At the time of the Great Depression, America had a 100% gold standard

[Thomas Paine]

Also, any implication that subscribing to the gold standard during the Great Depression was the proximate cause for the occurrence of the Great Depression is meritless. In fact, after World War II, the Bretton Woods monetary system was established, which pegged the U.S. Dollar to the gold standard until Nixon abandoned the Bretton Woods system in the early '70s. The U.S. Dollar would not have been pegged to the gold standard after the Great Depression if the gold standard had caused the Great Depression in the first place. For further information, do a google search for Bretton Woods.

 

[runderwo]

Even though it was backed by gold, the central bank made several bad decisions in how it handled it that caused a recession to go into a depression. Having a gold standard doesn't prevent bad economic policy, it just prevents runaway and deficit spending. Ideally, you wouldn't have a central bank either.

Right. These are two separate issues.

The cheap credit to the national banks through the OMO and the fractional reserve system is what creates the boom and bust cycle by fueling malinvestment. The lack of gold standard only affects the boom and bust cycle to a degree by the money that would otherwise not be able to be printed and filtered into the economy through Congressional funding of special interests.

The missing gold standard (or any other commodity backing) is what enables politicians to endlessly deficit-spend on wars, entitlements and corporate welfare.

A gold standard reins in Congress. It doesn't prevent the boom and bust cycle that is largely fueled by credit that is issued below market rate through OMO. Boom and bust cycle comes from malinvestment, and malinvestment comes from cheap credit and the imaginary money supply created by fractional reserve banking.

 

[chrismatthews]

ummm no we didn't. The Fed began fractional reserve banking roughly 20 years before the great depression. Tell your friend that reading is fundamental.

 

[Dan D.]

Read about the Panic of 1837 versus the Crash of 1929. The circumstances similar, but in the former, there was no central bank, and no price controls. Prices fell, but so did wages, and so the economy grew at 6% per year even during the worst of it. Incidentally disproves a central tenet of Keynesianism, that wages are inherently sticky downward.

 

[LukeNM]

It is my understanding that everyone and their brothers, plumbers, merchants, laborers, housewives, you name it were borrowing money from the banks to invest in the stock market (reminded you of anyone). When the big money boys decided to cash out guess who got left holding the bag? That is what I believe started the bank failures and the Great Depression.

 

[ronpaulfan]

Welcome to the forum

On an unrelated note, a shill tactic is to post "my friend/mother/brother said X" in the forum

 

[Bradley in DC]

We went off the gold standard in a true sense with the adoption of the Real Bills Doctrine.
http://www.independent.org/publications/tir/article.asp?articleID=612&issueID=48

An inexcusably short explanation would be that the Fed in the 1920s kept the nominal general price level stable in an environment of great technological innovation (trains, radio, etc.) when real prices were falling. That action masked real inflation and the resulting malinvestment that manifested itself in a stock market bubble, etc. See Hayek and Mises and the Austrian Business Cycle Theory.

A good look at several of the factors here:
http://www.mackinac.org/article.aspx?ID=4013

 

[megasooner]

Wikipedia wins this battle for us:

http://en.wikipedia.org/wiki/Federal_Reserve#Criticisms

Ben Bernanke agreed that the Fed had made the Great Depression worse, saying in a 2002 speech: "I would like to say to Milton [Friedman] and Anna [J. Schwartz]: Regarding the Great Depression. You're right, we did it. We're very sorry. But thanks to you, we won't do it again."[43] [44]

 

[apc3161]

It is my understanding that everyone and their brothers, plumbers, merchants, laborers, housewives, you name it were borrowing money from the banks to invest in the stock market (reminded you of anyone). When the big money boys decided to cash out guess who got left holding the bag? That is what I believe started the bank failures and the Great Depression.

Have you ever heard that joke from that time period? It goes something like this:

"One day a successful wall street investor was walking on the road and decided to stop and get his shoes polished. So he was sitting there getting his shoes polished and the shoe polisher starting talking about all the stocks he owned, what stocks he was bullish about etc. He then asked the investor, "So where do you think the market is heading and what kind of stocks are you buying?" The investor got up walked away and then said he was on his way right now to sell all of the stocks he owned.

I always thought that was funny.

 

[Bradley in DC]

If you really need for someone to understand what caused the great depression (along with every market boom and bust since then as well as who profitted from same), have your friend devote the time to watch "The Money Masters" which is available at the following link in its entirity

TMM is factually inaccurate and plays loose with history (taking quotations out of context and manipulating meanings). Its goals and ours are incompatible.

 

[DRV45N05]

Firstly, there was not a pure gold standard in those days. The Federal Reserve was still able to create money and credit how it saw fit. The money was "REDEEMABLE" in gold at a rate set by the Fed; it was not a 100% rigid gold standard in which money supply only increased when the supply of gold increased, and subsequently when gold was exchanged for notes. The Federal Reserve doubled the money supply from the inception of the Fed to 1920, and it increased the money supply by 68% from that point through the crash. The 1920s expansion occurred mainly because of expansionary monetary policy (and the Mellon tax cuts), and when the inflation set in and the price of gold internationally rose, this (as predicted by the monetary model under a gold standard) caused a gold flight, as the Fed/banks did not adjust the exchange rate of the dollar for gold upward. Furthermore, the Hawley-Smooth tarriff (the news of which triggered the stock market collapse of 1929), along with the loan recalls, triggered the depression and the bank failures. The Hoover tax increases (in which the top marginal rate was jacked up from around 28% to about 65%) and the subsequent TIGHTENING of monetary policy by the Fed contributed big time to the prolonging of the depression.

The presence of the Gold Standard did not cause the Great Depression.

 

[slantedview]

The Great Depression happened because the economy was before doing so well and people got over confident and started taking loans and taking stock risks without thinking about the consequences.

Exactly! A direct comparison can be drawn to the current housing crash, where everyone and their mom took out mortgages and mortgage equity way beyond what they could afford. Now we have a situation where the Fed is bailing out Wall Street in order to prevent the big boys from collapsing. Of course, the way that the Fed "saves" the day is the same way they caused the crisis in the first place, by printing money.

If printing money was the problem, how can it be the solution?

 

[apc3161]

TMM is factually inaccurate and plays loose with history (taking quotations out of context and manipulating meanings). Its goals and ours are incompatible.

I agree. A lot of people need to step away from these conspiracy theories in my opinion. There are very real more tangible reasons as to why the great depression occurred besides saying it was some grand scheme.

 

[apc3161]

Exactly! A direct comparison can be drawn to the current housing crash, where everyone and their mom took out mortgages and mortgage equity way beyond what they could afford. Now we have a situation where the Fed is bailing out Wall Street in order to prevent the big boys from collapsing. Of course, the way that the Fed "saves" the day is the same way they caused the crisis in the first place, by printing money.

If printing money was the problem, how can it be the solution?

The fed caused the great depression and no one else as a result of bad policies, the same can be said for the housing crisis. In the case of the great depression they increased interest rates, contracted the money supply, and didnt allow gold to circulate throughout the economy because they were trying to protect during a time of uncertainty because it was an asset, it is because of this that we went into a depression.

With regard to the sub prime crisis, the fed simply bought up too many federal securities post 9-11, this increased the money supply which led to artificially low interest rates. People took out mortgages for houses that they wouldn't be able to afford once interest rates inevitably rose.

This is similar to what you said, but you seem to oversimplify it.

 

[LFOD]

Booms and busts can be attributed both to the existence of the Federal Reserve, AND to fractional reserve banking. Fractional reserve banking predated the Fed by centuries, and was the norm even under the classical gold standard. It too is a type of legalized dishonesty. The inevitable result of fractional reserve banking is overexpansion of credit, leading to booms then busts and bank runs - even when the currency is on a gold standard.

When you *combine* fractional reserve banking, with the legalized mechanism for creating unlimited paper (and especially, electronic) money (the Federal Reserve), that sets the conditions for *spectacular* booms and busts.

The trend for this entire process is nations ruined by debt, which is where we are headed.

 

[Silverback]

The Fed was born in 1913. 16 years later an unlimited supply of credit ran into a limited supply of money.

Blaming the depression on gold is like blaming a drunk driving fatality on the telephone pole.

 

[runderwo]

TMM is factually inaccurate and plays loose with history (taking quotations out of context and manipulating meanings).

Can you be more specific?

Its goals and ours are incompatible.

I thought its goal was to support eliminating the central bank, or do you mean that it goes too far in supporting elimination of fractional reserve banking?

 

[Bruehound]

The cause of the Great Depression was the Fed creating artificially low interest rates in part to cheaply pay off war debt accumulated from WWI. This easy money policy lead to a speculative bubble. Is any of this sounding familiar so far?

 

[constituent]

The Great Depression happened because the economy was before doing so well and people got over confident and started taking loans and taking stock risks without thinking about the consequences.

So have a gold standard, but make sure it's flexible too.

where'd the loans come from... that's the crux of the matter.

 

[apc3161]

The cause of the Great Depression was the Fed creating artificially low interest rates in part to cheaply pay off war debt accumulated from WWI. This easy money policy lead to a speculative bubble. Is any of this sounding familiar so far?

No, that was what created the inevitable recession, it turned into a depression however because the Fed raised interest rates and contracted the money supply.