“The gold standard remains the best available monetary mechanism”

< UPDATE: See an updated version of this piece here >

This is from the Bank of International Settlements third annual report publish in May 1933:

“For the Bank for International Settlements, the year has been an eventful one, during which, while the volume of its ordinary banking business has necessarily been curtailed by the general falling off of international financial transactions and the continued departure from gold of more and more currencies, culminating in the defection of the American dollar, nevertheless the scope of its general activities has steadily broadened in sound directions. The widening of activities, aside from normal growth in developing new contacts, has been the consequence, primarily, of a year replete with international conferences, and, also, of the rapid extension of chaotic conditions in the international monetary system. In view of all the events which have occurred, the Bank’s Board of Directors determined to define the position of the Bank on the fundamental currency problems facing the world and it unanimously expressed the opinion, after due deliberation, that in the last analysis “the gold standard remains the best available monetary mechanism” and that it is consequently desirable to prepare all the necessary measures for its international reestablishment.”

Take a look at the report. The whole thing is outrageous – the world is falling apart and it is written very much as it is all business as usual. More and more countries are leaving the the gold standard and there had been massive bank runs across Europe and a number of countries in Europe had defaulted in 1932 (including Greece and Hungary!) Hitler had just become chancellor in Germany.

And then the report state: “the gold standard remains the best available monetary mechanism”! It makes you wonder how anybody can reach such a conclusion and in hindsight obviously today’s economic historians will say that it was a collective psychosis – central bankers were suffering from some kind of irrational “gold standard mentality” that led them to insanely damaging conclusions, which brought deflation, depression and war to Europe.

I wonder what economic historians will say in 7-8 decades about today’s central bankers.


Reading recommendation of the day: Lords of Finance – The (Central!) Bankers who Broke the World

Completely unrelated take a look at this story about Bundesbank chief Jens Weidmann.

Meanwhile in Greece you have this and in Hungary you have this.

Draw your own conclusions…

Leave a comment


  1. “I wonder what economic historians will say in 7-8 decades about today’s central bankers.”

    Easy one. “And they were targeting WHAT!? The CPI rate? Were they INSANE?”

  2. In the Weidmann piece he says:
    “Our role as central banks is to guarantee price stability in the Eurozone. I’m convinced that the future of the euro is fundamentally linked to the support of the population, and that this support depends on the confidence Europeans have in the stability of their money.”

    Interesting how despite adding to the balance sheet that there is still deflation. Doesn’t he know that isn’t price stability and erring on the downside with no bottom isn’t better than up?

    Then he says:

    “You have to find the equilibrium between economic necessities and political limits,” he said. “Reforms in countries that receive aid are necessary: they may be hard, but they permit the country to pick itself up and not depend indefinitely on others.”

    I translate that from banker speak to: the beatings will continue until morale improves. It is eventually headed for Germany because that kind of monetary policy can never work for anyone, and then, suddenly printing money may not look so bad.

    Just pass some perhaps positive info along, Mitt Romney is talking about the need for rising national income during his campaigning. I don’t know exactly what he means by that, but that is a very interesting choice of words.

  3. Ravi

     /  May 31, 2012

    This is from Bloomberg, and simply shows why this crisis won’t end any time soon: “It’s not our mandate” and “not our duty” to “fill the vacuum left by the lack of action by national governments,” Draghi said in Brussels today. “The ECB will continue lending to solvent banks and will keep the liquidity lines active and alive with solvent banks.”
    Responding to criticism that the ECB’s liquidity policies are stoking inflation, Executive Board member Joerg Asmussen said on May 24 that there is “no reason to question our commitment to price stability.”
    “If inflationary risks were to emerge, we would take the necessary action to prevent these risks from materializing and withdraw any excess liquidity,” Asmussen said. Still, euro- region inflation will probably remain “close to, or slightly below, 2 percent for the foreseeable future.”

    Draghi thinks this is a banking crisis (not an NGDP crisis), and some questioner is still concerned about inflation – this cannot end well.

  4. Agreed – this whole thing is extremely depressing. They talk about “price stability” but they seem to define that asymmetrically. 5% deflation is better than 5% inflation. It is horrible and they are playing with fire. I guess nobody in Frankfurt studied economic history.

  5. Guest

     /  May 31, 2012

    While the video footage showing the Hungarian radicals is certainly alarming, however our domestic situation is not quite as unstable as in Greece’s case. The presence of right wing-radicals in mainstream political discussion is unfortunately by no means a new phenomenon. And while their sudden emergence (they practically had no support before 2010) can be attributed to the economic crisis (in my experience, the number of political radicals in any economic system is directly proportional to the depth of the crisis of the given economic system), it has more to do with the decline in the support of the post-communist MSZP party, supporters of which have now switched to voting for Jobbik (the right-wing radical party). Jobbik’s main “enemy” is however, not the the economic crisis, but the minority Roma people (although their anti-estabilishment and anti-capitalist tone must also be noted), contrary to the Greek extremists.
    As for the video shown above, the protest was organised in the memory of a highly controversial murder back in the 1890’s when the populace of a village accused the local Jewish community with the disappearance of a 14-year-old girl, quickly withdrawing the accusations following a nationwide scandal and a prime ministerial intervention – shortly, a plainly domestic issue.

  6. Guest, thanks for the comment.

    I certainly agree – that the Hungarian situation is different for the Greek situation. I, however, am deeply concerned the main opposition to Fidesz (the governing party) today is not (classical) liberals, but the quasi-fascist Jobbik.

    I better not write too much about the Hungarian political situation, but I must say that it is depressing to have little extent there is any support for real economic reform in Hungary. Fidesz has as governing done very little if anything to reform the country. That concerns me a lot.

    It is further concerning that some of the rhetoric we would hear form Jobbik you from time to time would hear from government officials.

  7. Guest

     /  June 1, 2012

    Indeed, the liberal opposition is compromised mostly of fragmented, so-called civilian platforms, with diverse ideologies – ranging from liberal to Chavezist – and the situation is further complicated by the fact that the term liberal itself is now considered pejorative in right-wing discussion, and the paradoxic term “liberalbolsevist” or less bluntly, “socliberal” (thankfully to respectively Jobbik and Fidesz propaganda) term is also common. The government itself is more pragmatic with it’s radical rhetoric (and it’s working) than Jobbik, but their financial agenda is basically nonexistent, consisting of creating very-business disruptive sectoral taxes in order to fill in the holes of the budget. The whole situation would make an intriguing case study of the possible political and psychological consequences of long-term economic mismanagement (we are talking about a post-communist country after all), but that would likely carry this discussion to far from the original topic.

  1. No Nouriel, I am no longer optimistic – it feels like 1932 « The Market Monetarist
  2. 1931-33 – we should learn something from history « The Market Monetarist
  3. The painful knowledge of monetary history « The Market Monetarist
  4. BIS is fearful of bubbles, but is not always right (remember the gold standard?) | The Market Monetarist
  5. Mussolini’s great monetary policy failure | The Market Monetarist

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