rates. Suddenly you could earn more by cashing in your gold for dollars, and investing the dollars in the economy. Gold flowed back in. Once things had matched up in the Treasury again, the central banker could ease off on interest, and so it went.
Proponents of a return to the gold standard are seduced by the apparent serenity of this monetary picture, and either forget, or think we should accept, the bloodshed in the background. Those who disagree with them consider gold a blunt instrument for monetary purposes today, when economic planners have an abundance of data, such as the consumer price index, to help them assess how a currency is doing. Against these more sophisticated measurements, then, gold is just not a good indicator.
There are other reasons too that economists think goldâs hour has passed. In a growing economy, for example, a gold-backed currency has to cover a correspondingly growing number of transactions, and it can only do this if prices fall, which is deflation, a killer of jobs.
âUnder a true gold standard, moreover,â writesBarry Eichengreen, âthe [Federal Reserve] would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system fromcollapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster. Its proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite.â
T HE GOLD STANDARD WAS THROTTLED to death on live TV on a Sunday night in Washington. Its crime: hamstringing the government into whose care it had been placed, that of the United States. In some ways the situation that led to the systemâs demise was a replay of the 1890sâa lousy American balance of payments and the sucking sound of large amounts of bullion leaving the Treasury. Yet in the intervening years the condition of the United States had changed almost beyond belief. It was the worldâs titan. Five years after the end of World War II, two thirds of all the monetary gold reserves in the world belonged to the American government.It had 20,000 tons of bullion in its deep-storage vaults, such as the one at Fort Knox, Kentucky. Why would Americans, with such a gold position, sideline the power that the metal represented?
4
CAMP DAVID COUP
I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.
âRichard Nixon, address to the nation, August 15, 1971
A S WITH ANY SATISFYING MURDER story, we must set the stage for goldâs last moment at the center of monetary life. We begin the story where so many really first-rate crimes have taken placeâLondon. It is the Great Depression.Gold is surging out of the Bank of England as foreigners, uneasy at Britainâs prospects, take the cash and run. Things are so bad that King George V takes a £50,000 pay cut. When the government reduces naval pay, sailors at a base in Scotland go on strike. To foreign depositors, the word âmutinyâ signals that a revolution is at hand. Forty million pounds in gold flies out of the central bank in a week. The Bank of England begs the government to allow it to stop redeeming notes in gold. Parliament passes the necessary legislation. Britain is off the gold standard!
Within days, forty-seven countries followed suit. A year later,only five countries were still on the gold standard: France, Switzerland, the Netherlands, Belgium, and the United States. In the mood of panic, redemptions into gold began to churn through the system. In a single day the Belgian central bank took $106 million in gold from the U.S. Treasury and France took $50 million. A few weeks later the French came back for $70
Proponents of a return to the gold standard are seduced by the apparent serenity of this monetary picture, and either forget, or think we should accept, the bloodshed in the background. Those who disagree with them consider gold a blunt instrument for monetary purposes today, when economic planners have an abundance of data, such as the consumer price index, to help them assess how a currency is doing. Against these more sophisticated measurements, then, gold is just not a good indicator.
There are other reasons too that economists think goldâs hour has passed. In a growing economy, for example, a gold-backed currency has to cover a correspondingly growing number of transactions, and it can only do this if prices fall, which is deflation, a killer of jobs.
âUnder a true gold standard, moreover,â writesBarry Eichengreen, âthe [Federal Reserve] would have little ability to act as a lender of last resort to the banking and financial system. The kind of liquidity injections it made to prevent the financial system fromcollapsing in the autumn of 2008 would become impossible because it could provide additional credit only if it somehow came into possession of additional gold. Given the fragility of banks and financial markets, this would seem a recipe for disaster. Its proponents paint the gold standard as a guarantee of financial stability; in practice, it would be precisely the opposite.â
T HE GOLD STANDARD WAS THROTTLED to death on live TV on a Sunday night in Washington. Its crime: hamstringing the government into whose care it had been placed, that of the United States. In some ways the situation that led to the systemâs demise was a replay of the 1890sâa lousy American balance of payments and the sucking sound of large amounts of bullion leaving the Treasury. Yet in the intervening years the condition of the United States had changed almost beyond belief. It was the worldâs titan. Five years after the end of World War II, two thirds of all the monetary gold reserves in the world belonged to the American government.It had 20,000 tons of bullion in its deep-storage vaults, such as the one at Fort Knox, Kentucky. Why would Americans, with such a gold position, sideline the power that the metal represented?
4
CAMP DAVID COUP
I have directed the Secretary of the Treasury to take the action necessary to defend the dollar against the speculators.
âRichard Nixon, address to the nation, August 15, 1971
A S WITH ANY SATISFYING MURDER story, we must set the stage for goldâs last moment at the center of monetary life. We begin the story where so many really first-rate crimes have taken placeâLondon. It is the Great Depression.Gold is surging out of the Bank of England as foreigners, uneasy at Britainâs prospects, take the cash and run. Things are so bad that King George V takes a £50,000 pay cut. When the government reduces naval pay, sailors at a base in Scotland go on strike. To foreign depositors, the word âmutinyâ signals that a revolution is at hand. Forty million pounds in gold flies out of the central bank in a week. The Bank of England begs the government to allow it to stop redeeming notes in gold. Parliament passes the necessary legislation. Britain is off the gold standard!
Within days, forty-seven countries followed suit. A year later,only five countries were still on the gold standard: France, Switzerland, the Netherlands, Belgium, and the United States. In the mood of panic, redemptions into gold began to churn through the system. In a single day the Belgian central bank took $106 million in gold from the U.S. Treasury and France took $50 million. A few weeks later the French came back for $70
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