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From: plh@ukma.UUCP (Paul L. Hightower)
Newsgroups: net.politics.theory
Subject: Re: The gold standard.
Message-ID: <793@ukma.UUCP>
Date: Wed, 13-Feb-85 14:32:51 EST
Article-I.D.: ukma.793
Posted: Wed Feb 13 14:32:51 1985
Date-Received: Thu, 14-Feb-85 21:13:27 EST
References: <613@ukma.UUCP> <368@harvard.ARPA> <650@unmvax.UUCP>, <21296@lanl.ARPA>
Organization: Univ. of KY Mathematical Sciences
Lines: 23

>The Fed gave up the gold standard in 1933 due to rapid deflation causing
>a run on the gold reserves.  The proper course (to maintain the gold
>standard) would have been to cut back on the money supply.  The liberal
>politicians then in office didn't think this would be good, and they
>wanted a quicker, more responsive, solution.  Once off the gold standard,
>it's hard to return.
>
>J. Giles
>

Correction: a DEFLATION would lead to a rapid BUILD-UP of gold reserves, as 
people try to sell their gold before it declines further in value.  In this
case, the Fed should INCREASE the money supply to stem the fall in prices.

My impression of the economic history of the period is that, having contributed
to the market crash of 1929 by excessively inflating the money supply, the Fed
over-compensated in 1933, aborting an incipient recovery with a deflation.  
Those who object to the gold standard point to this as proof of its failure,
while supporters of the gold standard insist that the Fed failed to maintain
the standard.

Paul Hightower
University of Kentucky