{[ promptMessage ]}

Bookmark it

{[ promptMessage ]}

19291930 to reinstate the protectionist policies of

Info icon This preview shows pages 16–18. Sign up to view the full content.

View Full Document Right Arrow Icon
1929–1930, to reinstate the protectionist policies of the past, with disastrous results. The last major monetary hiccup in the United States, before the tectonic shifts of the 1930s, was a brief cycle of inflation and defla- tion during and after World War I. The outbreak of hostilities in Europe in 1914 was soon followed by a flood of demand for U.S. products by all the combatants to fight the war. At the same time, exports of European goods were reduced as factories retooled for wartime. All in all, delivery of roughly $1 billion in gold, sales of $1.4 billion in U.S. securities (accumulated over a century of investment in U.S. industries), and $2.4 billion of borrowing in U.S. financial markets were undertaken by European countries to finance their imports of U.S. goods. The gold flows were not in themselves inflationary, for it is the value of gold, not the amount of gold that happens to be located in the United States, that determines the value of the dollar. The sky- rocketing demand for U.S. goods pushed up U.S. prices beginning in 1914. This was primarily what von Mises called a “goods-induced” change in prices, caused by the intense demands of wartime. The same thing had happened when the United States manufactured goods for use in the Napoleonic Wars. That changed when the United States entered the war in April 1917. Gold inflows immediately stopped and were replaced by mod- est gold outflows, perhaps in anticipation of an end to gold redeema- bility (as every European government had done). In September 1917, President Wilson prohibited all gold exports without the permission of the Federal Reserve Board and the Treasury and brought foreign exchange transactions under explicit control. In September 1918, the gold embargo was broadened to prohibit private hoarding of gold, though the war would end only a few months later. The net effect of these two steps was to float the dollar, or at least make its link to gold highly elastic. The Federal Reserve had been created in 1913 to prevent liquidity-shortage crises. The coalition majority that wrote the bill for the new system even claimed it was not creating a central bank. GOLD: THE ONCE AND FUTURE MONEY 54
Image of page 16

Info icon This preview has intentionally blurred sections. Sign up to view the full version.

View Full Document Right Arrow Icon
In any case, the Fed was just starting operations when the Treasury pressured it into accepting a very contemporary central banking role—pushing down interest rates so that the government’s wartime funding could be accomplished more cheaply. With the dollar’s link to gold weakened, it was an invitation for inflation, which is indeed what happened. When the gold embargo was lifted in June 1919, gold immedi- ately flooded out, a sign that the dollar’s value had dropped well below its gold parity. Wartime prices, pushed up by real demand, would probably have begun dropping in late 1919, as government spending contracted, but the Fed’s expansion pushed prices higher into early 1920. Eventually, the outflows of gold could not be ignored, and the Fed, in 1920, began contracting the supply of base money. Combined with a natural retreat of wartime prices, the result
Image of page 17
Image of page 18
This is the end of the preview. Sign up to access the rest of the document.

{[ snackBarMessage ]}

What students are saying

  • Left Quote Icon

    As a current student on this bumpy collegiate pathway, I stumbled upon Course Hero, where I can find study resources for nearly all my courses, get online help from tutors 24/7, and even share my old projects, papers, and lecture notes with other students.

    Student Picture

    Kiran Temple University Fox School of Business ‘17, Course Hero Intern

  • Left Quote Icon

    I cannot even describe how much Course Hero helped me this summer. It’s truly become something I can always rely on and help me. In the end, I was not only able to survive summer classes, but I was able to thrive thanks to Course Hero.

    Student Picture

    Dana University of Pennsylvania ‘17, Course Hero Intern

  • Left Quote Icon

    The ability to access any university’s resources through Course Hero proved invaluable in my case. I was behind on Tulane coursework and actually used UCLA’s materials to help me move forward and get everything together on time.

    Student Picture

    Jill Tulane University ‘16, Course Hero Intern