> Except for the multiple decades post-WW2 with Bretton Woods.
Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold, instead of just dropping the pretense altogether as was done in the early 1970s when Bretton Woods fell apart). No US money was backed by gold at all (not even United States Notes, which were still in circulation) after the FDR administration confiscated all private gold holdings and suspended redemption indefinitely in 1933.
> being on the gold standard didn't seem to help with inflation in the US during the 1920s
To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913. A significant amount of that money was in circulation in the 1920s. Plus, even United States Notes, which were notionally backed by US gold reserves, were not expected to be redeemed for gold in any great quantities, since paper money was so much more convenient than gold for transactions; so the fact that those notes were notionally backed by gold did not have much practical effect on their exchange value. What did have a practical effect was the fact that United States Notes and Federal Reserve Notes exchanged at par (one dollar of each was required to have the same exchange value), so as more Federal Reserve Notes were printed, the exchange value of United States Notes dropped.
> Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold,
If USD was not linked to gold, why was a multi-country agreement needed to change the value of the US dollar to gold?
> To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913.
The Federal Reserve was limited to how much money it could "print" by the 1920s, which is why the article explicitly used that time period to make its point:
> It's not clear cut when exactly the U.S. was on or off the gold standard. We suspended it in July 1914 when the onset of World War I precipitated a domestic financial crisis. We then re-established the full gold standard in December 1914 after an aggressive policy response stabilized the financial system. This continued until we entered the war, and subsequently partially embargoed gold exports starting in September 1917. The gold standard was still in effect domestically -- meaning people could trade dollars for specie -- but not internationally. These restrictions on gold exports continued until June 1919, at which point we returned to the full gold standard. I have started from this last date, because there is no question that we were operating under the gold standard at this point. For more, read this superb Federal Reserve paper on the history of the gold standard from World War I through the Great Depression.
This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991):
> However, Temin (1989) argues that, once these destabilizing policy measures had been taken, little could be done to avert deflation and depression, given the commitment of central banks to maintenance of the gold standard. Once the deflationary process had begun, central banks engaged in competitive deflation and a scramble for gold, hoping by raising cover ratios to protect their currencies against speculative attack. Attempts by any individual central bank to reflate were met by immediate gold outflows, which forced the central bank to raise its discount rate and deflate once again. According to Temin, even the United States, with its large gold reserves, faced this con- straint. Thus Temin disagrees with the suggestion of Friedman and Schwartz (1963) that the Federal Reserve's failure to protect the U.S. money supply was due to misunderstanding of the problem or a lack of leadership; instead, he claims, given the commitment to the gold standard (and, presumably, the absence of effective central bank cooperation), the Fed had little choice but to let the banks fail and the money supply fall.
The economies of most countries started to recover once they left the gold standard as they could pump money into their systems to generate economic activity.
If there's not enough money in one's economy you can't do business. There are historical periods where economies literally ran out of money:
Note in particular this at the end of the section on fractional reserve money:
> Before leaving the subject of fractional reserve systems, I should mention one particularly bizarre variant -- a
fractional reserve system based on fiat money. I call it bizarre because the essential function of a fractional reserve
system is to reduce the resource cost of producing money, by allowing an ounce of reserves to replace, say, five
ounces of currency. The resource cost of producing fiat money is zero; more precisely, it costs no more to print a five-
dollar bill than a one-dollar bill, so the cost of having a larger number of dollars in circulation is zero. The cost of
having more bills in circulation is not zero but small. A fractional reserve system based on fiat money thus economizes
on the cost of producing something that costs nothing to produce; it adds the disadvantages of a fractional reserve
system to the disadvantages of a fiat system without adding any corresponding advantages. It makes sense only as a
discreet way of transferring some of the income that the government receives from producing money to the banking
system, and is worth mentioning at all only because it is the system presently in use in this country.
(By "this country" he means the US, although the US is not the only country with such a system.)
> Note in particular this at the end of the section on fractional reserve money:
> (By "this country" he means the US, although the US is not the only country with such a system.)
Actually the US is a country without such a system, i.e, the US (and most countries really) are not fractional reserve systems, and have not been in decades. James Tobin called this "The Old View" in 1963:
Fractional reserve banking is a nice 'Econ 101' way of thinking of the monetary system, but in no way does it match reality. It should really be stopped being taught because people hold onto the paradigm and it causes faulty analysis:
By the simple definition of "fractional reserve"--that a financial institution only needs to keep a fraction of its total liabilities as actual currency in its reserve pool, and must convert other assets into currency if withdrawals exceed that reserve amount--it most certainly is. That is how all financial institutions in the US work, just as in other countries.
It would be interesting to see a debate between Friedman and the other economists you reference, who obviously hold very different views. I don't think we're going to resolve any such differences here; I would simply note that there are such differences, and that the views of the economists you mention are not universal, nor are they necessarily correct.
> why was a multi-country agreement needed to change the value of the US dollar to gold?
By that time, as the article you linked to notes, redemption of US dollars to gold at $35 per ounce had already been suspended by Nixon. I was in error before when I said there had not been any such redemption possible since the FDR administration suspended it in 1933; Bretton Woods did re-establish that in 1944 (though IIRC it was at a different conversion rate than before 1933, so it was effectively a devaluation of the dollar).
The Smithsonian Agreement itself was about exchange rates of other currencies relative to the dollar; it was made because those other countries realized that the US had already gone off the gold standard (when Nixon suspended redemption), and they were trying to make the best out of the situation that they could.
> This limitation was one of the contributing factors of turning a market crash and economic downturn into deflation and the Great Depression. See James and Bernanke (1991)
While this might be true given that the Fed had already been given the power to manipulate the money supply, that does not mean it would not have been better still to not manipulate the money supply at all, and for the government to have simply done nothing after the stock market crash of 1929--as it did after market crashes in 1920 and 1987, neither of which led to prolonged recession or depression.
As for the more general point that printing money and "pumping" it into an economy can generate economic activity, that is of course true, but that does not mean doing that is the best way to generate economic activity. Moreover, being forced to do it in response to a crisis that was caused by government interference in the economy to begin with, which has been the case in every instance I'm aware of where fiat money or paper currency was involved, is not a good argument for it being a good idea.
Um, what? The Bretton Woods agreement was part of "the fiat currency situation we now find ourselves in" (just an earlier stage of it where the government was still trying to pretend to some sort of "linkage" with gold, instead of just dropping the pretense altogether as was done in the early 1970s when Bretton Woods fell apart). No US money was backed by gold at all (not even United States Notes, which were still in circulation) after the FDR administration confiscated all private gold holdings and suspended redemption indefinitely in 1933.
> being on the gold standard didn't seem to help with inflation in the US during the 1920s
To call the monetary regime in place in the 1920s "the gold standard" is a serious misnomer. The Federal Reserve was created and authorized to print money (Federal Reserve Notes, not backed by gold or anything else) in 1913. A significant amount of that money was in circulation in the 1920s. Plus, even United States Notes, which were notionally backed by US gold reserves, were not expected to be redeemed for gold in any great quantities, since paper money was so much more convenient than gold for transactions; so the fact that those notes were notionally backed by gold did not have much practical effect on their exchange value. What did have a practical effect was the fact that United States Notes and Federal Reserve Notes exchanged at par (one dollar of each was required to have the same exchange value), so as more Federal Reserve Notes were printed, the exchange value of United States Notes dropped.