History question...

RichardE

Banned
Dec 31, 2005
10,246
2
0
What was the importance of the Gold Standard in American history during the period of 1910 to late to late 1940's? I'm reading a book that seemse to center around it, and am embarassed to say I don't know the importance/history of it during this time frame.
 

alchemize

Lifer
Mar 24, 2000
11,486
0
0
It was before modern banking evolved. Folks used to only use gold/silver coins or barter. Then "banks" popped up to keep your money safe, and started issuing "notes" on your gold on deposit. Then the government took the same approach as the banks only on a broad scale.

Then modern economic theory (velocity of money, etc.) was developed, then conspiracy theorists and anarchists decided tin was a valuable resource, strapped to their heads in their basements, and started freaking out about the Federal Reserve.
 

3chordcharlie

Diamond Member
Mar 30, 2004
9,859
1
81
Originally posted by: alchemize
It was before modern banking evolved. Folks used to only use gold/silver coins or barter. Then "banks" popped up to keep your money safe, and started issuing "notes" on your gold on deposit. Then the government took the same approach as the banks only on a broad scale.

Then modern economic theory (velocity of money, etc.) was developed, then conspiracy theorists and anarchists decided tin was a valuable resource, strapped to their heads in their basements, and started freaking out about the Federal Reserve.

A fine answer, for someone who already knows the answer!

The issue was that currency backed by gold (and convertible to gold) meant there was a tangible value to money; the major problem was that as economies grew rapidly, and things like modern 'finance' began to be truly important, the dependence of money on actual gold tied things like inflation/deflation to the output of mines, and the rate of population growth, which are not closely related.

Inflation is a bitch, but deflation leads to debts (like mortgages) that can literally never be repaid, and therefore to massive bankruptcy and economic instability.

At one time, adding silver as a legitimate backing of currency had widespread support, but of course this just pushes the problem onto another resource.

Leaving the gold standard allowed modern money supply managemnt (not that there haven't been disasters and near-disasters caused by this), but the fear at the time was that money would cease to be valuable, and economies would crumble.
 

Witling

Golden Member
Jul 30, 2003
1,448
0
0
To elaborate just a little on what alchemize said, it's basically correct as a starting point. Banks began issuing notes based on solid, physical assets or money that was on deposit with them. Since only a small portion of the deposits is withdrawn at any given time, a shrewd banker could issue more notes than the bank could cover. This worked very well unless there was a run on the bank -- which happened repeatedly and people were wiped out. When the gold standard was here it was generally felt by economists and citizens alike that paper money needed to be backed by a physical asset to limit the government's ability to just print money, hence the gold standard. At one time you could go to a bank and demand gold for notes. The government stopped this ability sometime in the early thirties during the Great Depression. The U.S. then began issuing three types of bills. One was a silver certificate, which in theory you could take to a bank and redeem in silver. In theory, each silver certificate was backed by silver held by the U.S. government. A second type of bill was the Federal Reserve Note, which we use today. I think the third type was a U.S. Note, issued by the Treasury. In any event, the government fudged on asset backed currency just like the bankers. The requirements for the percentage of metal needed to back up a note gradually dropped. Sometime during the mid- to late-20th century everyone who was aware of money and currency decided that it was all really a matter of faith. Our money is not backed by metal. It's value is upheld by a statement on the bill that it's legal tender. That's it, it's not exchangeable for any tangivle asset.

This is all dredged up from the misty depths of my memory. Perhaps someone will elaborate more and correct any err0rs I've made.

3chordcharlie's answer, immediately above mine, is more accurate and illuminating in some ways. However, I would disagree with the statement that there "haven been disasters and near disasters." I'm OK with this if you add "in the U.S." But, several third world countries have had near disasters.
 

charrison

Lifer
Oct 13, 1999
17,033
1
81
Originally posted by: 3chordcharlie
Originally posted by: alchemize
It was before modern banking evolved. Folks used to only use gold/silver coins or barter. Then "banks" popped up to keep your money safe, and started issuing "notes" on your gold on deposit. Then the government took the same approach as the banks only on a broad scale.

Then modern economic theory (velocity of money, etc.) was developed, then conspiracy theorists and anarchists decided tin was a valuable resource, strapped to their heads in their basements, and started freaking out about the Federal Reserve.

A fine answer, for someone who already knows the answer!

The issue was that currency backed by gold (and convertible to gold) meant there was a tangible value to money; the major problem was that as economies grew rapidly, and things like modern 'finance' began to be truly important, the dependence of money on actual gold tied things like inflation/deflation to the output of mines, and the rate of population growth, which are not closely related.

Inflation is a bitch, but deflation leads to debts (like mortgages) that can literally never be repaid, and therefore to massive bankruptcy and economic instability.

At one time, adding silver as a legitimate backing of currency had widespread support, but of course this just pushes the problem onto another resource.

Leaving the gold standard allowed modern money supply managemnt (not that there haven't been disasters and near-disasters caused by this), but the fear at the time was that money would cease to be valuable, and economies would crumble.


To make matters worse for the tinfoil hat brigrade, our money is not even backed up worthless bits of paper anymore. It is now largely represented by imaginary digital signals.
 

RichardE

Banned
Dec 31, 2005
10,246
2
0
Originally posted by: loki8481
do your own homework

Actually, was honestly reading a book. A more tin foil hat book, but a book none the less

Thank you for the answers guys.


One question though, why would bankers want to mess with the Gold Index? What advantages/disadvantages could be had during that time? I know I keep asking questions, just trying to understand this though.
 

alchemize

Lifer
Mar 24, 2000
11,486
0
0
Originally posted by: RichardE
Originally posted by: loki8481
do your own homework

Actually, was honestly reading a book. A more tin foil hat book, but a book none the less

Thank you for the answers guys.


One question though, why would bankers want to mess with the Gold Index? What advantages/disadvantages could be had during that time? I know I keep asking questions, just trying to understand this though.

Easy - with a gold standard, a bank can only loan as much money as you have gold in the vault. To be able to loan more money (to meet the demand for loans) and therefore make more profit for the bank - and also stimulate the economy, you need to be able to instead loan on a percentage of deposits. That's where the Federal Reserve steps in.
 

3chordcharlie

Diamond Member
Mar 30, 2004
9,859
1
81
Originally posted by: Witling
To elaborate just a little on what alchemize said, it's basically correct as a starting point. Banks began issuing notes based on solid, physical assets or money that was on deposit with them. Since only a small portion of the deposits is withdrawn at any given time, a shrewd banker could issue more notes than the bank could cover. This worked very well unless there was a run on the bank -- which happened repeatedly and people were wiped out. When the gold standard was here it was generally felt by economists and citizens alike that paper money needed to be backed by a physical asset to limit the government's ability to just print money, hence the gold standard. At one time you could go to a bank and demand gold for notes. The government stopped this ability sometime in the early thirties during the Great Depression. The U.S. then began issuing three types of bills. One was a silver certificate, which in theory you could take to a bank and redeem in silver. In theory, each silver certificate was backed by silver held by the U.S. government. A second type of bill was the Federal Reserve Note, which we use today. I think the third type was a U.S. Note, issued by the Treasury. In any event, the government fudged on asset backed currency just like the bankers. The requirements for the percentage of metal needed to back up a note gradually dropped. Sometime during the mid- to late-20th century everyone who was aware of money and currency decided that it was all really a matter of faith. Our money is not backed by metal. It's value is upheld by a statement on the bill that it's legal tender. That's it, it's not exchangeable for any tangivle asset.

This is all dredged up from the misty depths of my memory. Perhaps someone will elaborate more and correct any err0rs I've made.

3chordcharlie's answer, immediately above mine, is more accurate and illuminating in some ways. However, I would disagree with the statement that there "haven been disasters and near disasters." I'm OK with this if you add "in the U.S." But, several third world countries have had near disasters.

I commited the crime of the double-negative there; there have absolutely been disasters caused by currency management, which is what my statement says.
 

dababus

Platinum Member
Apr 11, 2000
2,555
0
0
Originally posted by: RichardE
What was the importance of the Gold Standard in American history during the period of 1910 to late to late 1940's? I'm reading a book that seemse to center around it, and am embarassed to say I don't know the importance/history of it during this time frame.

I would address this issue as the unimportance of the gold standard which did not contribute towards this nation's financial stablity, but only served to weaken this nation. In order to explain that, I am going to state some historical facts which occured before the time period that you have posted.

It is essential to recognize that United States was never truly on a gold standard. Constitutionally, United States has always been on a silver standard because our currency which is the dollar is defined in terms of silver, not in gold.

The banking establishment which had vested interest in gaing control over United States' monetary system faciliated the establishing of gold standard and demonetizing of silver. In 1873, Congress passed the Coinage Act which basically demonetized silver and made gold coins the only acceptable form of coin money.

The purpose of the Act was to make money scarce in United States and in result gave banks the control over the nation's money supply. Prior to this act, silver coins were minted by the mint free of charge. Any one could bring silver to the United States and have it struck into silver coins by the mint. Additionally, silver was discovered in United States in plentiful amount which made it quite difficult for it to be manipulated by the banks. Gold has always been historically scarce and was easy to be monoplized by the bankers.

As a result of this gold standard which led to scarcity of money in the economy, the post civil war depression ensued which lasted until 1878 when Congress passed the Sherman Law which permitted minting of silver coins once again.

The issue of free silver versus the gold standard gain momentum even after the years of post-civil war depression. Interestingly enough, one of the most important issue of 1896 presidential election was free silver or the re-instituting of the gold standard. Supporters of William Jennings Bryan knew what was at stake if the gold standard remains. He addressed this issue by saying, " We will answer their demand for a gold standard by saying to them: You shall not press down upon the brow of labor this crown of thorns, you shall not crucify mankind upon a cross of gold." The defeat of William Jennings Bryan paved way for the continuity of the gold standard which lasted until 1934.

Having said that, I would answer your question about the period of 1910 to 1940 regarding the importance of gold standard as " a monetary base that offered no tangible advantage to the economy." The most important argument against the gold standard especially during the era as you mentioned is the Great Depression. The United States was on a "gold standard" on the onset of the depression and continued to be until 1934 when the gold standard was abolished by FDR under the Gold Reserve Act. The failure of gold standard to provide any economic stablity to the growing economy of the United States is the proof that it offers no monetary advantages.

The gold standard is not a cure for US monetary system as it was touted by the bankers who wanted to setup the standard so that they can control this nation's money supply. The argument that gold backing ties the money to a standard so that all the money issued is based on some physical entity in possesion rather than government's printing press is flawed. The fact is that even while the United States was on a gold standard, the printing press operated by the banks in conjuction with the government did not cease to exist. The banks gained the right to issue money in this country as as result of National Banking Act which deprived the government of its powers as the only entity allowed to issue and circulate money.

Additionally, the argument which had been used in that era that gold standard keeps inflation in check is quite misleading. It is misleading because of the economists lack of understanding of inflation. Inflation is our monetary system is defined as debt- induced monetary devaluation, or a chronic shortage of money accompanied with increase in debt. Our money system is debt based not commodity based. To link our monetary system to any commodity, will not solve the problem. Additionally, the practice of fractional reserve banking as practiced by the banks renders any commodity backing of the money useless when banks are given free reign to lend more money than they acutally have deposits upon.

Economists and the historians have stated over and over the merits of having a gold standard and use this argument for the so called prosperity of the roaring twenties. The fact is that roaring twenties was a product of massive increase of credit and loosening up of the money supply by the Federal Reserve. It is important to note that during the same era as you have inquired about the Federal Reserve had cornered most of the gold and gold certificates, a fact which was revealed by Congressman Louis T. Mcfadden in later years.

In the years after 1934, FDR ordered all gold to be taken away from public possession and made it illegal to own gold for Americans. It is interesting to note that during those years a substantial portion of public's wealth existed in form of gold coins or gold bullion. The government through its gold buying program infact confiscated public wealth and ammased it in its depositories. Although, the EO ordered issued called for annual audits of these depositories especially the Fort Knox depository, not a single audit has been conducted since 1953. In the later years it has been learnt that the all the gold that is being held by the United States Treasury does not belong to the US Govt, but to the Federal Reserve.

I would conclude by saying that so called gold standard was nothing more than a swindle, a means to confiscate public wealth either by government through outright purchasing from the public or by the banks who instituted this standard so that they could expand or contract this nation's money supply at will and ultimately use this gold standard as a means to transfer public wealth to few hands.






 

Moonbeam

Elite Member
Nov 24, 1999
73,286
6,349
126
I wonder if you took the entire value of the nation and divided it by the number of people how much each of us would be worth.
 

compuwiz1

Admin Emeritus Elite Member
Oct 9, 1999
27,111
926
126
Every dollar in paper print used to = a dollar in gold backing it up. Forget that nowadays. The money says "Federal Reserve Note". Note=debt.
 

her209

No Lifer
Oct 11, 2000
56,336
11
0
This might sound like a dumb question but how does the government tax you on your gold if it goes up in value?
 

greatfool66

Member
Mar 6, 2006
83
0
0
It seems to me that having currency backed by metals indicates a failure to understand basic ideas proposed by Adam Smith, that currency is just a legal entity created or destroyed by the government or customs agreed upon by a society.

Probably some powerful interests benefited from controlling the money supply in this way and thats why the standard lasted so long.

I'm not as informed on this issue as earlier posters but I have been reading "Secrets of the Temple", a book about the history of the Federal Reserve. Its really interesting and I would reccomend it to the poster.

Also I think you would be taxed on a increase in the value of gold when you sold it as capital gains like any other investment.
 

dababus

Platinum Member
Apr 11, 2000
2,555
0
0
Originally posted by: compuwiz1
Every dollar in paper print used to = a dollar in gold backing it up. Forget that nowadays. The money says "Federal Reserve Note". Note=debt.

Not necessarily true that every dollar in print = a dollars in terms of gold backing.

Although Congress gave the FRNs full legal tender status, but it never recognized them as dollar. The dollar is a unit measurement. It measures something specific, which is 371.25 grains of fine silver. The FRNs do not satisfy this definition hence they are not dollars.

 

dababus

Platinum Member
Apr 11, 2000
2,555
0
0
Originally posted by: greatfool66
It seems to me that having currency backed by metals indicates a failure to understand basic ideas proposed by Adam Smith, that currency is just a legal entity created or destroyed by the government or customs agreed upon by a society.

Probably some powerful interests benefited from controlling the money supply in this way and thats why the standard lasted so long.

I'm not as informed on this issue as earlier posters but I have been reading "Secrets of the Temple", a book about the history of the Federal Reserve. Its really interesting and I would reccomend it to the poster.

Also I think you would be taxed on a increase in the value of gold when you sold it as capital gains like any other investment.

As I stated earlier, the powerful interests were the international bankers who setup the gold standard in this country.

The secrets of the temple is interesting read, but I would recommend the OP to check out the documentary called "The Money Masters."

 

LunarRay

Diamond Member
Mar 2, 2003
9,993
1
76
Read the 1896 Presidential election issues.. or just google.. "William Jennings Bryan"..

Well.. his speech.. "A cross of Gold"... if I remember correctly.. that is what it was termed and given in the primary that he won..
 
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