The trouble was that the exchange rate of dollars for gold was kept fixed, while the Fed had been inflating the currency since 1914. By 1930, the dollar had inflated by 85% or so, meaning that you could roughly double your money by trading dollars for gold.
This was why there was a giant run on the banks to trade for gold.
Similar sharp corrections happen every time an exchange rate gets fixed by law between two otherwise unrelated specie.
> The trouble was that the exchange rate of dollars for gold was kept fixed, while the Fed had been inflating the currency since 1914.
The Federal Reserve's gold reserve requirements and the gold price of the dollar were set by Congress.
> By 1930, the dollar had inflated by 85% or so
This is not the normal meaning of the word inflation. (Nor do I know where your 85% number comes from).
> meaning that you could roughly double your money by trading dollars for gold.
That's not what that means. If that were true then the gold standard would have failed the minute that gold was worth 1% more than its dollar equivalent.
> The Federal Reserve's gold reserve requirements and the gold price of the dollar were set by Congress.
Yes.
> This is not the normal meaning of the word inflation. (Nor do I know where your 85% number comes from).
Perhaps I should have said deflated. Anyhow, it comes from any of the various historical inflation calculators you can find on the internet.
> That's not what that means. If that were true then the gold standard would have failed the minute that gold was worth 1% more than its dollar equivalent.
I too find this surprising, but it happens again and again whenever one currency is artificially pegged to another - nothing happens for years, and then a wrenching correction.
Ok, so you subscribe to the notion that price increases equals "dollar inflation"
The fallacy in your thinking is that because prices increased, dollars were "inflated" vs. gold, in which prices would have otherwise remained fixed. But the gold supply increased dramatically over the same period.
As you point out prices increased ~75%, but at the same time US gold reserves increased nearly 3x. 2293 tons in 1913 vs 6358 tons in 1930:
Remember, the Fed still had a gold reserve ratio it was required to maintain. So as the money supply increased, so did its gold supply. You might seem to imply that the reserve ratio was getting smaller and smaller as part of "dollar inflation" evidenced by price level increase, while gold had a fixed quantity and value. This is not the case.
The value of gold is not determined by the quantity the Fed has. The global supply of gold did not increase 3x. The Fed kept a fixed exchange rate for gold, while inflating the currency supply. As I said, such pegged systems inevitably result in a sharp correction.
> The Fed kept a fixed exchange rate for gold, while inflating the currency supply.
"inflating" the current supply of what? dollars? As noted the reserve ratio did not decrease. As there were more dollars there was more gold backing it.
This was why there was a giant run on the banks to trade for gold.
Similar sharp corrections happen every time an exchange rate gets fixed by law between two otherwise unrelated specie.