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Great find! I'm *definitely* adding this to my lecture notes on the gold standard.

Stephen - oh good! I'm glad you found it useful.

This is a "cost of the gold standard" only when you have a phony gold standard like Bretton-Woods. Under an actual gold standard, the currency just *is* a certain amount of gold. There is nothing "fixed" about the price of gold at all. And therefore, no inefficiencies regarding mining occur at all. A rise in mining costs will produce deflation, making gold more valuable in terms of goods, recouping the mining costs. But with Bretton-Woods we have a "gold standard" that won't allow any deflation... so of course, THEN prices can't adjust!

That's a good point - I cover Bretton Woods right after, so I'll talk about it then.

Well Frances, I'm surprised and intrigued your department still has a 1961 Ontario Economic Survey in its lounge! What else might you have there?

We actually have a bunch of old things like that, which are in constant danger of being thrown out. I can take a photo and send you some pictures if you like. Are copies of the 1961 Ontario Economic Survey hard to come by?

And by the way, I'm not a "gold bug": I am fine with the idea of fiat currencies. I just think we ought to recognize the special conditions that led to this problem in 1961.

The Ontario Economic Survey's natural habitat these days is a university library government documents section. Even so, university libraries are often throwing them and other older government documents out - pardon me, "deselecting" them - in order to make room for things like more student study space. We had our federal public accounts disappear from our library last year. They are however fortunately available online.

Livio - o.k., so I won't bundle them up and send them to you through the the Inter University Transit System! Are you interested in seeing what else we have?

Gene - thanks, your intervention was useful. As you've probably gathered, I'm more a micro person, and hadn't really thought about the distinction between the idea of a gold standard in general as opposed to the Bretton Woods gold standard in particular.

Sure Frances. A few photos of the covers via e-mail should do it. Thanks.


Phase V: Bretton Woods and the New Gold-Exchange Standard (the United States) 1945–1968

The new international monetary order was conceived and then driven through by the United States at an international monetary conference at Bretton Woods, New Hampshire, in mid-1944, and ratified by the Congress in July, 1945. While the Bretton Woods system worked far better than the disaster of the 1930s, it worked only as another inflationary recrudescence of the gold-exchange standard of the 1920s and — like the 1920s — the system lived only on borrowed time.

The new system was essentially the gold-exchange standard of the 1920s but with the dollar rudely displacing the British pound as one of the "key currencies." Now the dollar, valued at 1/35 of a gold ounce, was to be the only key currency. The other difference from the 1920s was that the dollar was no longer redeemable in gold to American citizens; instead, the 1930's system was continued, with the dollar redeemable in gold only to foreign governments and their central banks. No private individuals, only governments, were to be allowed the privilege of redeeming dollars in the world gold currency.

In the Bretton Woods system, the United States pyramided dollars (in paper money and in bank deposits) on top of gold, in which dollars could be redeemed by foreign governments; while all other governments held dollars as their basic reserve and pyramided their currency on top of dollars. And since the United States began the postwar world with a huge stock of gold (approximately $25 billion) there was plenty of play for pyramiding dollar claims on top of it. Furthermore, the system could "work" for a while because all the world's currencies returned to the new system at their pre-World War II pars, most of which were highly overvalued in terms of their inflated and depreciated currencies. The inflated pound sterling, for example, returned at $4.86, even though it was worth far less than that in terms of purchasing power on the market. Since the dollar was artificially undervalued and most other currencies overvalued in 1945, the dollar was made scarce, and the world suffered from a so-called dollar shortage, which the American taxpayer was supposed to be obligated to make up by foreign aid. In short, the export surplus enjoyed by the undervalued American dollar was to be partly financed by the hapless American taxpayer in the form of foreign aid.

Well worth reviewing the history every so often. Some very clever guys back then. Surprisingly difficult to find a problem that hasn't already been looked at in great detail.

When the price of gold is fixed in dollar terms, that price by definition cannot adjust to changes in the metal's production costs.
When you have a real gold standard, that cannot be a problem, because if the voluntary market price of gold ever got higher (due to supply scarcity) than the nominal fixed price of the standard, what quickly happens is a run on redemption of paper for metal and the market will flush out the fakers who issue paper but cannot deliver the metal. It just automagically works itself out.

Suppose a mine was issuing notes that promised to deliver 1 Troy ounce of gold to the holder of that paper. Would we ever need to "adjust" the size of a Troy ounce? Of course not... it's only a problem for a mine that issues more paper than they can deliver metal, and the answer to that is not an ounce adjustment, it is bankruptcy court. No different whatsoever to a butcher offering certificates for delivery of 1 pound of meat, or a baker issuing certificates offering delivery of a dozen bread rolls. Do we need to start making "adjustments" to the meaning of a "pound of meat" or the meaning of "1 dozen rolls"? That would be ridiculous, I hope you agree.

The trick of Bretton Woods was that ordinary citizens were blocked from attempting to take their IOU notes back to the issuer and demand the metal that was promised. Thus, it wasn't really a gold standard, nor was it any sort of free market voluntary standard. The whole purpose was to give an outward appearance of a gold standard, without the monetary discipline being imposed. They believed that although a free market would surely call them on it, if they restricted the handling of real gold only to governments, then it would be easier to keep the caper going... eventually France called them on it anyhow and brought the whole thing to an end.

The symptoms described in the 1961 Ontario Economic Survey were consequences of maintaining that pretense, and those mine subsidies were doubtless a way to quietly keep it going a little while longer. Someone in 1961 with a crystal ball looking into 1971 would have immediately thought of one thing only: stockpile gold!

Tel: thanks for this.

"what quickly happens is a run on redemption of paper for metal and the market will flush out the fakers"

Which kind of explains why we ended up with Bretton Woods, rather than a fully convertible gold standard!

I'd put it slightly differently than this:

"That's one aspect of the gold standard that is sometimes forgotten. When the price of gold is fixed in dollar terms, that price by definition cannot adjust to changes in the metal's production costs."

Micro models of S&D are all about real prices, and are silent on nominal prices. Under a gold standard the nominal price of gold is fixed, but the real price is free to fluctuate. Instead, I'd say something like this:

When the nominal price of gold is fixed in dollar terms, changes in the real price of gold can only occur via changes in the overall price level, not the nominal price of gold. Because wages and prices are sticky, there may be a long and difficult period of adjustment when changes in gold's production costs (or demand) necessitate a change in the real value of gold.

Tel / Frances,

My take on things is that the "Gold Standard" of the Bretton Woods system was meant to impose fiscal discipline on each member country to prevent trade imbalances from building up (Country A sells goods to Country B and buys it's government bonds). I don't think there was any pretense of countries eliminating fractional reserve banking at the domestic level. With fractional reserve banking, it becomes impossible for the a central bank to redeem all currency in circulation for gold on demand at a fixed exchange rate. Hence gold redemption (at least in the case of the U. S.) was limited to foreign owners of U. S. government debt.

Also, real resources are consumed (labor, fuel, machinery, time) in the mining of gold, and so it is not clear that a shortage of gold due to low yielding mines would cause the prices of all goods to fall relative to gold. Low yields could spur technological improvements that reduce labor intensity.

Scott - well said! Thank you.

Frank: I'm not sure that I quite understand. The way I think of it, there are prices of capital, labour, etc. that are determined mostly by what's going on in the economy as a whole. Production costs of gold are basically determined by those prices and the technology of gold extraction. I guess perhaps you're arguing that technology is endogenous to prices? Yes, that's true, but not just for gold - it's true for all production processes. If the price of gold gets too far out of line with production costs, I'd think firms would be more likely to shut down than search for technological improvements - because e.g. a 10 or 20 or 30 percent reduction in costs isn't going to help if the price of gold is $35 per ounce and your production costs are, say, $70 per ounce.


I think adding a $ price for gold just clouds the issue. What you are saying is that if it takes 2 ounces of gold / hr to pay for labor and equipment to obtain 1 ounce of gold / hr from the ground, then the mine will likely shut down rather than search for technological improvements.

The two (shutting down and searching for technological improvements) are not mutually exclusive. Technological change takes research, experimentation, and time.

Also, the absence of central banking and printed currencies does not preclude the introduction of localized borrowing against future production. Deep mining for gold requires a period of time of locating and digging to reach the gold seam. Prices for equipment / labor / research / borrowed gold may rise in gold terms in the face of a shortage of gold.

A mine entrepreneur will take risk - borrowing gold to pay for employees and equipment (and possibly paying a premium for those resources). He will only know the gold content of his mine after he begins digging.

"Any contemporary lessons from this episode?"

Sure - that gold is not a stable store of value because the cost of producing incremental gold can fluctuate with discoveries of new mines, the exhaustion of old mines, and changes in production standards.

Saying that Bretton Woods was not a true gold standard misses the point that the largest players, namely gold holding sovereigns, could freely convert among themselves. It does not take a lot of players to create a functioning market.

The suggested solution by Mr. Callahan that rising gold production costs should result in the rest of the economy deflating would really be an example of the tail wagging the dog.

Frances, a lot of good stuff in response to your post.

With respect to inefficiencies, Friedman pointed out a least two with respect to the gold standard. First, real resources are used to produce the commodity used as the standard and held as reserves. A fiat system would avoid these costs. Second, as Scott Sumner points out, all other prices adjust to the price of gold in the gold standard. Friedman argued for free exchange rates because it is easier for one price – the exchange rate – to adjust than for all the other prices.

That said, this episode by itself does not say much about the inefficiencies of the Bretton Woods regime. Canada was on a floating exchange rate in 1961 and had been since 1949. The government would fix the dollar again only in 1962.

As Tal points out, the fixed price of gold only applied to official transactions. There was an unofficial market for gold where the price gold reached $40 in 1960. Still this market was not totally free: residents of some countries including the US were generally not allowed to hold gold.

Gold producers could have escaped the inefficiency if they sold on the free market. Unfortunately they could not: the government required them sell to it at the official price. That’s very strange because we had a floating exchange rate at the time. They must have been anticipating a return to the fixed rate.

The subsidies then were not an inherent element of our exchange rate regime. Rather they were the result of the restrictions on selling gold and were attempts to prop up declining communities. Interestingly, the subsidies took the price the producers received above the free market price at the time.

Lots of inefficiencies to ponder here.

... gold is not a stable store of value because the cost of producing incremental gold can fluctuate ...
That's true of everything, which is why even back in the Roman and Greek empires that extensively used gold as a medium of exchange (as well as other lesser items: silver, salt, bronze, etc) people stored long term economic value in a variety of ways (e.g. ownership of land, and holding slaves was legal at the time, owning means of production, having large families, plenty of livestock, fine arts, and whatever else).

But if you were looking for a long term store of value, any fiat currency would be a terrible choice (better than ripe bananas as a store of value, but only slightly). Check the US dollar over the past 50 years or so if you want proof of that.

Outrageously more resource costs have been incurred digging up gold as an inflation hedge in the last five decades than would have been otherwise.

If gold mining was becoming unprofitable without subsidies, then that meant that one of two things needed to happen:

A. The dollar price of gold could be re-valuated upwards (a devaluation of the dollar with respect to gold). Of course, this screws anyone who based their investment decisions on the promise that the gold/dollar exchange rate would be held fixed, and it tells people that the way to get rich in the future is probably to hoard gold in anticipation of the next inevitable devaluation that will roll around, instead of loan money out for interest to be repaid in meaningless dollars. In other words, sooner or later such devaluations will trigger a "revolt of the bondholders." They will hoard wealth in terms of gold and abstain from loaning out funds except at much higher dollar interest rates. This is how you got 20% interest rates in the early 1980s.

B. To avoid high interest rates associated with devaluation as described above, there is a simple, but painful alternative: the dollar prices of gold mining inputs must be re-valuated downwards by restricting the supply of dollars and causing dollar deflation in the prices of those gold mining inputs.

If a country is really committed to a certain gold standard exchange rate between gold and their official currency, and if gold mining is becoming unprofitable in terms of that currency, then that simply means the country's monetary authority must issue less currency and perhaps even vacuum up some of the existing currency in the system. There needed to be fewer dollars sloshing around in the world economy. With that small fix, there would have been deflation in the dollar prices of the inputs to gold mining, and gold mining would have become attractive again even at the existing gold-to-dollar exchange rate.

One more thing to note: I don't think whether there is an official gold standard policy or not really changes things. The revolt of the bondholders in the late '70s and early '80s happened after the end of the official gold/dollar peg.

I think the Federal Reserve still has to contend with a similar potential problem today, gold standard or not. There still exists an "invisible gold standard."

Many market monetarists such as Scott Sumner have been puzzled about why the Federal Reserve hasn't been more expansionary since 2008. I think Scott Sumner is correct that all of this blaming the "zero lower bound" is a big lame excuse and a big distraction. The truth is, the Federal Reserve could have expanded more (such as by having no interest on excess reserves at all, or by "buying the world"), but it didn't.

Just think what would have happened to the dollar price of gold if the Federal Reserve had been more expansionary. $3000/oz.? $4000/oz.? And how long do you think creditors would have been content to loan at low dollar interest rates when the self-apparent success of goldbuggery would be mocking them to their face? I predict that we would have seen interest rates rise, CPI-inflation or not, simply because loans would have to compete with the opportunity cost of hoarding rapidly appreciating gold. There would have, in other words, been another revolt of the bondholders, a repeat of the late '70s/early '80s, the effect of which would be to restrict the effective amount of liquidity available to the financial system at just the time that it needed more, thus counter-acting or even nullifying the Federal Reserve's expanded efforts to run an expansionary monetary policy. I don't think being more expansionary has really been an option for the Fed since 2008 for this reason.

Great discussion! Old-timey conversations about the implications of the gold (and silver, and bimetallic) standards often seem to encode a lost wisdom that is interesting to the historian, if not the economist.

A case in point: The Roman Empire's coinage was nominally trimetallic. Augustus established fixed exchange rates in which the 7g gold aureus was worth 25 3g silver denarius and 400 9--12g bronze As. The silver coinage was repeatedly stepped on until by the middle of the Third Century, it had nothing but a silver wash. According to contemporaries, not exactly unaware that this was going on, the emperors reduced the silver content to meet their extravagances; but that's part of a moralising conversation about "debasement." What we do know is that Roman bullion mining in the West went into recession in the first decades of the Third Century and never recovered. Various exogenous explanations (plague, climate change, etc) have been invoked.

The middle of the Third Century is also the era of the "Crisis of the Third Century," which is either a particularly nasty bump in the road, or the precursor to the collapse of the Roman system in Europe a century later. Traditionally explained by reference to either political failure or exogenous events (barbarian invasions), the barbarians have been a particularly obnoxious historical artefact since at least 1939. Getting rid of them would seem to require substituting a massive social crisis that somehow produced the impression of a largescale Volkerwanderung.

The question for today is whether that could have been a massive deflation --Roman secular stagnation! The 1961 Ontario Economic Survey, and Gene Callahan's comments suggest a mechanic. (With the caveat that the post-crisis Emperors went off trimetalism in favour of a gold standard, so any recovery would be only in gold-winning --probably not mining as such, but rather trade with the West African gold fields via Egypt.)

Erik - the collapse of the Roman empire is due to secular stagnation! I love it!

Matthew - "the dollar prices of gold mining inputs must be re-valuated downward" - that's the subject for another blog post...

Andrew_FL: "Outrageously more resource costs" - that is something worth remembering. E.g. the site Giant gold mine in Yellowknife https://en.wikipedia.org/wiki/Giant_Mine is a mind-bogglingly awful mess. Any policy that creates incentives to leave it in the ground may not be all bad.

John: "Unfortunately they could not: the government required them sell to it at the official price. That’s very strange because we had a floating exchange rate at the time. They must have been anticipating a return to the fixed rate."

I'd like to know more about that. I haven't quite got my head around why the price of gold was fixed (should have paid more attention in your monetary econ course!) (it's always great to hear from you by the way)

Karl Skogstad and Rob Petrunia are presenting a paper on the Emergency Gold Mining Assistance Act (EGMAA) at the Canadian Economics Association meetings in Antigonish this June. They contacted me by email, and kindly agreed to share some of their preliminary results here:

Karl Skogstad writes:

"I’ve been going through the 1950s and 1960s data recently, and it is amazing how reliant the mines were on the EGMAA. It is not an exaggeration to say that if the act had not been renewed, there would have been an immediately closure of perhaps a dozen mines and the loss of at least one thousand direct jobs. Given that the communities in which these mines were located were so reliant on these mines for jobs, it is unsurprising that the act was consistently renewed.

"The design of the program was interesting as well. It provided more support to the least efficient mines, and no support to the most efficient mines (I won’t bore you with the full scheme of the program). Given that these mines were not really competing against one another, this didn’t seem to be a source of tension for the industry.

"We’re currently writing a paper that looks at the efficiency of the industry over those 50 years, and the impact of the policy will certainly be a focus of the paper....

"Here is some additional information that puts impact of the act and the need for it into perspective.

"In 1937, the Kirkland Lake Gold Mining Company employed 160 people at their mine to produce 35,726 ounces of gold. It received, on average, $34.98 per ounce of gold and it cost them, on average, $16.40 to produce an ounce, giving them a very healthy profit margin.

"By 1953, the company was employing 298 people at their mine to produce 43,173 ounces of gold. It received on average $34.42 dollars per ounce, but it cost them, on average, $35.00 to produce each ounce. Thanks to an average subsidy under the EGMAA of $5.40 per ounce, the mine was still profitable. However, even with the subsidy, the mine operated at a loss for the next 4 years.

"This mine is very representative of the state of the industry at the time. Wages were increasing substantially during the period, and, as you stated, the price of gold didn’t move (except for exchange rate variations.). Average wages in the industry increased from $2,000 to $3,200 between the end of the WWII and 1953. The result was what Professor Frank Knox from Queen’s termed the cost-price squeeze (https://archive.org/details/goldmininginonta00onta).

"The design of the subsidy was interesting. For instance, in 1950, for every ounce produced beyond a designated value (based on historic output), the mine received from the government 50% of the cost above $18 an ounce. So, for instance if the base rate of ounces was 10,000, and a mine produced 15,000 ounces, then it could potentially be subsidized for 5,000 ounces. If the average cost to produce these ounces was $24, the mine would receive $3 for each of these ounces ((24-18) x 0.5 = 3), or $15,000 total. Note that the plan changed year by year in terms of how many ounces qualified for assistance and what the average cost cut-off.

"So, I hope you find this as interesting as I do. It was an interesting program, and I believe that there was a suggestion by an Ontario MPP to bring back a similar program in the late 1990s/early 2000s when gold prices were low again. Though, I believe nothing came out of it in the end."

I have always puzzled over why some economists and politicians etc. have pined for a monetary system based on gold. If it were not for the various gold rushes of the mid to late 1800s (California, Victoria Australia, Witwatersrand, mainly) the world economy of the period would have endured an horrendous deflation. It was serendipitous gold discoveries that saved the day. The post WWI world economy was under constant pressure from deflationary forces owing to the gold supply constraint. (And on top of that, few played by the rules of the game anyway - gold inflows were ongoingly sterilized.)

Every gold mine is unique in terms of exploration potential, tonnage, grade, 3 dimensional geometry, host rock and ore rock geomechanical characteristics, metallurgy, location, availability of process water and power etc., etc.. In the 1950s and 1960s most gold production came from underground mines with grades of (very roughly) 10 - 30 gm/t. There are now mines in Nevada that produce huge quantities of gold from rocks which carry gold grades less than a 1 gm/t - these are monstrous quarry operations. Gold is also won as a co-product from enormous low grade copper mines located in the circumpacific belt.

In the last 50 years there has been a revolution in exploration, mining and metallurgical techniques. The economics of gold mining is vastly different than what it was 60 - 70 years ago.

Looking purely at the supply side, given that gold production is at the mercy of its disposition by capricious natural forces and subject to the vicissitudes of technological change, how could anyone believe that gold should form the basis of a stable monetary system?

Henry - fascinating perspective, thanks. I guess the answer to the question "why gold?" can be found by thinking of another one "what are the alternatives?" Shells are fine (e.g. https://en.wikipedia.org/wiki/Wampum) until some technological shock causes massive inflation and destroys the currency's value. Fiat money requires a sovereign that the public can trust - something that, historically speaking, has been rarer than gold.

“Fiat money requires a sovereign that the public can trust……….”

Fair point, however, the same can be said for a gold based monetary system.

The experience of the pre- and post WWI gold based monetary system is that it was rarely allowed to work as designed - the "rules of the game" were ignored. That is gold outflows should have been managed by deflating the source economy and gold inflows should have been managed by inflating the receiving economy. However, gold flows were routinely sterilized. More problematically, was the fact that, in the late 1920s, governments sought to preserve the gold exchange standard and defend the fixed exchange rate system based upon it at all costs such as to exacerbate and propagate around the globe the severe slump following the collapse of Wall St in 1929, thereby bringing on the Great Depression.

The problem with using any material as the standard for money is that when the economy is growing, the lack of that material works against that growth. You get the choice of arbitrarily limiting a society's wealth or having to "debase" the currency. Even before Bretton-Woods and FDR changing the gold standard in the US, there was fractional reserve banking which has forever had risks during downturns. As reported in Fortune, January 1932:

"With a single $25,000 gold brick in its vaults, the United States Federal Reserve System may extend some $71,000 of credit to its member banks. And upon that credit the member banks may extend further credit of $550,000 with which to facilitate the commerce of the world."

This sounds rather unstable. If everyone demanded gold for their cash money, you'd have the same problem as when everyone demanded cash money for their bank statement value. The problem is that if you don't do this, you stifle economic growth.

The Canadian government action had nothing to do with gold and the value of the dollar, Canadian or otherwise. It had to do with maintaining an industry. Canada has a lot of land, but a lot of it is not all that desirable as a place to live. Subsidizing gold mining was a way to assert dominion over areas that otherwise few would care to call home. (The US does this with Alaska. Russia does this with Siberia. China does this with its western backwaters. Luxembourg probably does this with it 2800 block on High Street.)

This also explains something from my childhood. My father, in the early 1960s, often invested in Canadian gold mining outfits. As a child, I liked exploring those old stock brokerage offices with their clacking price indicators, stock tickers and news projection screens. I didn't follow all of his investing, but I do remember him arguing with his broker over Giant Yellowknife. I wonder if he was betting on the Canadian government subsidies more than the metal itself. Obviously, I was unaware of this possibility back then. Very few of us are sophisticated investors at age 9. Back then I was pretty sure it was about the gold, but this article adds an intriguing possibility today.

Re: Kaleberg, if gold mining continually seems to lag behind economic growth elsewhere, continually threatening the need for deflation, then I would argue that it is because the full extent of demand for gold is never properly conveyed as long as people rely on credit instead. I think you were close to sensing this problem with credit in your post, but I would like to flesh it out a bit more:

Without the use of credit, the need for gold and the demand for gold would be self-apparently much higher. Gold would have a higher (yet more stable) relative price compared to other commodities. This would encourage the proper amount of gold mining, and there would be no problem with the world gold supply continually lagging behind the supply of other goods and services in the economy.

The problem with gold only has to do with the fact that banks mask the demand for gold by offering credit as an alternative means of exchange instead. But credit, under the gold standard, was ultimately a promise to pay in a currency backed by gold--or, what amounted to the same thing, a promise to pay in gold (if customers should want to redeem their banknotes for gold--and why shouldn't they?)

So, the higher latent gold demand was still there, accumulating ever higher especially as more promises to pay in gold were accumulated as the system of credit expanded. But this demand was not being communicated to the market because it erroneously appeared to people that credit could take the place of gold's function, and thus gold was not needed for exchanges.

So the apparent demand for gold and the price of gold did not rise as it should have. Thus, you got a chronic underproduction of gold relative to other commodities, until such a point that people realized that credit was not a perfect substitute for gold as a means of exchange, but merely a short-term unsustainable substitute, and that there had not been enough gold produced to meet the promises of credit contracts. Then the latent demand for gold that had been building up would be suddenly revealed, and its relative price compared to other commodities would skyrocket in a rapid manner and produce rapid deflation in the prices of other commodities, thus producing an acute crisis...whereas, if there had not been a reliance on credit and if the true demand for gold had been communicated to the market all along, the relative price of gold would have had a more gentle trajectory.

By the way, people make the same fallacious assumptions about gold that they do about oil. Yes, the supply of gold or oil in the short-term does depend on lucky discoveries. However, in the medium-to-long-run, even without luck a high enough gold or oil price will encourage enough prospectors to scour the Earth and brainstorm technical innovations until they find and produce what the market demands. I was a "peak-oiler" back around 2005, and my big mistake was to discount the power of the invisible hand and the ability of the profit incentive to encourage companies to innovate and figure out how to use those oil shale resources, given higher oil prices to cover their increased costs.


That's all fine if your a willing to accept a flexible gold price, that is a gold price that can vary against currencies - which is the system that pertains now except that there is no official gold backing to currency issue or convertibility. However, the point of the gold standard was that gold's currency value was fixed. This is what was supposed to convey and underwrite the stability of the monetary system. For that system to not be inherently deflationary gold supply had to keep pace with growth in payments. With a fixed gold price, this was unlikely to happen once major gold discoveries were out of the way owing to the relentless upward march of cost structures (as history demonstrated). Serendipitous gold discovery was possible when there was a willing army of 100,000s of prospectors, hungry in the belly, looking for fame and fortune. Once the easy surface gold discoveries were depleted, discovery of deeper concealed resources required sophisticated and capital intensive exploration and mining techniques. This required that the gold price/cost ratio was adequate for the enterprise to be viable.


Thank you for engaging with my ideas. I disagree, however. You don't need a flexible gold dollar price to guarantee profitability in the gold mining sector as long as you have downward-flexibility in the dollar prices of gold mining inputs--which means things like machines and labor-power and everything else that, in a roundabout way, probably factors into gold production. So, yeah, I wouldn't dispute that the gold standard was deflationary for most prices. To my mind, that's how it ought to be--you should expect the prices of things to drop as society gets more efficient at making them. In fact, you should expect the prices of all things to drop as productivity as a whole increases.

Ditto for labor-power. If the consumption goods of workers become cheaper, then (according to the logic of capitalism) of course workers' nominal wages should drop! Whenever I hear the phrase "downwards wage-stickiness," I hear a bunch of cowards crying about how they are afraid of proletarian revolution if they should try to lower workers' nominal wages. Crank up the unemployment. Liquidate, liquidate, liquidate. Turn off the social assistance. Turn up the pain. Then I guarantee you that you'll find workers willing to work for lower nominal wages!

I look at the abandonment of the gold standard as little more than a cowardly and deceptive way of lowering workers' gold-wages by stealth rather than outright.

"Crank up the unemployment. Liquidate, liquidate, liquidate."


Andrew Mellon's exhortation to President Hoover to "liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate" was precisely what happened - it was called the GREAT DEPRESSION.

Obviously, Mellon was long cash.

Henry, you're repeating Hoover's libel of Mellon. Mellon never said that and it is inconsistent with his actual actions and public statements.


Do you have any details about this libel?

From THE MEMOIRS OF Herbert Hoover, The Great Depression 1929-1941:

Two schools of thought quickly developed within our administration discussions.

First was the "leave it alone liquidationists" headed by Secretary of the Treasury Mellon, who felt that government must keep its hands off and let the slump liquidate itself. Mr. Mellon had only one formula:

"Liquidate labor, liquidate stocks, liquidate the farmers, liquidate real estate." He insisted that, when the people get an inflation rainstorm, the only way to get it out of their blood is to let it collapse. He held that even a panic was not altogether a bad thing. He said: "It will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up the wrecks from less competent people." He often used the expression, "There is a mighty lot of real estate lying around the United States which does not know who owns it," referring to excessive mortgages.

At great length, Mr. Mellon recounted to me his recollection of the great depression of the seventies which followed the Civil War. (He started in his father's bank a few years after that time.) He told of the tens of thousands of farms that had been foreclosed; of railroads that had almost wholly gone into the hands of receivers; of the few banks that had come through unscathed; of many men who were jobless and mobs that roamed the streets. He told me that his father had gone to England during that time and had cut short his visit when he received word that the orders for steel were pouring toward the closed furnaces; by the time he got back, confidence was growing on every hand; suddenly the panic had ended, and in twelve months the whole system was again working at full speed.

I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago, when we were 75 per cent an agricultural people contrasted with 30 per cent now; that unemployment during the earlier crisis had been mitigated by the return of large numbers of the unemployed to relatives on the farms; and that farm economy itself had been largely self-contained. But he shook his head with the observation that human nature had not changed in sixty years.

Secretary Mellon was not hard-hearted. In fact he was generous and sympathetic with all suffering. He felt there would be less suffering if his course were pursued. The real trouble with him was that he insisted that this was just an ordinary boom-slump and would not take the European situation seriously. And he, like the rest of us, underestimated the weakness in our banking system.

But other members of the Administration, also having economic responsibilities—Under Secretary of the Treasury Mills, Governor Young of the Reserve Board, Secretary of Commerce Lamont and Secretary of Agriculture Hyde—believed with me that we should use the powers of government to cushion the situation. To our minds, the prime needs were to prevent bank panics such as had marked the earlier slumps, to mitigate the privation among the unemployed and the farmers which would certainly ensue. Panic had always left a trail of unnecessary bankruptcies which injured the productive forces of the country. But, even more important, the damage from a panic would include huge losses by innocent people, in their honestly invested savings, their businesses, their homes, and their farms.

The record will show that we went into action within ten days and were steadily organizing each week and month thereafter to meet the changing tides—mostly for the worse. In this earlier stage we determined that the Federal government should use all of its powers:

(a) to avoid the bank depositors' and credit panics which had so generally accompanied previous violent slumps;

(b) to cushion slowly, by various devices, the inevitable liquidation of false values so as to prevent widespread bankruptcy and the losses of homes and productive power;

(c) to give aid to agriculture;

(d) to mitigate unemployment and to relieve those in actual distress;

(e) to prevent industrial conflict and social disorder;

(f) to preserve the financial strength of the United States government, our credit and our currency, as the economic Gibraltar of the earth—in other words, to assure that America should meet every foreign debt, and keep the dollar ringing true on every counter in the world;

(g) to advance much-needed economic and social reforms as fast as could be, without such drastic action as would intensify the illness of an already sick nation;

(h) to sustain the morale and courage of the people in order that their initiative should remain unimpaired, and to secure from the people themselves every effort for their own salvation;

(i) to adhere rigidly to the Constitution and the fundamental liberties of the people.

While fearful, we could not know at this early stage to what extent the European situation might affect us.

In a nutshell, Hoover claimed that Mellon was in favor of liquidation, and then went on to claim that he (Hoover) was of quite the opposite opinion, and wanted government to interfere with the process in every way possible. Indeed, Hoover not only interfered, it was Hoover's plans that were later extended by FDR to become the New Deal (which also failed to end the Great Depression). Hoover delivered the greatest government spending stimulus that had been seen to that date. FDR campaigned on the basis that Hoover was a spendthrift, but the moment he gained power he reversed his campaign promises and got into the same spending programs.

I look at the abandonment of the gold standard as little more than a cowardly and deceptive way of lowering workers' gold-wages by stealth rather than outright.

John Maynard Keynes as Jonathan Gruber.

Call it the stupidity of the working men and women.

I have always felt that this statement was disingenuous:

"High costs of living and high living will come down."

Perhaps if Mellon had spent some time talking with Irving Fisher, he would have realized that debt contracts are fixed in nominal terms (and protected by law) while the real cost of debt service can fluctuate. And so part of those high costs of living were in fact the high cost of servicing debt.

And Hoover nails him on it here:

"I, of course, reminded the Secretary that back in the seventies an untold amount of suffering did take place which might have been prevented; that our economy had been far simpler sixty years ago, when we were 75 per cent an agricultural people contrasted with 30 per cent now..."

With industrialization comes a greater reliance on credit to bridge the gap between raw materials and finished goods.

But wasn't the petrodollar as a reserve currency (a.k.a. hegemonics) defacto replacing gold as a fundamental unit of value, in this case a commodity?

To wit - both quotes from comments section found here: http://wolfstreet.com/2017/02/12/why-a-nymex-veteran-is-getting-nervous-about-oil/

"...Is there any DOUBT that the price of oil is a key factor in controlling inflation/deflation by the Central Banks? Same can be said for gold.

This is why futures markets were never reformed to force only users of commodity to play the futures market in a significant way.

GS and JPM are tasked with holding oil prices UP as high as possible for any suppply/demand imbalance. I’d say they have done a damn good job as the price of oil is much higher than I think supply/demand would normally support. Same for gasoline.

We all know gold is manipulated lower through the futures market. Oil is the one key commodity that flows through almost every cost structure. They can’t let oil collapse. That would be hugely deflationary and devastating to the world economy.."

"...Soon to arrive on the futures scene?
The new China based Oil Futures Contract (fully convertable) Trading Platform, priced in yuan.
With Russia, Iran and Saudi Arabia now selling oil to China denominated in yuan, the other oil producers will be able to do the same. With the added bonus of being able to convert yuan to gold bullion on the Shanghai Gold Exchange.
Those countries who must buy oil, but who produce gold will be able to do the same in reverse, by-passing their need to hold US dollars.
What happens to all those unwanted dollars sloshing around the world? They come back home. The price of oil in US dollars may go far higher, but it won’t be gauged by the value of the oil, but by the eroding purchasing power of the US dollar. Inflation cometh. Big time.."

These stories seem almost cute today, like tire rationing in WW II or Nixon-era price controls.

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