buying a condominium wouldn’t cause employment to go up – condominium buildings don’t get constructed magically, you know………

25

Mao Cheng Ji 03.22.13 at 4:44 pm

Not much construction is usually going on during a recession. But that doesn’t prevent people from buying and selling ones that were built decades ago.

26

burritoboy 03.22.13 at 5:05 pm

Mao,

Are you merely pretending not to understand this?

As a real estate developer (yes, I haven’t built anything for about 6 years), I get loans based off a revenue projection and a cost projection (along with my equity in the project and my track record of doing this without blowing up the loan). The revenue projection is based off of comparable sales, essentially. The more condo buy/sell transactions at a stable level (or, of course, rising level), the more the bank believes my revenue projection(s). As long as I can get my costs a certain level below my internal revenue projections, I take the loans and start building.

27

Pete 03.22.13 at 8:57 pm

“I don’t want this, and obviously I am everyone, therefore this is a bad idea”

28

F 03.22.13 at 9:19 pm

Mao,

The poor save.

I totally believe that you did save when you were poor. But are you really that naive? The poor don’t save because they can’t afford to.

Or are you being a prick? A no-true-scotsman where poor who save are truly deserving poor, but poor who do not save are junkies, alcoholics and gamblers?

29

Ken 03.23.13 at 11:26 pm

Keynes: can it be possible today to forecast a respectable future for [gold]

Is “commodity” respectable, or did he have something more in mind?

30

The Tragically Flip 03.24.13 at 7:23 am

If you are able to save, are you really “poor”? If you don’t have enough for basic needs like food and heat, you aren’t going to save some windfall money, you will eat more and not be cold for awhile. This is well researched and not something any worthwhile debate should need to rely on anecdotes for.

Also, “just starting out in my career” is not poverty. Lots of us ate kraft dinner and lived in crummy apartments to get through university. That isn’t poverty any more than going camping is the same as being homeless. You expect the deprivation to end. Maybe the person above was actually poor, but it really doesn’t sound like it.

31

The Tragically Flip 03.24.13 at 7:32 am

Oh, and when you buy a condo from savings the person who sold it is likely to spend some of the money. After all, they wanted money for something, or they wouldn’t have sold the condo. Even if they just pay a mortgage, the bank now has extra capital to lend. Real estate agents and lawyers will collect fees on the transaction and spend some of the money. Condo values are bolstered and other owners benefit from that. There’s no way to tell this story where the effect isn’t at least slightly stimulative.

32

Mao Cheng Ji 03.24.13 at 8:54 am

” The more condo buy/sell transactions at a stable level (or, of course, rising level), the more the bank believes my revenue projection(s).”

Well, it seems odd. It’s a recession, so you already borrowed too much, and built too many condos. If people (being in a pessimistic mood) sell their expensive condos, it doesn’t seem like a good justification for building more.

But what do I know. I’m just surprised at the assumption that a monetary stimulus is some sort of silver bullet, that’s all.

33

Mao Cheng Ji 03.24.13 at 9:02 am

@30, yes, if you’re chronically hungry you’ll spend too.I meant someone who is poor but not destitute, in a stable pattern of income/spending. I apologize.

34

burritoboy 03.25.13 at 3:45 pm

@32

Again, are you pretending to be obtuse? The more buy/sell transactions occur, if there is a backlog of inventory, the buy/sell transactions will work through the backlog. Your purchase of an already constructed condo provides additional evidence that there is a market for condos at that transaction price. Thus, it’s reasonable for a lender to use that as a basis for a revenue projection (of course, any particular lender may disagree – but we are talking about aggregates here).

Buying real estate is a huge consumption item – for the vast majority of people, it’s by far the largest consumption item they will ever even contemplate buying – usually, by at least an order of magnitude.

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