Bernanke's essays on the depression: gold hoarding...

Discussion in 'Economics' started by scriabinop23, Mar 13, 2008.

  1. From chapter one of his essays (i'm still reading), he makes the point that monetery supply contractions were an obvious cause. Look whats happening now... hoarding of gold and oil in inducing an actual reduction of money supply in circulation. Sounds familiar? He's not such an idiot as every one claims... Read the last 3 paragraphs in particular ... Almost calling current events to a T...

    Here he writes throughout:

    As noted, a striking aspect of the short-lived interwar gold standard was the tendency of the nations that adhered to it to suffer sharp declines in inside money stocks. To understand in general terms why these declines happened, it is useful to consider a simple identity that relates the inside money stock (say, M1) of a country on the gold standard to its reserves of monetary gold:

    M1 = (M1/BASE) x (BASE/RES) x (RES/GOLD) x PGOLD x QGOLD (1)


    M1 = M1 money supply (money and notes in circulation plus commercial bank deposits),

    BASE = monetary base (money and notes in circulation plus reserves of commercial banks),

    RES = international reserves of the central bank (foreign assets plus gold reserves), valued in domestic currency,

    GOLD = gold reserves of the central bank, valued in domestic currency = PGOLD x QGOLD,

    PGOLD = the official domestic-currency price of gold, and

    QGOLD = the physical quantity (for example, in metric tons) of gold reserves.

    However, in 1931 and subsequently, the large declines in the money-gold ratio that occurred around the world did not reflect anyone's consciously chosen policy. The proximate causes of these declines were the waves of banking panics and exchange-rate crises that followed the failure of the Kreditanstalt, the largest bank in Austria, in May 1931. These developments affected each of the components of the money-gold ratio: First, by leading to rises in aggregate currency-deposit and bank reserve-deposit ratios, banking panics typically led to sharp declines in the money multiplier, M1/BASE (Friedman and Schwartz 1963; Bernanke and James 1991). Second, exchange-rate crises and the associated fears of devaluation led central banks to substitute gold for foreign exchange reserves; this flight from foreign-exchange reserves reduced the ratio of total reserves to gold, RES/ GOLD. Finally, in the wake of these crises, central banks attempted to increase gold reserves and coverage ratios as security against future attacks on their currencies; in many countries, the resulting "scramble for gold" induced continuing declines in the ratio BASE/RES.

    A particularly destabilizing aspect of this process was the tendency of fears about the soundness of banks and expectations of exchange-rate devaluation to reinforce each other (Bernanke and James 1991; Temin 1993). An element that the two types of crises had in common was the so-called "hot money," short-term deposits held by foreigners in domestic banks. On one hand, expectations of devaluation induced outflows of the hot-money deposits (as well as flight by domestic depositors), which threatened to trigger general bank runs. On the other hand, a fall in confidence in a domestic banking system (arising, for example, from the failure of a major bank) often led to a flight of short-term capital from the country, draining international reserves and threatening convertibility. Other than abandoning the parity altogether, central banks could do little in the face of combined banking and exchange-rate crises, as the former seemed to demand easy money policies while the latter required monetary tightening.

    From a theoretical perspective, the sharp declines in the money-gold ratio during the early 1930s have an interesting implication: namely, that under the gold standard as it operated during this period, there appeared to be multiple potential equilibrium values of the money supply. Broadly speaking, when financial investors and other members of the public were "optimistic," believing that the banking system would remain stable and gold parities would be defended, the money-gold ratio and hence the money stock itself remained "high." More precisely, confidence in the banks allowed the ratio of inside money to base to remain high, while confidence in the exchange rate made central banks willing to hold foreign exchange reserves and to keep relatively low coverage ratios. In contrast, when investors and the general public became "pessimistic," anticipating bank runs and devaluation, these expectations were to some degree self-confirming and resulted in "low" values of the money-gold ratio and the money stock. In its vulnerability to self-confirming expectations, the gold standard appears to have borne a strong analogy to a fractional-reserve banking system in the absence of deposit insurance: For example, Diamond and Dybvig (1983) have shown that in such a system there may be two Nash equilibria, one in which depositor confidence ensures that there will be no run on the bank, the other in which the fears of a run (and the resulting liquidation of the bank) are self-confirming.
  2. plugger


    Hi Scri, where did you get the essays? I'd be very interested in reading them. Thanks.
  3. Back then it shocked them with a Crash and surprise.

    This time, it will creeep up slooooowwww, like a "drive By" on the American SHeoople.

    It will not be a "SHOCK" but a "Oh shit", i should have noticed that things are FUKD UP.

    We have 10 to 15 years to go of serious Inflation, housing deflation, (Stagflation?) Job losses, FUBAR beyond most peoples means.

    It is just the start of a long long long downward sprial.

    The smart money is already taking advantage of "Bullish" areas in the GLobal Venue.

    However, most SHeoople will still keep their dollars in US banks, will still spend beyond their means, will still stick their head in the sand.

    HUGE OPORTUNITIES are in front of everyone right now. JUST WAKE THE FUCK UP!
  4. Daal


    I dont think thats happening at all. for every gold buyer there is a seller, money supply doenst change, a massive demand to withdraw phisical currency from banks would have the same effect as gold hoarding but I think that would only happen if a big bank failed or the FDIC failed, but then the fed and treasury would step in with MASSIVE intervention to prevent currency hoarding
  5. ZBEAR


    Here's my thinking.
    And BTW - I don't claim to "Know" I'm probably wrong
    about lots of things....... I'm just Mr Mom & Pop.
    ..... and I love to be shown how I'm please do....
    but do so in a mannerly manner if you please.

    I see the Golden Rule:
    ...He who owns the gold - makes the rules.
    Who owns the gold - The one form or another.
    They got gold down to where they could buy it back...and they have.

    President FDR essentially did the same thing during his term... by making it illegal to own.
    Once it was legal again... it went for twice the price.

    I think that the Gold Standard has always worked.....
    I think that fractional reserve banking has never worked.
    History bears me out on this.
    It is a scheme for the Super Rich / Daddy Warbucks......
    To keep ahead of the pack with their incredible BullShiiiii.

    Having the FED in charge of the Banking system is like having
    Dracula in charge of the Blood Bank.

    Like Jimmy Rogers said yesterday...... get rid of em.

  6. you're right about that. money supply isn't changing in this situation discretely. But at the same time, we have a deflationary cycle in credit occuring (housing, credit markets) in parallel..

    So the next effect appears similar. Bank losses have resulted in a contraction of total money supply. At the same time, you never hear the end of gold and oil as the new investment class (detached from s/d fundamentals now) as the currency is falling off the cliff.

    His paragraph of:

    Second, exchange-rate crises and the associated fears of devaluation led central banks to substitute gold for foreign exchange reserves; this flight from foreign-exchange reserves reduced the ratio of total reserves to gold, RES/ GOLD. Finally, in the wake of these crises, central banks attempted to increase gold reserves and coverage ratios as security against future attacks on their currencies; in many countries, the resulting "scramble for gold" induced continuing declines in the ratio BASE/RES.

    Looks like today... But replace central banks with 'Foreign and local wealth'. Dumping the dollar (flight from foreign exchange reserves), then simultaneously buying gold/oil ... both are moves in the same direction -- away from the dollar. And (BASE/RES), according to Bernanke, is an equal contributor to M1 circulation just as money multiplier.
  7. From the essay:

    Because the ratio of inside money to monetary base, the ratio of base to reserves, and the ratio of reserves to monetary gold were all typically greater than one, the money supplies of gold-standard countries—far from equalling the value of monetary gold, as might be suggested by a naive view of the gold standard—were often large multiples of the value of gold reserves. Total stocks of monetary gold continued to grow through the 1930s; hence, the observed sharp declines in inside money supplies must be attributed entirely to contractions in the average money-gold ratio.

    Suspended at the beginning of World War I, the gold standard had been laboriously reconstructed after the war: The United Kingdom returned to gold at the prewar parity in 1925, France completed its return by 1928, and by 1929 the gold standard was virtually universal among market economies. (The short list of exceptions included Spain, whose internal political turmoil prevented a return to gold, and some Latin American and Asian countries on the silver standard.) The reconstruction of the gold standard was hailed as a major diplomatic achievement, an essential step toward restoring monetary and financial conditions—which were turbulent during the 1920s—to the relative tranquility that characterized the classical (1870-1913) gold-standard period. Unfortunately, the hoped-for benefits of gold did not materialize: Instead of a new era of stability, by 1931 financial panics and exchange-rate crises were rampant, and a majority of countries left gold in that year. A complete collapse of the system occurred in 1936, when France and the other remaining "Gold Bloc" countries devalued or otherwise abandoned the strict gold standard.

    Table 1 illustrates equation (1) with data from six representative countries. The first three countries in the table were members of the Gold Bloc, who remained on the gold standard until relatively late in the Depression (France and Poland left gold in 1936, Belgium in 1935). The remaining three countries in the table abandoned gold earlier: the United Kingdom and Sweden in 1931, the United States in 1933. [Throughout this lecture I follow Bernanke and James (1991) in treating any major departure from gold-standard rules, including devaluation or the imposition of exchange controls, as "leaving gold."] Of course, the gold leavers gained autonomy for their domestic monetary policies; but as these countries continued to hold gold reserves and set an official gold price, the components of equation (1) could still be calculated for those countries.

    Gold standard doesn't sound so good. A useless metal, and a failed policy tool. Currency strength and innovation comes from smart planning and aggregrate supply growth that keeps up with aggregrate demand growth.
  8. ZBEAR



    Yes, I read it previously, thank you.

    I just don't buy it.
    """Naive views on the Gold standard etc...
    Banking failures by the scores etc...

    ........ right.....because the FED engineered drive out the competition.

    It's the typical "party line"
    Like I say... I struggle to understand.... so I respectfully say all this.

    I guess I subscribe more these points of view.

    Thanks for the post.....
  9. blah blah blah yada yada
    standard keynesian/monetarist recount of the 20's and 30's.
    you've got to read austrian economists to find out what really happened then.
    what Bernanke's papers don't tell you is that before the crises, there was a huge expansion of money and credit supply ala Greenspan. When creditors and paper holders started to ask for their money and discovered it was gone (just like todays MBS and CDOs) financial markets paralized in fear.
    Bernanke is saying it all happened because central banks could not print more money due to the gold standard.
    Now he can print all the money he wants and now hes discovering all his theories are wrong.
    The solution is simple let the morons who bought and the crooks who sold bad paper to pay for their excesses. When the market is finished purging those bad assets, that's the end of the crisis.
    You can't replace destroyed wealth with monetary magic. Just like when someone dies no Dr Frankestein or Dr Bernankestein can bring him back to life, all you can do is bring him to the cemetery.
  10. ZBEAR


    There it is !

    #10     Mar 13, 2008