|Gold! Always believe in your soul. You've got the power to know|
you're indestructible. Always believe because you are gold.
There’s some seriously horrible shit. I’m going to be talking about something funny. Ironically funny.
Friedman uses a Federal Reserve decision that badly worsened the American economy during the Great Depression to argue that the Fed should lose much of its power. Sounds like it fits in with conservative orthodoxy. It would, coming from one of the men whose ideas pretty much invented America’s conservative orthodoxy today.
Wait for it.
One of the major causes of the spiralling death fire of the Great Depression was banks collapsing. They didn’t have enough liquidity to deal with a bank run – too many people were panicking and withdrawing their money, and the banks didn’t have enough cash on hand to give it all out and keep running.
The Federal Reserve at the time held to a very strict principle that the government should interfere in the economy as little as possible. So central bank leaders gave no assistance to the banking sector.
|Yeah, I'm just going to walk into the bank with a car-sized rock of gold.|
In 1933, England left the gold standard because bank runs were dangerously depleting the country’s gold reserves. In 1934, the United States did the same.
But before 1934, the United States was still on the gold standard. If the government were to give private banks liquidity assistance, they’d literally have to fork over huge amounts of gold from their own reserves to the banks.
Under the gold standard, it’s impossible to revalue currency by printing more. Because currency is linked to gold, only the shifting value of gold can change the value of currency. A central bank can’t change interest rates either, because the value of gold is stable no matter what an interest rate would be. So gold replaces currency in borrowing.
Since American currency’s value was pegged to gold, there was no way to introduce liquidity into the country’s financial system to prevent catastrophic bank collapses.
Because bank collapse was a central cause of the Great Depression, Friedman argues that the refusal of the Federal Reserve to inject liquidity into the banking system was a key cause of that collapse.
|Yes, Milton Friedman argued for the actions Barack Obama would|
eventually do fifty years later. Conservatives called him a
communist, but Obama was following – probably without knowing
it – the advice of a paradigm new liberal.
It’s an extra level of irony that Friedman makes this argument to show that the Federal Reserve needs less power. Central bankers, with their loyalty to the gold standard, should never have had the power to prevent the government from keeping the economy afloat in a dangerous time.
It’s an even more brain-busting intensity of irony that Friedman’s popular heirs in the 21st century, radical economic libertarians, want to return to the gold standard because they believe that it stabilizes an otherwise too-dynamic economy.
Getting painful to think about yet?