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Comment by mmaunder | Hacker News Reader

There's a school of thought that blames the gold standard for the great depression. The French accumulated massive amounts of gold between 1928 and 1932 and some scholars say the global deflationary effects of Bank of France's policy during this time caused the great depression.

The gold standard also ties money supply to gold production which is a little like tying fed policy to the quarterly flip of a coin. For example, the Australian and Californian gold rushes of the 1850's caused huge short term price instability.

I'd counter the above statement with the following:

Many problems were solved with our departure from the gold standard and paper money is backed by the faith and credit of the country that prints it and it's value should, and does, fluctuate accordingly.

But arguing with an anonymous "smartest man in Europe" is a little like arguing with Santa.

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The gold standard was not the cause of the Great Depression; the collapse of the investment bubble created by the Federal Reserve, along with the interruption of international trade by the Smoot-Hawley Tariff Act caused the initial problem. Subsequent interference in the economy by both Hoover and FDR extended the problems.

The gold standard merely prevented the government from inflating away the dollar and using inflation to hide the consequences of other bad policies. Its a form of discipline that the founders wisely put in place to prevent the disastrous policies that many other governments have perpetrated throughout history.

But now the constraint of the gold standard is off and much larger bubbles can be created.

The supply of gold changes very slowly. The vast majority of all gold ever mined is still part of the supply. Its the manipulation of the value of paper currency that causes demand for gold to fluctuate.

It's not that simple. The gold standard basically established an international monetary union, similar to the Euro today.

In such a setting, long-term trade imbalances cannot be balanced out by exchange rate adjustments, so there is a very real danger that countries are drained of money by running net imports in the long term. While this then prevents the country from net importing even more - which is only fair - it also reduces the purchasing power of the country's population internally.

The circulation of money is slowed, causing unemployment and the very bizarre situation where people cannot afford to buy desired XYZ, while at the same time there are involuntarily unemployed producers of XYZ. Everybody's unhappy, simply because the social construct of money ties their hands.

By decoupling from the gold standard, countries left what was effectively a currency union, which enabled them to restart internal circulation.

This is also the choice that Greece has right now, which this supposed "smartest man" does not, or for ideological reasons refuses to, see: leave the currency union to restart internal circulation of a new currency.

We went off the gold standard in 1914. There was a minor depression in 1920, but the government did nothing and it resolved itself. In 1929, the government decided to abandon that policy and took action, and by 1933 the use of gold as money in the USA was forbidden by executive order.

When you criminalize the wealth of the country, it is hard to blame people's use of that wealth for the problem. By 1933 it was literally a crime for money (in the form of gold) to circulate, and much of it was sent overseas to hide it.

Starting a new currency is only an option if they restructure also the debt. Having a new currency and owing the money in euros won't help much.

  Many problems were solved with our departure 
  from the gold standard

Such as having to give the Saudis, and now the Chinese, all our gold. Instead we give them paper, and they then reinvest that paper in:

  * internet companies
  * enron
  * property
  * banks

And now, governments! http://blogs.reuters.com/felix-salmon/2011/07/15/the-horrify...

Fancy.

Well, the collapsing credit money couldn't be offset by more printed paper money; so that's what made the Depression cut so deep. But the credit money was only able to collapse because it had gotten so high in the first place.

Whether your money is a bank account, commercial bonds, government bonds, or gold; it doesn't pay to have fluctuations in total volume. Keeping the base (i.e. gold or dollars) fixed won't stop the banks (and governments) from borrowing and loaning more every year, until a crisis shows them that they have gone too far.

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