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Letters by a modern St. Ferdinand III about cults

Gab@StFerdinandIII -

Plenty of cults exist - every cult has its 'religious dogma', its idols, its 'prophets', its 'science', its 'proof' and its intolerant liturgy of demands.  Cults everywhere:  Corona, 'The Science' or Scientism, Islam, the State, the cult of Gender Fascism, Marxism, Darwin and Evolution, Globaloneywarming, Changing Climate, Abortion...

Tempus Fugit Memento Mori - Time Flies Remember Death 

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Monday, March 26, 2012

Great Depressions and Gold Standards

From hard metals to mysticism.

by StFerdIII

 Churchill was blamed by Keynes and sundry revisionist historians for putting Britain back onto the gold standard on January 1 1926 and thereby 'cementing' an artificially high Pound sterling rate to the US$, abetting a rush to the Great Depression. Neither gold, nor the gold standard caused the Great Depression. Nor does a high currency exchange rate cause by itself an economic contraction. The Great Depression was caused in the main by two factors, namely; central banks attempting to manipulate market forces; and state governments increasing taxation which curtailed capital and investment, whilst trying desperately to pay of the debts of the First World War. By the mid 1920s for example over 40% of the UK's budget was used to pay off war debt.

When most major economies had returned to the gold standard by the mid 1920s there was a marked shift from unproductive ossified industries such as mining and cotton production; to new more dynamic sectors such as advanced manufacturing of cars, consumer products and electronics. The mechanism of the gold standard [see here] also exerted a tight discipline on national finances and for major powers like Britain provided positive trade balances.

Economies began to 'take off' and the 'roaring 20s' were born during the middle years of that decade. The decline began with France. The French fearful of British trade dramatically lowered the exchange rate of the Franc and began to redeem British Pound Sterling for English bullion. Instead of issuing a paper note against these gold inflows [which the gold standard 'rules' mandated]; the French hoarded or 'sterilized' the inflows. This held down domestic inflation. In normal operations the English central bank would then increase rates to re-attract gold inflows. But given the existing threat of deflation the English central bank decided to do nothing and instead appealed to the US central bank to lower American interest rates and discount rates to banks; in order to reverse the outflow of British gold by making British rates artificially higher. This enacted what Bernanke has preached for the past 5 years – an easy monetary policy of near zero rates and liquified US banks through central bank money-printing. In 1927, these policies unleashed a torrent of US speculative and investment furor in US stock markets and new industrial ventures. Stock markets soared around the world, and money poured into both equities and business investments. The 20s were indeed roaring.

By the middle part of 1928 the US central bank was alarmed by this 'irrational exuberance' and reversed its easy money policy. Gold flowed out of England and Germany back to the higher interest rate environment in America. As in France, the US central bank hoarded the gold 'sterilizing' its effect on inflation and domestic prices. Yet at the same time, the expanded credit from easier policies was still coursing through world markets and investments, just as the gold base for that expanded credit was contracting and disappearing.

By 1929 the system became insupportable. Even worse governments had now prevented citizens from exchanging paper currency or IOUs for gold. The 19th century check on government policy was lifted. This meant that in effect central banks could mingle the restrictions of a gold standard with the extremely elastic effects of a controlled fiat currency. Market forces were principally excluded from exercising a restraint on the system, which they had enacted during the 19th century when world trade had increased by a factor of 10 times.

With the Americans and French hoarding gold a global money shortage developed. Deflation in wages and prices had to follow. The Depression was a cataclysmic decline in prices, wages, revenues, trade and monetary asset values. Central banks had ignored the 'rules' of the orthodox-19th century gold standard and cheated to keep their own economies stabilized. Monetary policy at once too loose and then too tight had precipitated investment and business cycle shocks and contractions. The gold standard – or more accurately the unorthodox gold-based system - was shattered. But it was not the orthodox gold standard but simply a set of policies which must be viewed as an evolution from 'hard money' based on metallic value, to 'soft money' premised on coloured paper with no metallic backing and only of value because governments have 'promised' to pay a certain current value for that piece of paper. A shift in other words from tangible asset based monetary and currency value; to something approaching mysticism and even blind faith. 

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