If one of the advantages of a gold standard is the nature of it keeping the over expansion of credit in check limiting or eliminating the business cycle altogether then what caused the panic of 1907? Or other panics of the late 19th century? According to Wikipedia if correct, the crash of 1907 was set off by the Knickerbocker Trust that went belly up which was triggered by a failed attempt of the United Copper to corner the market with massive shorting. United Copper’s stock plunged which brought the Knickerbocker Trust down with it.
This event took place at a very inconvenient time since during the fall season money was more scarce in New York as harvests were being purchased. Thus interest rates were normally raised to attract money back to New York. But also the 1906 earthquake of San Francisco was sucking up financial resources that would otherwise be parked in New York City. In the days that ensued the panic, JP Morgan brought together the heads of many banks and large industrialists like Rockefeller to make short term loans to many troubled, but still solvent banks and to also keep the exchanges open.
Now I think liquidity would have eventually found its way into the struggling yet still solvent New York banks and into the exchanges, but in the case of a panic where people on the verge of making a run on the bank and the exchanges are collapsing what is there to do? Do we just hope someone like JP Morgan is able to soften the blow by bringing together banks who inject liquidity into the needy banks as well as the exchanges for traders to continue to buy on margin? Does this fall to the US Treasury for a solution absent a central bank? I’d like to know what you think because I can already see someone sticking this whole question to me if I bring up the AE view on business cycles and how they are created by bad monetary policy.
This is the easiest question to answer as people view the “Gold Standard” as some hard fast rule where the amount of gold is fixed. I respond to this issue two ways:
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The cause of these panics was the creation of artificial credit through fractional reserve banking and the artificial creation of money and credit by the governments. Although on the Gold Standard, these banks were strictly regulated on a state by state basis. Eliminate most of the regulations and allow profit and loss in the market place for loans and currency to determine the amount of fractional reserve banking and you may see panics and recessions but nothing like the history of the USA which is good compared to most other places. If banks have to be up against market forces they will be much more careful about what they do with other peoples money.
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As for the limited amount of gold, there are a multitude of NON-GOVERNMENT solutions to this problem. Gold is a commodity with alternative uses. As its price climbs the alternate users will substitute for gold reducing its price. Let the marketplace determine what money is and how it is valued. Then you will not have shortages of anything much less cash. As gold becomes scarce the market will use silver or even copper or cigaretts or cows or invent something else. Banks can create paper money redeemable in what ever things the market determines as money. Depositors could write a contract(for higher interest) that they will not redeem deposits in gold for some period of time and receive bank notes instead. The point is that there are a huge number of ways individuals could use to resolved this issue. It is government redeeming notes for gold and only gold that creates the problem.
Read this, learn stuff.
(Panic of 1907 is covered on page 240 onward)
There’s been many threads on this topic (not that it’s bad to rehash it again).
Here is one such recent thread: https://forum.freecapitalists.org/t/booms-and-busts-before-the-fed-era/12291