How does inflation and deflation occur with a gold standard? Sounds to me like a oxymoron.
I am thinking of feds actions in the great depression. Also if gold was flowing out of the USA would that not result in a contraction of the money supply on gold standard, should the fed be blamed for that?
I feel ashamed to ask these question that are probably elementary, but if economics is science the only bad questions are the ones not asked.
Check out Henry Hazlitt’s “Economics in One Lesson” as well as Murray Rothbard’s “What Has Government Done To Our Money”.
Both texts are reasonably concise and will answer your questions.
Here are the links to them, available for free, online:
NEVER be ashamed in the pursuit of knowledge.
Hard Rain linked to “What has government done to our money?”, which is remarkably short and will answer many questions you have about money.
In respect to the Great Depression, most of the contraction in the money supply which took place after the late-1929 crash was in the credit market. That is, in previously created fiduciary media (or money substitute created beyond the actually supply of real money). If the Federal Reserve, and the government, could make a note pose as money (or a money substitute), then it followed that they could make it seem as if this money was redeemable in gold expecting that nobody would redeem the value of their banknotes in gold all at once. During the credit contraction which took place between 1929 and 1932, the Federal Reserve simply could not inflate the money quickly enough to counteract the deflation (although, their attempts at inflation probably extended the period in which the contraction took place).
In 1934, the government would again inflate the money supply on a grand scale by artificially raising the value of gold compared to the U.S. dollar.
Expansion of fiduciary media and artificial government prices of metals aside, inflation or deflation in a free-market could occur in two ways:
Commenting on the outflow of gold during the early years of the Great Depression, for the most part that gold belonged to European banks which simply demanded their holdings, on the basis that it no longer seemed safe in the hands of American banks (at least, this is as much as I got form Garet Garrett’s The Bubble that Broke the World). In the mid-1930s, due to increased regime uncertainty in Western and Central Europe (largely due to the rise of Hitler) and due to an artificial increase in the exchange rate of gold in the United States, there was actually a large inflow of gold, which inflated the supply of money.
Thank you for help. I expected that fed simply lied.
I am no economist by any stretch. The existence of the Federal reserve system seems to me to be a moral disgrace. Even if the Keynesian and monitorist are correct in all their theories and assumptions their support of the Fed is still wrong.
I understand that prejudice would exclude me from anything else beyond a economic observer.
I’m not sure if I’m understanding you correctly or not. Are you saying that the Federal Reserve wasn’t able to inflate the money supply because of how much they had in terms of gold?
I didn’t explicitely say that, although I am sure that the gold standard played some part in limiting the extent of their monetary expansion. The comment I think you are referring to was a response to this:
I am thinking of feds actions in the great depression. Also if gold was flowing out of the USA would that not result in a contraction of the money supply on gold standard, should the fed be blamed for that?
Contraction in the money supply due to the outflow of gold was only a minor portion of the total contraction which took place during the first four years of the Great Depression; the majority was constituted by a contraction in the credit market. Also, I was saying that the outflow of gold is somewhat overstated, since a lot of that gold did not actually belong to any American bank.