He Doesn’t Love Gold
Scott Sumner has written a fascinating book on how interaction between the operation of the gold standard and the labor policies of the New Deal influenced the course of The Great Depression. I only wish he had a better editor who would have tightened up a writing style that tends to wander in a way that mixes up the important from the unimportant.
His critical variable is the gold reserve ratio of the United States individually and the collective gold ratio of the then developed world. He makes a strong case that as the gold ratio rose policy tightened and as it fell policy loosened. Unfortunately aside from a few instances there was very little in the contemporaneous press, which he quotes extensively, that discussed this issue. Thus it seems policy makers were flying blind.
Similar to most economic historians of The Great Depression the seminal event that turned the economy around was Roosevelt’s abandonment of the gold standard in 1933-34 and then revaluing gold from $20.67/oz. to $35.00/oz. It was that action that enabled the Fed to open up the monetary floodgates. In Sumner’s view had the New Deal left well enough alone the economy would have fully recovered by 1935.
However, offsetting the gold policy, the National Industrial Recovery Act of 1933 triggered a 22% increase in wages during the summer of 1933 that completely stalled the industrial recovery that was well underway in the spring of 1933. He then goes on to discuss, in the tradition of Cole and Ohanian the additional wage shocks that came from the Wagner Act of 1935 and the Fair Labor Standards Act of 1938.
He makes a major point in discussing why the monetary ease of early 1932 failed and it was that failure that turned Keynes away from his belief in the efficacy of monetary policy. To Sumner the Fed’s policy was not credible because under the gold standard it was not able to continue its bond buying program. Only after gold was revalued did the Fed have the greenlight to engage in quantitative easing, to use today’s term.
I wish he would have spent more time on the Treasury’s gold sterilization policy of 1935-37 which Douglas Irwin mentions as the leading cause of the 1937-38 collapse. Nevertheless there are many fascinating nuggets in this book such as the role of the Young Plan bonds issued by Germany had on the financial markets of 1931-32. To my mind Sumner has written a very important book on what made the Great Depression great.
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