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Debunking Keynesian "History": The Gold Standard Had Nothing To Do With Panics And Busts
Authored by Brian Domitrovic, originally posted at Forbes, via Contra Corner blog,
One of the main reasons that detractors of the gold standard contend it is a “barbarous relic” (in John Maynard Keynes’s phrase) is that it was implicated in so many financial panics and economic busts back in its heyday in the 19th century. As the New York Times’ pet Internet troll once put it, sarcastically, “under the gold standard, America had no major financial panics other than in 1873, 1884, 1890, 1893, 1907, 1930, 1931, 1932, and 1933. Oh, wait….returning to the gold standard is an almost comically (and cosmically) bad idea.”
Looking at the 19th century, before the gold standard became a ghost, a dead-letter in the early era of the Federal Reserve from 1913-33, there is no evidence that the good old thing was implicated in any panic or bust. Certainly not in 1873, when the United States was still contemplating returning to the gold standard that it had abrogated in the civil war the decade prior.
Certainly not in the other famous panics of the 19th century, every one of which had at its root some form of extensive government meddling in the economy.
Not the panic of 1819—caused by the misallocation ofcapital owing to the U.S.’s printing, during the War of 1812, of fiat paper currency (some of which was so transparently desperate it paid interest). Not the panic of 1837, caused by undue speculation in land sparked by Congressional goading following “Indian removal.” Not the panic of 1857—caused by a collapse in railroad shares on the basis of over-investment encouraged again by federal policy.
Which brings us to the panic of 1884. Here are yearly the economic growth statistics of the five-year run from 1882 to 1886, the mid-point being that putative panic year, 1884. (GDP is a blunderbuss statistic, but at least these reconstructions don’t have to pretend that government spending is output, in that government spending was a twelfth of what it is today.) 1882-86, yearly growth came in 5.3%, 2.8%, -1.6%, 0.3%, 8.1%. Growth over the five-year period, with 1884 at the mid-point: 9.6%. By the end of the decade, the 1880s, further 28% growth (6.2% per annum) had been tacked on.
For there to be a “major financial panic,” economic growth must take a substantial and sustained hit—as in the years after 1929 and our own cherished post-2007 era. Here we have a modest trough bounded by good growth before, and epic growth after. Take 1884 off the list.
Which brings us to 1890 and 1893. Of all the panics in American history, these are perhaps the least understood and most misrepresented—with the possible exception of the tremendous recession of 1919-21, which the Times troll most very curiously did not mention (which is OK, since none other than James Grant is on the matter).
Saying that there was a panic in 1890 is weird, in that growth was some 9% that year. In 1891, growth tumbled down, but stayed positive, at 1%. Growth surged again in 1892, to at least 10%. Then the sustained drought came: growth fell by fully 10% through 1894 and took till 1897 to recover the old trend of sustained increase.
This was the desperate panic/bust of 1893, which gave us the Haymarket riot, the Pullman strike, mass bankruptcies, and the word and very much the fact of “unemployment.” Right smack in the middle of the gold-standard era.
Or was it? It is perfectly clear what caused both the huge run-up in output numbers from 1890-92, as well as the tremendous stress on the banking and credit system that led to the drying up of investment and the shuttering of factories in 1893 and beyond. The United States, in 1890, decided to traduce the gold standard.
1890 was the year in which Congress made two of its most intrusive forays into monetary and fiscal policy in the years before the creation of the Fed and the income tax in 1913. It authorized the creation of fiat money to the tune of nearly five million dollars a month, and it passed a 50% increase in tax rates in the principal form of federal taxation, the tariff.
The monetary measure came care of the Sherman Silver Purchase Act, whereby the United States was mandated to buy, with new paper currency, an additional 4.5 million ounces in silver per month. The catch: the currency that bought the silver had to be redeemable to the Treasury in gold too.
Silver-mining interests in Nevada and elsewhere had conned (and surely bribed) Congress into this endeavor. Knowing that their extensive silver was worth little, what better way to cash in on it than get a piece of paper that says the silver can be exchanged for gold, government-guaranteed?
The cascade of new money caused an asset bubble, the tariff made sure the bubble was especially deformed, and the most extended recession of the pre-1913 period hit. The United States, needless to say, ran out of gold to back all the extra currency. J.P. Morgan had to float a gold loan to bail out his pathetic government. With the private banking system devoting its resources to backing the currency, the market got starved of cash, and the terrible recession came.
To believe that this ridiculous episode impugns the gold standard is to miss the point, and badly. Any currency that is on the gold standard can have its manager ruin the monetary system if so disposed. If you print gobs more currency than you could conceivably redeem in gold, because some con man from out West got to you, the grim creeper will come for you and your economy. So avoid that fate.
In our own era, the Fed prints excess dollars without concern that they be redeemable in gold. Which means that our capital misallocation is extensive and long-term, our recessions are long and deep, our growth trend is shallow, and our complacency about how right we are in contrast to the benighted past is callow and pitiable.
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The real issue as always is that we the people let them fractionally reserve the gold. It's funny how gold gets blamed when really the issue was too much paper and not enough gold... I don't know if it's comforting we still have the same issue today or not... this game may go on and on and on and on... luckily far too many are waking up these days.
Stack on.
Just so everybody is fully aware, even during the gold specie standards of yore, gold bullion dealers operated as shadow banking systems, oft pledging numerous times, finite amounts of gold.
Oh, I'm all for a return to a sound money system, but be advised that alone does not prohibit leverage and speculation.
Just ask the City of London.
The solution is not specifically to return gold to currency by decree. The solution is allow competing currencies (and gold would certainly become predominant). This allows various money standards to be compared and the market price discovery serves the purpose of keeping the sound money in play.
Bingo! The boom/bust cycle is a direct and proximate result of government decrees that meddled with the money supply.
These monetary games have been going on in the Former United States from the beginning, and even before it's inception (Continentals anyone?). These games are older than tulips.
The only standard should be to allow individuals engaging in voluntary exchange, to determine what is money in each transaction.
Now they're re-hypothecating commodities in China
Tulips for everyone......
That is not about the gold standard. That is about fraud and over creation of credit. On or off the gold stanard what you describe happens. It is a much more serious problem when not on the gold standard because it kills the currency. Gold remains money before during and after a credit collapse. The public has a chance to survive.
Full reserve banking. Money backed by gold. We return to normal human beings.
and the syndicate loses their power over the donkeys.
No no no. We don't need "money backed by gold."
We just need to be free to trade in gold, silver or anything else we and our business counterparties can agree on.
In a world of finite resources, the "money" needs to also be a finite resource.
Indeed. Any physical standard works. Deviance from 1-to-1 translation of physical to paper/virtual does not work.
You could have the 2x4 standard, where $1 = One 8 foot 2x4, and that would work too, as long as the 1-to-1 translation remains.
In the future, when most plant life is dead from radiation, 2x4s will be a valuable resource, if humans are still around to piss around pretending they're the greatest, most special things ever.
Trading without the need of force of any kind. That could work. Heck one might actualy be able to figure out the true value of his own labor. Maybe even trade without out a middle man shaving every deal.
This was tried incase you forget it caused that thing called World War II... ofcourse this scares me not and I am all for doing it again but doing it right and finally putting an end to the "tribe". If you use the laws of the constitution along with the "monetary/barter" system good ole Adolf put to use then we have a winning system. The idea of honest work ...productive work ... is a measure of your worth "the minimum wage is what you expect from being a minimum producer" in the long run it encourages people to contribute to society rather than leech off of it ...thus ending the FSA the need for big .gov. hello free market principles and good bye freeloaders and best of all bye bye fucking corporations and their fucking monopolies. The ladder of success be restored and you get what you earn via honest production. You're only limited by your own incentive.
Ofcourse this will fall on deaf ears (blind eyes) because I live in a world of fat lazy entitleists whom know not what pride nor work is.
happy motoring on your "cheaper" gas until ya starve trying to survive with no ambition no skills and no pride.
.
.
white trash pride... on your meth and back to work dip shit
No, gold IS money. Thus money CANNOT be "backed by" gold. And also thus, fractional reserve cannot exist.
HOWEVER, you are absolutely correct to say that in ANY system, people must be free to barter. And barter just means "trade any goods for any other goods", with gold and silver only being two of the possible goods to trade for.
The FACT is, the true, honest "gold standard" IS simply barter. In fact, there is only one tiny difference between the true, honest gold standard and 100% chaotic, arbitrary barter.
And what difference is that?
There is an INFORMAL (not imposed) practice of listing the exchange rate for the goods you produce for grams of gold. PERIOD. That is ALL.
In other words, it is STANDARD PRACTICE for people and businesses to list how many grams of gold per egg, or kg of butter, or gallon of purified water, or 100 meters of 2x4 lumber is acceptable.
THAT IS ALL.
And this is massively efficient and beneficial too.
How so? Because now, with the exchange rate of virtually all goods versus gram of gold, one can compute the exchange rate of ANY TWO GOODS. If you want to trade lumber for eggs, you just look up the "price" of lumber and eggs in grams of gold, divide the two numbers, and now you have the standard exchange rate for lumber and eggs!
This convenience and efficiency is so vast, humans really need this. The "standard good" doesn't NEED to be gold (or silver), but gold is best BY FAR for other reasons. Namely, gold is inert (doesn't degrade), has significant value per gram (so people don't need to carry around tons of some other commodity to buy goods, and don't need a huge cavern to save for years to buy something expensive).
The gold standard has NOTHING to do with governments. The MOMENT predators-DBA-government have ANYTHING to do with trade... people are slaves, and the economy takes an enormous hit.
And so, to your point, the true "gold standard" actually HELPS and make more efficient what you propose --- trading any-damn-thing-we-want for any-damn-thing-we-want, because it makes obvious how much of each is the appropriate exchange.
-----
One problem is, the predators-that-be (especially banksters) try to pretend absolutely corrupt NON gold standards (including all "fractional ones") are called "gold standards", so they have actually legitimate gripes to point at.
The only TRUE gold standard is one in which people trade-for and save and exchange physical gold. No paper receipts for gold, and no government currencies (supposedly backed or not). People only trade GOODS for GOODS, gold just being a good that people save and commonly trade for other goods.
Money is a creature of the law. It divides down at the moment of transaction. Unequal goods can be transacted with money to make up the difference, or money can be traded for a good, and recipient can then spend the money in another transaction.
Metal is not money. Harnessing the money supply to metal volume confuses the mind of man and is unscientific. The actual economy is an S shape curve and metal cannot flex to this reality.
In history, the east west mechanism, that is the exchange rate differntial between silver and gold was used to enslave people. Also, metal creditors during the Levant period would allow intangible clay ledgers grow with usury and hence there could never be enough metal money to satisfy the ledger. To cancel the debts, people would give their lives, usually to be then spent in the silver mines.
Jesus was killed for Silver, and in those days it represented a generational debt. If you couldn't pay in silver, the your children had to. Our Semitic speaking friends of the tribe owned the silver mines during the iron age, and of course silver volume could not keep up with the demands of usury.
What we need is pure fiat money that is legal. Today we have fiat money that is created by private banks. In turn the hypothecation mechanism demand front loaded usury, which is interest seigniorage. In inevitable downturns, in order to eliminate exponential debts, the asset and populations are harvested.
Metal is inherently depressionary, as it goes off and hides (hoarding) during any sort of crises of confidence.
Those that currently hold the metal, if we go to a metal system, will then demand goods and services from labor. Go ahead and hand over your future labor power to ancient money powers who have hoarded the yellow metal.
Sorry, if we want to have a volume restricted system, with proper money path dependencies, it must be lawful money. The contract is part of banker fiat money as well, only they have usurped the law to their beneift.
The bankers will be very happy with a Gold system. It is part of the dialectic. They can still own money power and harvest populations during depressions.
You know when the change comes the old money will be worthless. It will require turning in "some max amount of old to get one new". This will not hurt the 99%, but will be the pits for the one percent (they just have way to much old money). So; It's just not going to just happen, but it will at some point .
Nope. Just punish fraud. That will not happen, because cartelized Banks own the monopoly criminal gangs with all the guns, and their justice system. It is unsustainable and will eventually end. When it does end, we need to remember that it was obedience that got us where we are now.
Great article! I did know about a couple of those "panics" either.
Pro'lly didn't know about my big anxiety attack either, I take it?
Why you've never heard of the Great Depression of 1920:
https://www.youtube.com/watch?v=czcUmnsprQI
48 minutes but well worth it.
1920 = 2008.
1929 = ?
2008 was just a warm up like in 1920. Problem is the reactions are just a little different in regard the FED and TPTB. Pretty much every last action taken by the monetary overlords since 2008 has only escalated the fundamental pronlem and insured a far larger and more disastrous crash.
And in case anyone has not noticed the game plan is the same this time around. The players and the pieces are all being lined up for a big 'ole war to paper over it all.
Any. Day. Now.
Well I agree, starting a Big Giant War is usually their solution to the currency collapse du jour. This time however, they have been bouncing from wall to wall trying to get that started, and have been "outed" over and over again. The beheadings were shown to be fake, French news reported that the "Head of ISIS" is an Israeli actor named Elliot Shimon. The so-called "conflict" over the Senkaku Islands is nothing, they've got nothing. Ukraine was a botched Mossad/CIA hatchet job, now they're trying everthing they can think of to get that repaired.
Domestically, Sandy Hook was shown - almost immediately - to be an almost laughable hoax. The California drive-by shootings was also outed almost immediately (as the repair glass for the windows allegedly "shot out" was shown to have been delivered the previous day). Et cetera.
It's true they want WOAR to cover for the overdue collapse of the USD (and the Euro for that matter). But they are bouncing off the walls like Eddie Barzoon trying to make it happen convincingly, and they have failed. Is it time for Brzezinski to get demoted? Maybe they need some fresh talent (PTB, I'm available).
https://www.youtube.com/watch?v=2c92b8jk4HM
Keynes was a Rothschild establishment front man.
A carnival operator wearing a suit.
His purpose was to legitimize a ponzi scheme in academic circles.
He hardly ever told the truth. Maybe never.
does it matter?
or, is there something to be gained out of condemning a dead guy?
who's really to be condemned?
the person who sells the $hitty game?
or those who buy (into and play) the $hitty game?
point #1, the shitty game is the only game, by design
point #2, does it matter if he was one of the key players who hoisted a usury system of money onto the world to turn us all into serfs by design? Is that the question?
point #3, the dead man is getting the credit he deserves which is to live in infamy as a film flam man of the lowest character
you don't know about the other game?
He liked them boys too, but that's another story. Seems he would have fit in splendidly with the cast of characters running our country presently.
Excellent Read!
Fantastic... thankyou
Will reference it frequently to the agnostics when we transition to a cash`less society?
Even a gold standard would be better than todays no standards. PROSECUTE THE USA's WAR CRIMINALS!
This article does not address the mechanisms governing human conduct that the capitalist lever gives the Capitalist class : it feeds GREED (all power corrupts) and evolves to Oligarchy structure of markets, and also to debasing the money line whatever its made of.
Having gold standard does not change despotic political power plays and dreams of universal empires. Just read History.
Gold coins were debased, rehypotheticated n times and war was always the convenient route when money supply ran out.
What Keynes did was to integrate those aspects of society in his construct. He was no pure monetarist but his theory allowed the state to counter the Oligarchy by generating money to re-allocate resources that OLigarchy greed and capital misallocation in a so called market system (in fact a rigged system by near monopoly control resulting in 1929 crash, although the gold standard was in place then) that could kick start the economy again. Political will is required once the market is OWNED by Monopoly Oligarchs.
This crisis is not CAUSED by Keynesian plays. QUITE THE CONTRARY : IT WAS REAGANOMICS.
Of course ONCE the CRISIS has occurred and the rot is set in then WE ALL BECOME KEYNESIANS TO PROTECT STATUS QUO. Thats what happened in 2008/2009 and OBAMA never reigned in the Oligarchy market and shut down the Casino. That was his crime.
Once we come out of this crisis the State regulation will be the key element to restart the economy. As the Oligarchy is now so corrupt it cannot be allowed to run the so called free market.
Before that happens the Oligarchy hold, chokelock on government, has to be ripped out.
The people have to re-win the government around to more honest ways and let state then install a regulated market.
This crisis will bring the financially fascist system down; like all totalitarian regimes before it.
You guys continue to live in the fairy land where "self regulating" markets re-establish balance between supply and demand; whereas IN FACT ALL THROUGH HISTORY, its never worked that way ! Gold standard or no gold standard.
Keynes died in 1946...and his Bancor system was shot down to create King $ !
Friedman and Nixonian BW revoke then got the petrodollar ball rolling. Where was Keynes in 1971/73 ?
Tacitus wrote that the Roman Empire was so corrupt and so many senior members expected the rewards of corruption that any emporer who would attempt to restore the Republic would have been assassinated.
This is where the US is today. True reformers will go the way of John F. Kennedy.
"This crisis is not CAUSED by Keynesian plays. QUITE THE CONTRARY : IT WAS REAGANOMICS."
Pretty sure the stagflation of the 70's and Carter came before Reagan and was something that was Unpossible! according to Keynesian theory.
It was so Unpossible! that when it happened, they started calling themselves neo-Keynesians in utter disbelief ;-)
That was nothing more than the petrodollar recycle spiral initiated by the US-Saud handshake after oil price hike.
All those TBTF banks of that age were recycling like mad those $ to City where there were no regulations on bank equity to debt ratio on the eurodollar market. Debt went ballistic and staglation resulted.
That was pure cause and effect of Nixonian Friedmanism.
You know that. ZH has explained it time and again.
The neo-Keynesians, in fact the post-friedmanian neo-keynesians as you don't say, were working outside the tenets of Keynesian mix; aka the fundamental tenet of BW with the gold exchange standard : BALANCED BUDGETS and Balanced Trade Balances. Something that was a dead end since Johnson's great society and Nam game; as well the peak oil of US production. The nascent neo-con warmongering mantra had made Keynesian BW equilibrium impossible.
Keynes would NEVER have revoked BW, his baby.
Even Greenspan admits a gold standard is the only way to protect against the usurpation of property rights by the state...
http://www.globaldeflationnews.com/what-caused-a-brilliant-young-economi...
Moral of the story: A gold standard won't save you if the government can conspire with crooked bankers and businessmen.
On the other hand, if we had honest politicians, businessmen and bankers we wouldn't need a gold standard.
Hmmm wonder if we have been fighting the wrong battle.
Can you get me a unicorn for xmas while you are at it?
Forbes,,......for fuck sake.
Peak Krugman
Aren't central banks the root cause of the fucked uppedness of the economic situation???? Eliminate the FED - that's the battle to be fought.
"When a government is dependent upon bankers for money, they and not the leaders of the government control the situation, since the hand that gives is above the hand that takes. Money has no motherland; financiers are without patriotism and without decency; their sole object is gain.”
Napoleon
I believe that banking institutions are more dangerous to our liberties than standing armies. If the American people ever allow private banks to control the issue of their currency, first by inflation, then by deflation, the banks and corporations that will grow up around [the banks] will deprive the people of all property until their children wake-up homeless on the continent their fathers conquered. The issuing
power should be taken from the banks and restored to the people, to whom it properly belongs.
—Thomas Jefferson, 1802
“Paper is poverty,… it is only the ghost of money, and not money itself.” –Thomas Jefferson to Edward Carrington, 1788.
“Experience has proved to us that a dollar of silver disappears for every dollar of paper emitted.” -Thomas Jefferson to James Monroe, 1791.
Yet another country: Austria considers repatriating its gold
http://www.sott.net/article/290087-Yet-another-country-Austria-considers...
......as Trust evaporates, each sovereign nation will demand its hard currency (Au) returned to its possession.
Since the Au has been leased, leveraged, rehypothecated, there will come a time of Crisis.
Do not be played by the paper markets.
As the currencies fall, and continue to fall, Au will rise. We are now seeing the beginning of the beginning of the End.
This will cause major disruptions in the world markets.
It may lead to War. It will certainly lead to the worthlessness of paper in every country.
Why would anybody want to hold any asset proven in history to have and maintain value through every conceivable event and outcome? I mean really folks. Get with the program: Just burn your own house down you just paid off and move on with filling out more loan apps.
No mention of Andrew Jackson's fight against Nicholas Biddle of the US bank, 1829-1837.
Biddle caused a panic by withdrawing credit from the system to retaliate against Jackson's plans to dismantle the Bank and return to Lawful US Treasury money.
Throwing PMs into that part of story is a bit of a misleading statement.
When Jackson was younger, there was a shortage of 'good money' in the west. People were using Spanish silver, anything they could get ahold of. Hard money was 'hard' to find.
Later, President Jackson realized the Banksters (with connections to Europe), could play with the economy at their leisure, with detrimental results to the USA. IMO, Biddle and cohorts were Financial Traitors to their own country!
There was an article published here a while back with a NYT's story on the 1800s being the "Century of the Rothschilds."
We all know a Private Bank, allowed to control our currency/finance is not just Unconstitutional, it is a Crime against our Republic.
Just as Biddle bribed congresscritters to support his cause, so did the Jekyl Island conspirators bribe politicians in 1913.
This theme has its roots back to the founding of our Republic. Until We The People rid ourselves of this current iteration of a private bank, we will be Subjects, not Citizens in our own country.
The only way this will change (IMHO) is when a Collapse hits the US and everyone is hurting. The Banksters (not all of them are 'Zionistas') will have to be evicted from the Temple.
They have solidified their position with control of the mass media and the ownership of our political representatives. These representatives will have to be replaced. Right now, the only way I can see this happening is if Libertarian-oriented candidates subvert the Republican and Democratic parties as stealth candidates. Speech Box, Ballot Box, Bullet Box.
When the next Crisis happens, at least 3-5% of the population will have to wage war of some kind to free us from the Central Bank, or we will wind up as prisoners in our own land, which is pretty much the situation right now...
The idea that a Central, Private Bank, made up of foreign stockholders is anathema to the ideals and Laws of the Republic.
We may soon see what mettle Americans are made of!
I do see a window: the Representatives just elected will be in office in January. They must be supplemented with more Americans in the next election. This is the legal, non-violent opportunity available.
I have spent a large part of my life in places where there was no rule of law. We are in a bad way, but we still have a non-violent way out. I hope we are able to pursue this objective.
The dollars strength and the rising American stock market could also be taken as a sign of an unstable global economy. The money flowing in from other countries in search of a safe home screams of a bigger problem! When a strong shift in currencies occurs someone gets hurt and this leads to bankruptcy and contagion.
A great deal of the shadow banking world falls into and overlaps into the grey world of derivatives. There is no single commonly adopted definition of derivative or derivative contract in the European Union. This plays havoc with what and when reporting rules apply. It also highlights divisions in how national regulators view reporting rules for the $693 trillion over-the-counter derivatives market.
Remember this is only part of a much larger market, it is estimated the total derivatives market includes hundreds of trillions of dollars in non-reported agreements and private contracts. Everyone paying attention knows that the size of the derivatives market is 20 times larger than the global economy. The article below explores some of its ins and outs of derivatives and why they could collapse the economic system.
http://brucewilds.blogspot.com/2014/03/derivatives-house-of-cards.html