Hey – we’re getting somewhere!
The causes of the Great Depression are of course still debated. Most of the usual arguments involve the gold standard as culprit, because of the implied constraints on monetary policy.
I would note that even after leaving the gold standard in 1933, the US still kept tight constraints on monetary policy. The Clearest example was the “Roosevelt Recession” of 1937:
From the fall of 1937 to the summer of 1938, industrial production declined by 33 percent; wages by 35 percent; national income by 13 percent; and not surprisingly, the unemployment rate rose by roughly 5 percentage points, with an estimated 4 million workers losing their jobs.
Keynesians say the cause was the drastic cuts from imposing a balanced budget, while Monetarists like Friedman argue it was the tight money policy of 1936-1937. Whichever argument is more correct, the germane point for our discussion is that both policies would have been implicit under a gold standard. That is the central bankers of the world might have made one or these mistakes, but gold standard would have forced both of these mistakes.
I do not understand your point about 1873. Yes, the immediate proximal cause was a financial panic in Vienna and over-investment in US railroads. But nemomen’s and my point is that the monetary straightjacket makes it very difficult to recover from these mistakes. I think his graph sums this up nicely.
Perhaps you can help me understand something about the benefits of a gold standard.
Under the gold standard, there is still a money supply. Namely, the amount of gold about. And, just as there are people who can manufacture money in our current system, namely central bankers, so there are people who can manufacture money under the gold standard: gold miners.
Why do gold miners implicitly make better central bankers? Put differently: what is the benefit of making the world’s leading gold producers – China, Australia, and Russia – the world’s central bankers?
