Tuesday, March 22, 2011

The Gold Standard Did Not Cause the Great Depression

Among the many myths of the cause of the Great Depression I have heard, I recently learned of a new one: the gold standard caused it. The argument is of course Keynesian in nature. People suddenly started hording money. Since that money was in the form of gold, and money could be exchanged for gold, people were in fact hording gold. Thus, there was no money available. It is also argued that the global gold standard is what caused the Great Depression to go global. Of course, these people would have to explain why, then, the Great Recession went global even though money today is, globally, fiat money.

Professor Richard Timberlake argues otherwise. Indeed, if there had been a real gold standard, the Federal Reserve could not have expanded the money supply in the 1920's to create the artificial boom known as the Roaring Twenties, and the subsequent crash. More, during the Depression, Roosevelt got a law passed making private ownership of gold (beyond things like jewelry, of course) illegal. Under the theory that gold hording caused the Depression, this would have ended the Depression. It most certainly did not.
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