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Edit: The "depression" referred to in this post refers to the global economic instability that led to the collapse of the Bretton Woods System. It does not refer to the Great Depression. I was not able to address that due to time constraints. Please see child posts for clarification:

http://news.ycombinator.com/item?id=2670994

"Many economists disagree, for example George Robinson..."

I have been studying economics for a while and I have never heard of this George Robinson. I tried to google for some information on him and all that I can come up with is line noise. If George Robinson was an economist of some repute then he should at least have some published research available, but I am unable to find anything.

Side Note: Obviously, there is no formal licensing process, but in order to call themselves an economist, it is generally accepted that someone should have a graduate degree in economics or a related field. If someone is discussing Macroeconomics, then they really should have a graduate degree in order to be taken seriously. Macroeconomics is an incredibly complex subject and a layman's knowledge is not sufficient in order to have a good grasp of it.

Just for the record, it is actually commonly accepted by modern economists that the gold standard was responsible for the severity of the depression, but stimulus was not the reason for this. The real problem with the Bretton Woods System was that it functioned as an implicit dollar peg for the countries that were in it. Other currencies were pegged to the dollar and the dollar was pegged (at constant rate) to Gold.

Thus, other countries in the Bretton Woods System ended up taking on the risk of America's monetary policy, and American monetary policy had to be managed in such a way that it was perhaps not always in America's best interest. This is the principle argument against a modern global gold standard. To properly manage such a standard for the benefits of all participants would require a superhuman amount of even-handedness and situational awareness, and all of this would be for a system that basically approximates the system that we have today (in which countries are, mostly, free to set their own monetary policy to benefit themselves).

Now, for the idea of a gold standard here in America. The principle objection to this is that it would tie America's currency to a commodity. This seems like an obvious observation, but there are some geopolitical implications here that I rarely see mentioned. Let me put it like this: "Meet the new boss, same as the old boss"

Yes, a lot of people have disagreements with the Fed. You can voice those disagreements, and we can make alterations to the Fed's structure as needed, but if the dollar was set on a gold standard tomorrow, then America would lose control of its monetary policy. Voicing your disagreement at that point becomes a little bit more complex.

That last line sounds a little bit extreme, but you need to think about it. Constantly, I hear people talk about gold as though making the dollar dependent on it would alleviate all concerns about the monetary supply. People seem to think that we adopt the gold standard, then, poof, suddenly there would be no monetary policy. This is completely untrue.

Like dollars, the amount of gold in the market at any given time is a mutable value. Gold can be added to the market and gold can be taken out of the market. If the dollar depends on gold, then we would still have a federal reserve bank. The only difference is that it would not be based in the U.S. and under American jurisdiction.

Now, here's a question to think about. Who would comprise our new federal reserve board? Let's take a look at the top ten board members[1]:

    Rank	Country/Region	Gold production (kilograms)
    1	    China	        320,000
    2	    Australia	    210,000
    3	    South Africa	210,000
    4	    United States	205,000
    5	    Russia	        205,000
    6	    Peru	        180,000
    7	    Indonesia	    140,000
    8	    Canada	        95,000
    9	    Ghana	        90,000
    10	    Uzbekistan	    80,000

Hmmm, looks like a bunch of countries that are unequivocally in favor of Americans' best interests. Of course, these are just the chief board members. There are many others. In fact, any country or organization with cash can weigh in on the market, and with the stakes being so high (the monetary policy of one of the most powerful nations on the face of the earth), you would be naive to think that interested parties would not take the necessary actions.

[1] Taken from http://en.wikipedia.org/wiki/List_of_countries_by_gold_produ... (which in turn is sourced from the Economist)

Note: Originally, I intended to debunk all of the "points" raised by this George Robinson, but I am not able to due to time constraints. Time constraints also ensure that this is a much more brief post than would be necessary to fully argue my point. However, I hope that I have been able to provide a helpful angle on why economists are leery of a return to the gold standard.

"Actually commonly accepted by modern economists"

This phrase is the anti-science. No science operates based on "commonly accepted". Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression.

How could the use of gold as money cause anything when it was banned by executive order, and the citizens were required to turn it in? Are you going to argue there was a massive underground black market. You don't make that argument, and from my studies no such market existed because people feared the repercussions of being caught with this banned substance.

http://en.wikipedia.org/wiki/Executive_Order_6102

"The circumstances of the case were that a New York attorney, Frederick Barber Campbell, had on deposit at Chase National over 5,000 troy ounces (160 kg) of gold. When Campbell attempted to withdraw the gold Chase refused and Campbell sued Chase. A federal prosecutor then indicted Campbell on the following day (September 27, 1933) for failing to surrender his gold.[4] Ultimately the prosecution of Campbell failed but the authority of federal government to seize gold was upheld."

A great response! Let me see if I can shed some more light on this topic.

"This phrase is the anti-science. No science operates based on \"commonly accepted\"."

Exactly! And, there is a very good reason for this. Economics is not a science. It is a social science that makes some use of the scientific method. Within this context, meta-analysis becomes extremely important for drawing pertinent conclusions. This is just a side note, because it seems that we have crossed our wires somewhere.

"Consider how absurd it would be for any modern economist to claim that a form of money, which was banned in 1933, was the cause of prolonging the great depression."

I should have been more clear. I was referring to the global economic instability (generally manifesting itself as a number of depressions across the Bretton Woods countries) that preceded the collapse of the Bretton Woods System.

I have to apologize, but when I see "gold standard" I immediately start my Bretton Woods rebuttal. It is a reflex reaction from spending too much time arguing with Austrian economists.

Of course, the grandparent post was referring to the Great Depression. Well, all is not lost. Dr. Scott Sumner (my favorite practicing economist) has a nice starter post on the Great Depression:

http://www.themoneyillusion.com/?p=4161

Why would economics not be a science?

I wouldn't say that phrase is actually anti-science.

Science is fundamentally a social institution where groups of people can great bodies of knowledge that can be used to make accurate predictions about the world. This body of knowledge is imperfect and so periodically people challenge it, making predictions where they hope their theories will be right and the standard model will be wrong. The thing is, there are many more ways to be wrong than to be right, and the large majority of people trying to challenge established knowledge are wrong.

Because of this we generally ought to use commonly accepted views until people challenging them can point to ways that their theories can make predictions that are superior to accepted theories. New theories might be intuitivly appealing, but if they can't pull their empirical weight they shouldn't get anywhere.

In fact, my reading of George Robinson's theory is that it would predict that the US economy would be much more unstable after going off the gold standard, when in fact it tended to be more unstable before we did. Now, if his book actually did predict "fewer but worse" recessions maybe we should look into it, but I'm worried that it doesn't.

I think I have a better way of making the point you're trying to make. You're rebutting the claim that reliance on the gold standard made the depression worse.

However, in the early 1930s, the monetary use of gold was criminalized in the USA. In fact, possession of gold itself was illegal for individuals (with the exception of jewelry) until sometime in the 1970s!

while many people refused to turn the gold in as the government demanded in the 1930s, they instead shipped it overseas, and at any rate you couldn't do contracts in gold or make payments in gold without risk of getting in trouble.

This action effectively invalidated much (maybe most?) of the countries wealth, and so it is no surprise that the result was a great depression, or a prolonged depression.

Further, rather than adhering to a hard money position, as is popular for political economists to posit today, the actual position was inflationary. This position is well argued by Rothbard in his book "America's Great Depression".

The reason the myth of "hard money" prolonging the great depression persists, is because governments want an inflationary monetary policy to allow them to spend without the fiscal restraint that would be imposed by having to raise via taxes and fees, all the money they want to spend.

Your position is absolutely right, and you've been attacked by others for citing someone with the "fallacy of appeal to old foggies". Rothbard's analysis was done in the 1970s, I believe, and is effectively contemporary. (Or at least I'm not aware of any serious attempts to refute it.)

Unfortunately, in popular culture the science of economics does not get much respect, going against the popular political perception of inflation being "good" and I've gotten banned from hacker news for making economic arguments like the one I've just made. Which is why this is the first post from a new account. (It is unfortunate that Hacker News does not tolerate differing opinions. But as anyone can see from this post, the salient fact-- that gold was banned-- is undisputed historical fact that blows the operating theory out of the water... and thus I have contributed to this discussion historical facts that are relevant to it. Should I be praised for that? Or banned for disagreeing with the party line? (or for pointing out that I've been banned in the past? I think the censorious nature of this site is employed to keep hidden its intolerance... so I might get the ban for that... but you never know because there is no warning, you just suddenly get the ax. My last account's karma was about 1,200 acquired over 6 months of contributions.) Consider this warning about the nature of this site the payment I require for going thru the effort of making a new account to contribute this critical historical fact to the discussion.

I believe (though I obviously can't know) the reason you are getting down votes is that you are making an explicit appeal to authority ("An economist from 1935 disagrees") against another appeal to authority (the "Many economists" from the article). But the thing is, "many economists", who have the added benefit of decades worth of observations and accumulated knowledge in the field of economics are almost certainly _much_ better authorities than someone from the 1930's.

Which doesn't prove any points, because appeals to authority never really do. But if you open your argument with an appeal to a weak authority, the rest of your argument will look weak as well. I imagine you wouldn't have been down voted if you had just left out the bits about George Robinson and let the arguments stand on their own.

You're probably right about the downvotes, but the article itself made an appeal to authority and majority (i.e. "many economists"), and I wanted to counter that with a specific exception, and I see no harm in citing him by name.

On your other point, I don't put much stock in the decades worth of obfuscation that have followed, such as the silly praise for breaking windows, or digging holes and filling them back up, or other activities only sustainable by confiscating or devaluing property.

Here's the thing about gold. I don't care if anyone uses or does not use gold to settle business. I just don't want anyone interfering with people who do choose to use it. (Same goes for bitcoin etc.) That is to say, no harassment, no fines, and no jail time. That's all I ask.

For your information, the phrase about "digging holes and filling them back up" is probably one of the most distorted quotes in all of economics.

Keynes essentially asked his readers to compare three possible scenarios in a situation where the private sector does not provide enough job opportunities due to a lack of aggregate demand. The scenarios are: (1) mass unemployment (2) the state providing employment in work that is considered useful (3) the state providing employment in "digging holes and filling them back up"

Keynes point was that the order of desirability is: (2) is better than (3), and (3) is better than (1)

He was not in any way advocating in favour of (3), he was merely pointing out that even though (3) looks stupid, it is still better than (1).

Keynes was making hay out of a disaster. The banks enabled a speculative boom, resulting in a massive mis-allocation of capital for many years. Then when the boom ended, they had mass unemployment. No surprise there.

Keynes was wrong to think that (3) is better than (1). All that does it take capital forcibly out of one individual's hands and put it into the pocket of someone doing something useless. You might as well save him the trouble of digging the ditch.

It's not a big surprise that you were able to find one economist from 1935 who disagreed. It would have been more surprising if you hadn't been able to. In any event, this is not a situation where a contemporary analysis necessarily has a closer view of the situation; far from it, as someone in 1935 didn't see what the next 75 years brought.

So: I didn't downvote, but I remain unimpressed with George Robinson's contemporary analysis, as it consists simply of two unsupported assertions.

He writes a whole book to support those assertions, but I only had time to hit the high points here.

I have no interest in getting all religious or dogmatic about gold, silver, bitcoin, US dollars, Euros, or any other form of money. My real point is: let individuals decide what forms of money they wish to use, without harassment.

Clearly the practice at the time of banks lending money to buy stocks and Florida real estate, using stocks as collateral for those loans, was insane and unsustainable. In effect, common stocks were indeed monetized, and this led to an enormous boom in the money supply which enabled and encouraged the mis-allocation of capital. When that stops, people suffer, no doubt about it.

It was just sick what certain people did back then to keep prices propped up artificially high. They would spy on farmers to make sure they didn't produce too much, and if they did, they'd go in and burn crops and slaughter hogs. This while people were going hungry. I had a neighbor who, as a 14 year old boy, was hired to drive around the countryside spying on farmers. A dry cleaner who charged too little for his services was imprisoned. The authoritarians fought deflation tooth and nail, and years of misery was the result.

I didn't downvote this (I don't have that awesome power yet, anyway), but I think I see why people might.

Your arguments are phrased in such a way that it's unclear what's being said. Maybe you got this directly from Robinson, maybe you're doing a bad job summarizing - we can't tell.

Example: "The Fed's policies enabled the monetization of the WWI Liberty bonds, and the monetization of common stocks". What does that mean? Monetization means transforming something of value into a monetary payment. Social Security is a monetized benefit, Medicare is not - you can't take your share and spend it on a car. Stocks and bonds were always monetized: you can buy them and sell them at any time, pledge them as collateral, whatever. So what did the Fed do? It's kind of annoying when you read something which is said with great passion, but you can't really tell WHAT was just said without further explanation. And there are several example like that in your post.

Fantastic response, thanks.

You wrote: "monetization ... what does that mean?"

In a nutshell: at the time banks would lend money to people for the purpose of buying stocks and real estate, and as collateral for those loans, they would accept already inflated stocks.

On the one hand you might sanguinely say "oh that's just trading on margin", and in a way you'd be right. But it had gotten to a point where the "collateral" only had value because of the insanity which had gone before. Not to mention that the banks were lending the newly issued money on a fractional reserve basis. I don't oppose fractional reserve in principle, but in this case it amplified the insanity by a factor of 10 or so.

So the investor went off with new "money" from the bank in hand, and hauled off and put it all into Consolidated Gas. Yay, happy days -- that stock kept racing up. In the meantime, the investor had debt service (interest expense) to contend with, and keep in mind that many of these stocks were paying no dividends or miniscule ones at best.

Eventually many investors end up with a cash flow problem, and they are forced to liquidate. This drives down stock prices, and then even more liquidate. After all, there's no sense holding a stock that gives you net negative cash flow and negative capital gains.

Regarding the monetization of war bonds, I quote this: "At the end of the Liberty Loan campaings, our banks held very large amounts of United States bonds and it was their habit thereafter to use these as security for Federal Reserve credit when they wanted it, in preference to rediscounting commercial paper."

And further: "The difficulties in this situation were these: (1) that the United States bonds were not, like the prime commercial paper, due to be liquidated by the natural process of consuming goods and paying for them, and (2) that the United States had agreed to pay in gold on demand [... but could not]"

On this latter point, the financing of war has always been a major driver of monetary inflation, even during periods of an alleged gold standard. World War I was an utter catastrophe in so many ways.

The funny thing about the 1920s boom is, it was ultimately grounded in real productivity gains: principally, technological innovations such as the electrification of manufacturing plants. So it certainly was not all an artificial mania like tulip bulbs. But it became that way with the aid of banks, principally the Fed but also others.

I understand that. Yes, it was a problem that banks were lending money to people so that those people could trade the stock market. That's described as ONE of the causes of the Great Depression in every standard history. However, this is not called monetization, and it was not a policy of the Fed. The Fed didn't even have the power to regulate this type of loans; it got expanded powers as a result of the Great Depression.

Imagine if someone came here and said: "the problem in the crisis of 2008 was that the big banks RADICALIZED the financial markets, and then UNLEVERAGED government money to make good their losses." People don't disagree with this, once it gets deciphered to something that they understand, but it's going to get a downvote for being not very understandable as phrased.

You wrote: "this is not called monetization".

Monetization is a technical term, and I won't quibble with you over that. However ...

You wrote: "it was not a policy of the Fed."

Yes, the whole phenomenon was baked into Fed policy even at its founding in 1913.

Quote: "We undertook in the Federal Reserve Act (1913), (I) to reduce the reserve requirements of the banks; and (2) to substitute for "gold and other lawful money" as bank reserve, the single item, credit at the Federal Reserve banks, which in turn need be gold-secured only to the extent of 40 percent, which the remaining 60 percent could be commercial paper and United States bonds."

In short, Fed policy allowed banks to operate with less solvency than they had before. This enabled massively speculative loans which would not have been possible otherwise.

Robinson is not making a good case here - the Federal Reserve Act was, at the time, seen as strengthening banks by making their reserves more liquid. If Robinson wants to argue that it had the opposite effect, he will need a lot more than his opinion. If he is right, then there should have been fewer bank failures in the decades preceding the FRA; but in fact, history is full of them. The post-1913 banking system functioned well for decades, including during a world war. Obviously it had its weaknesses, but where is the proof that the pre-1913 system would have been better in the same circumstances?

Also, he is carping about the wrong thing - he complains that the Fed was only 40% secured by gold, but the Fed is not the entity that failed; the banks did. It wouldn't have mattered if the Fed was secured by pure unobtanium.

In short, I'm not convinced by any of this - it's basically just one guy's opinion from 1935.

In 1935, a lot of very intelligent people thought that the Soviet model was the answer (I don't mean George Robinson in particular). It turned out that those people lacked some information and perspective, and were probably guilty of wishful thinking. So why should the 1935 date of this book impress us, in itself?

P.S. The story of Westerners who relocated to the Soviet Union in the 1930s is fascinating. And very sad, for the most part. There were tens of thousands of such people. I am sure Google will find references.

Sure, such as Walter Duranty, the famous admirer of Stalin. But I like to discuss specifics. I disagree with Walter Duranty and Stalin on many points, and I agree with George Robinson on many points. I'm willing to discuss all of these things on their own conceptual and moral merits, beyond many of the overly high-level responses I've seen here.