Did going off the gold standard help Britain (and Scandinavia) during the great depression?

The Improviser 

By Steve Matthews
Bloomberg Markets June 2008

http://bloomberg.com/news/marketsmag/mm_0608_story2.html

"While the United States moved to protect the dollar, the Bank of England, faced with depleted gold reserves backing the pound, in 1931 let the value of the currency float freely. The decision to abandon the gold standard allowed Britain and the Scandinavian countries to recover from the Depression earlier than the rest of Europe."

While I am curious about your thoughts on the whole article, the above quote stands out in my mind.  FWIW, wikipedia claims the depression ended in Britain due to rearmement. http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom

geo8rge:

The Improviser 

By Steve Matthews
Bloomberg Markets June 2008

http://bloomberg.com/news/marketsmag/mm_0608_story2.html

"While the United States moved to protect the dollar, the Bank of England, faced with depleted gold reserves backing the pound, in 1931 let the value of the currency float freely. The decision to abandon the gold standard allowed Britain and the Scandinavian countries to recover from the Depression earlier than the rest of Europe."

While I am curious about your thoughts on the whole article, the above quote stands out in my mind.  FWIW, wikipedia claims the depression ended in Britain due to rearmement. http://en.wikipedia.org/wiki/Great_Depression_in_the_United_Kingdom

From what I understand the countries that went off the Gold Standard first recovered faster. I believe France was the last to go off the Gold Standard and also the last to recover but I'm not sure of the exact reason for this. You might also want to note that the countries that weren't on a Gold Standard didn't suffer as much during the Depression. I am somewhat interested in seeing an Austrian school economist explain this. I'm waiting...

Perhaps because it was only a faux gold standard? I think Rothbard addresses this in one of his works on it.

-Jon

What does "recover faster" mean? Does it mean that Britain was able to return to inflation sooner?

Our government has been using inflation to prevent and "shorten" depressions for a long time now. Certainly this is to our detriment, not our benefit.

Jon Irenicus:

Perhaps because it was only a faux gold standard? I think Rothbard addresses this in one of his works on it.

-Jon

Technically you could define a Gold Standard as one where each dollar is a receipt for a fixed amount of gold that is stored in a vault somewhere and that you can redeem at your discretion.. With this definition the U.S. was not on a Gold Standard during the Great Depression. This would probably be the best argument from an Austrian perspective for why the "Gold Standard" didn't seem to work in during the Great Depression.

JonBostwick:

What does "recover faster" mean? Does it mean that Britain was able to return to inflation sooner?

Our government has been using inflation to prevent and "shorten" depressions for a long time now. Certainly this is to our detriment, not our benefit.

It means production increased more quickly and unemployment fell earlier.

Yes, abandoning the gold standard did help Britain recover from the Great Depression more quickly.

That is because the pound was overvalued.  That is, its domestic purchasing power was lower than the international purchasing power of the gold it could be redeemed for.  Britain had abandoned the gold standard in 1915 in order to fight a major war, and it had foolishly returned to the gold standard in 1925 at the original pre-war exchange-rate instead of the new inflated rate.

The result was a bleeding of gold reserves from the UK coupled with downward pressure on prices.  This was very harsh on debtors, and unfriendly to investment.  And the unions were hostile to wage-reductions and already powerful enough to resist them; there was a general strike in 1926.

The result of keeping wage rates coercively high was mass unemployment. The political solution was to devalue the pound.  Instead of forcing wages down, this forced other prices up.  The subterfuge kept the unions onside.

It was not necessary to abandon the gold-standard as well, but the political temptation was compelling.  The new credit-fueled boom coincided with rearmament.

Solid_Choke:

JonBostwick:

What does "recover faster" mean? Does it mean that Britain was able to return to inflation sooner?

Our government has been using inflation to prevent and "shorten" depressions for a long time now. Certainly this is to our detriment, not our benefit.

It means production increased more quickly and unemployment fell earlier.

Again, because of inflation?

Does it matter how much is being produced if the counterfitters own it all?

If they stuck to a real gold standard they probably wouldn't have had a depression in the first place.

The paragraph before the quoted one is more telling from an Austrian perspective:

In July 1928, when financial markets were still booming, the Fed raised its benchmark interest rates to 5 percent, the highest since 1921, effectively cutting the money supply, in order to reduce what it saw as excess speculation on Wall Street. It did so even though there were no signs of inflation, Bernanke said at the conference honoring Friedman. In October 1931, after the market crashed and GDP had begun to nosedive, the Fed raised rates again to prevent the dollar from falling in international markets. That made it harder for companies and individuals to borrow even as the economy was contracting 30 percent and deflation was setting in. A series of bank failures further reduced credit throughout the economy.

They fail to address why the economy was 'contracting 30 percent'. Most of it was due to the worldwide import/export market being effectively shut down by the Smoot-Hawley tariff act and retaliatory tariffs from other countries.

But the gold standard got the blame and was abolished to remove the restrictions to systematic inflation by the central banks of the world. If only, according to Bernake, the Fed kept inflating the economy would have kept on chugging along which is his plan of action today -- to fix an inflationary bust with an inflationary boom.

Looking threw the responses I do not find anything convincing.

The one true gold standard argument will not work as you will never accomplish the one true anything in this world.

Talking about the Fed is not a good argument here because at the time the UK was the world power at the time.

Perhaps the Mises people should write a book, or recommend one, about the depression in the UK similar to Rothbard's book on the US.

Possible arguments about the UK I could come up with:

1) The British exported their problems to their colonies particularly India.  Perhaps a book about the depression in India?  In effect rearmement forced colonials to buy weapons from the UK, and pay for British to administer them.  The UK and the colonies should be looked at together.  

2) The British were supported by the US.  The UK exported it's problems to the US.

How about you address these "unconvincing" responses then? Further, you need to prove your first and second contentions.

-Jon

geo8rge:

Looking threw the responses I do not find anything convincing.

You should look closer at LanceH's post then, he nailed it perfectly.

LanceH claims that Britain overvalued its currency, and the way to solve that problem was going off the gold standard.  I thought the idea of the gold standard was that the value of a currency would stabilize as gold left or entered the country.

geo8rge:

LanceH claims that Britain overvalued its currency, and the way to solve that problem was going off the gold standard.  I thought the idea of the gold standard was that the value of a currency would stabilize as gold left or entered the country.

He also explained that the overvaluation was the result of Britain going off of gold in 1915, suffering inflation for 10 years, then going back to gold in 1925 at the 1915 price.  So it was an artificial overvaluation -- had they gone back to a price of gold that had reflected the 10 years of inflation (as Mises warned them to do, by the way) there wouldn't have been a problem.

So the gold standard didn't fail, the British government failed by 1) leaving the gold standard in the 1st place, then 2) reinstating it in a faulty manner.

geo8rge:

Talking about the Fed is not a good argument here because at the time the UK was the world power at the time.

Hmm...

The Fed was pushing massive inflation to help the Brits with the 'bleeding gold' problem.

I would recommend looking up the trade policies and labor/industry practices during this time in the UK.  Both (all three) of these were major contributors to the delay in the recovery in the States.

Not much of a 'world power' when they needed the Yanks to save their bacon...

geo8rge:

Talking about the Fed is not a good argument here because at the time the UK was the world power at the time.

Perhaps the Mises people should write a book, or recommend one, about the depression in the UK similar to Rothbard's book on the US.

You will find an excellent account of the UK experience in Part 4 of Rothbard's "History of Money", downloadable here:

http://mises.org/rothbard/historyofmoney.pdf

He explains how the UK and US were interlocked, and how it was partly imperial vanity, and partly pressure from creditors, that impelled Britain to adopt the gold standard in 1925 at the pre-war rate.

Britain had emerged from the war as "the world power" in name only.  There is a hilarious account in Malcolm Muggeridge's autobiography of how the British Cabinet in August 23, 1931 were waiting on tenterhooks for US bankers to decide whether to grant a loan sufficient to enable the UK Treasury to go on supporting the pound on the gold standard.  Wall Street insisted on a balanced budget as a pre-condition, the Cabinet was split, the government was dissolved, and the gold standard was abandoned.  How ironic, noted Muggeridge, that the fate of Britain's first Labour Government should be decided by US financiers.