Gold is Innocent

Memo To: Washington Times Letters Editor
From: Jude Wanniski
Re: Gold and the Great Depression

I'm an old friend of Paul Craig Roberts and a great admirer of his column, but I have to disagree with his March 29 effort, which blames the Great Depression on the U.S. Federal Reserve Board. It is not unusual for modern commentators like Craig to take that position because Milton Friedman holds to that view, and any number of Keynesians and Austrians do as well. Robert Samuelson of Newsweek made the same argument in his column early last month.

The issue is of extreme importance because I believe it is absolutely necessary for the United States to return to a gold-linked dollar. Since Richard Nixon broke the gold link in 1971, the world has gone through a series of financial convulsions and energy crises -- the result of errors made by the Federal Reserve that would not have been made if we had been on a gold standard. The Asian crisis of 1997-98 was caused by the Fed's deflation, I believe. The current energy crisis that bedevils much of the world, not only California, is another consequence of the Fed deflation.

In the course of researching and writing The Way the World Works in 1977, I discovered that the cause of the 1929 Wall Street Crash was the emerging Smoot-Hawley Tariff Act, a fiscal event, not a monetary event. That is, when the tariff wall went up between domestic and foreign producers, inventories accumulated on both sides of the wall and prices had to fall for those inventories to be liquidated. There would have been a short recession, but to recover lost revenues, President Herbert Hoover raised the top income tax rate to 63% from 25%. This made it far more difficult for producers to exchange goods over the domestic tax wall. President Franklin Roosevelt made the situation worse by raising the top rate to 91% and hiking the capital gains tax.

There could be no blame attributed to the Fed, as Craig and Samuelson do, because the Fed was created in 1913 to manage the gold standard. This meant the Fed had to supply dollar liquidity to the banks when the banks asked for it, as long it did not disturb the dollar gold price of $20.67 per ounce. It was the Fed's job to maintain the value of the unit of account, the standard of measure of the paper dollar, by keeping it as good as gold.

There are assertions that the Fed should have acted as the lender of last resort, but in 20 years of looking, I can find no evidence that the Fed turned away any eligible commercial paper at its discount window. If Craig or anyone else can find such evidence and present it, we could then consider the possibility that the Fed contributed to the problem. But even if he can find what I cannot, the contribution had to be trivial when set against the enormous damage done by the tariff and tax hikes.

America's commitment to keeping the dollar as good as gold in the Great Depression was the only reason we did not experience a far worse economic decline, a "Great Stagflation." This might have meant the victory of the Axis Powers in WWII. As it was, we were able to finance the great cost of WWII at 2% interest rates, as bond buyers were assured that when their bonds matured, they would get back hard, gold-equivalent dollars, not an inflated currency.

Economists who have been trained for more than a half century to attribute part or all of the Great Depression to the Federal Reserve and the gold standard need to re-examine that thesis in light of my thesis that the whole of the 1929 Crash and Depression can be explained by fiscal errors, the tariff and tax policies of Hoover and FDR. Once the role of gold can be rehabilitated, it can serve as a guide in the new international monetary system envisioned by Robert Mundell, the godfather of supply-side economics and the euro.