The other day we took a poke
. . . or maybe that was a peek . . . at what people mean when they say “gold
standard.” Today we look at why the U.S.
abandoned the gold standard in 1933. It
might surprise you.
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| Founder of Chartalism |
Getting off the gold standard
had been the goal of John Maynard Keynes ever since he became an economist. As
a follower of Georg Friedrich Knapp, the founder of the socialist monetary
theory called “chartalism,” the basis of "Modern Monetary Theory" (MMT), he believed that the entire money supply should
consist of government debt — “bills of credit” . . . which the individual
states are expressly prohibited from issuing, and the Congress does not have
the power to emit (the language that would have permitted Congress to do so was
removed from the first draft of the Constitution).
Keynes’s alleged reason was
that gold is both expensive and insufficient to serve as a currency. In that he
was correct . . . but he didn’t realize that gold and silver have never served
as the primary currency. Instead, the
bulk of the money supply has from ancient times has consisted of financial
paper representing private sector hard assets, i.e., mortgages and bills of exchange. A gold or silver standard
for the currency was useful to help people measure the value of other money, e.g., this bill of exchange for 100
sheep has the same value as 100 ounces of silver of the weight of Troyes.
Convertibility of non-coin money into coined money (gold and silver) was to
establish and maintain public confidence in the currency, whatever it consisted
of.
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| Man of the People: Franklin Delano Roosevelt |
In the U.S. in 1933 right
before Keynes induced Roosevelt to take the U.S. off the gold standard the only
currency backed specifically by gold were the gold certificates. The United
States Notes (“Greenbacks”) and the National Bank Notes were backed by
government debt (by 1933 the government debt-backed Treasury Notes of 1890 had
been withdrawn), albeit convertible into gold, but the intent of the Federal
Reserve Act of 1913 was to replace the debt backed Greenbacks and the National
Bank Notes with debt backed Federal Reserve Bank Notes, and then the debt
backed Federal Reserve Bank Notes with indistinguishable asset-backed Federal
Reserve Notes as the debt was paid down and member banks presented qualified
paper for rediscounting.
As a result of financing WWI with
government debt, the politicians realized they could emit bills of credit by
sneaking through the loophole left open to redeem the Greenbacks and National
Bank Notes. Keynes used this to start shifting the currency from a backing of
private sector assets, to government debt, thereby giving the State total
control of the economy . . . presumably. (Keynes didn’t realize that the money
supply, technically, consists of all contracts, not just government debt or
“money contracts.”)
What really led to the
abandonment of the gold standard in the U.S.?
Dr. Harold G. Moulton gave this analysis:
Great Britain’s abandonment of
the gold standard resulted in a wholesale breakdown of the international
monetary system. The British act of
September 1931 was a signal for similar action on the part of a large number of
other countries. As soon as the gold
standard system began to crumble, governmental control of foreign exchange
transactions also began to be widely introduced. Some countries used exchange control in
conjunction with the abandonment of gold for the purpose of regulating
fluctuations in foreign exchange rates; others employed it to prevent
depreciation of their currencies, thus insuring a nominal maintenance of the
gold standard. In either case, these
artificial measures represented essentially an abandonment of the gold
standard. (Harold G. Moulton, The
Recovery Problem in the United States.
Washington, DC: The Brookings Institution, 1936, 45.)
The bottom line? The gold standard had to be abandoned if the
government was going to exercise effective — and presumably total — control
over the economy and be able to implement something like the New Deal. An objective standard is something that
either is, or isn’t. It acts as a
constraint against arbitrary acts by people or institutions. By replacing a fixed standard with a
changeable one, everyone is at the mercy of whoever has the power to manipulate
the standard, which is suddenly not a standard at all.
#30#
