The appeal of the Gold Standard is that classic image of the Gold Coin in the minds of people. It is a concrete mental picture. Our paper money system is something else. People know the Federal Reserve dollars are slowly losing value (“inflating”). The gold coin you see in your mind’s eye is more than just a physical object; it is a belief in permanence, a belief in objective reality (and in some sense, “natural law” i.e. chemistry, mechanics).
Economists would want to promise a “Stable Price Level” as a monetary standard. It is not believable. The Federal Reserve cannot even “manage expectations” about their plans for interest rates in 2016. Seeking this elusive ideal, government “planning” crowds out financial planning by individual families and businesses, because “the language of future prices/values” becomes fuzzy. The ideal of their success – a “stable price level” – is not believable (another example, perhaps, of believing in unicorns).
The graph below shows with a RED LINE the relative growth rate of the U.S. Economy and the BLUE LINE shows the relative growth rate of the Rest of the World’s economies. The connection is that foreign demand pulls exports from the United States for use in foreign countries. Imports are what Americans demand to add to domestic production to create U.S. economic growth. Imports increase when the economy grows, and they increase faster when the USA grows faster. (“Production” is an inclusive term meaning whatever increases individual standards of living and personal flourishing, even if it is a cheap toy from China “to produce” your baby’s smile.)
The RED LINE also shows what has happened to the CAPITAL ACCOUNT in the Balance of Payments. The Capital Account has been in consistent SURPLUS both because the Rest of the World demands U.S. Dollars in the form of U.S. Treasury bonds, but also because foreign nationals need to buy real estate and build factories in a country where the government does not confiscate wealth and infringe liberty as much as in, e.g., China.
The graph on the left side begins with the Smoot-Hawley Tariff of 1929-30. The stock market crash happened when the House of Representatives passed the bill in October 1929 and the Great Depression began (after a stock market recovery) the following spring of 1930 when the Senate passed and President Hoover signed the Tariff Act, dramatically increasing the tax Americans had to pay for anything imported.
Since the Rest of the World, particularly Europe, in 1930, could not so easily sell goods to Americans (who had to pay the tariff-tax on imports), they stopped buying large volumes of agricultural exports from the Midwest.
SAY’S LAW: Foreign buyers need to raise money to buy US goods, and if their own sales have been taxed to minimal, they no longer can pay US farmers.
That caused small banks in those small farm towns to collapse, which rapidly spread to collapse in the money-center banks. The rest of the story is well known. The Great Depression lasted over a decade. Thank you, government policy Hoover-F.D.R. “admininstrative state.”
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