After four years of rising mass unemployment, the gold standard was devalued by FDR in 1933. Soon after, the US economy began to recover. Presumably, this act was inflationary and would have contributed to economic recovery by allowing real wages and prices to fall.
Sure, the classical Keynesian description of things is that if there is unemployment, it is because wages are too high and people refuse to settle for less, so they stay unemployed. Inflation, according to Keynes, tricks them into thinking they are not taking a cut in wages, so they go back to work, ending the depression.
From another angle, the cause of wages being high is that those workers arent needed, because for some irrational reason demand has dropped. Inflation means the govt prints money and spends it, thus increasing demand, and everyone is happy.
But there are a few q’s I have.
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Please provide the evidence that there was an economic recovery after FDR siezed all gold in 1933, or in 1934 when he set the price of gold at $35 an ounce instead of about $20. From what I understand, there was no recovery until 1946.
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Why does his devaluing of the dollar create inflation? Gold was not legal tender, in fact it was illegal to own gold until 1977. Say he had declared the price of moon rocks to be something or other. What effect would that have on the economy?
The only way it would be inflationary is that it enabled him to print more paper money, since it would not have to be backed by gold.
- Inflation does indeed create a temporary “stimulus” of the economy. With all that money atound, people buy more, creating more demand, and thus more jobs. It’s all true. But there is a bit of a problem. It’s a temporary fix. Since no new wealth is created by printing more money [wealth meaning physical things that people want] the amount of wealth stays the same. It gets gobbled up. Then there is a shortage of it. The nation is getting poorer, but thinks it is getting richer.
What usually happens is that the true demand for some good or other is incredibly overestimated. So way too much of it is produced. Then when there is nobody to buy it, prices come crashing down. The bust has begun.
- The way to stimulate an economy correctly is by leaving it alone, as this site explains.
The economy didn’t recover… people thought it was recovering - but people were largely acting with regard to false signals. No more wealth is created in this world when paper is printed.
So people think they are richer than they are, and they think there is more natural demand than there really is, and so malinvestments are made, and several years later you have to undergo another downturn.