Why Gold's Price Rose in the Great Depression

Recently by Gary North: Keynes, Crackpots, and Deflation

I keep coming back to this theme because the non-Keynesian, hard-money deflationists keep pitching the same old deliberately deceptive statement: “Gold’s price rose in the Great Depression.” They tell their readers to buy gold.

If there is price deflation, gold’s price will fall, unless there is a war or a non-monetary crisis.

These people never respond to my arguments. They pretend that I have not raised this issue. I have. Repeatedly. Examples:


There comes a point when readers who cannot make up their minds about who is right had better say to themselves: “I think I had better pay no attention to the guys who refuse to respond to North’s argument.”

Here is my argument.

THE STORY OF A GOVERNMENT-RIGGED COMMODITYThe United States government guaranteed the dollar-price of gold from the end of World War I until August 15, 1971. On that Sunday, Richard Nixon announced a new policy. The United States government would no longer redeem dollars for gold at $35/ounce when presented with dollars by foreign governments and central banks.

Until then, the world’s gold price had a floor: $35/ounce. Gold was a rigged commodity. It was not a free market commodity. Nobody sold gold below $35/ounce because the United States Treasury would buy gold at this price. The United States Treasury guaranteed a market for gold. It was not a free market.

This is always the meaning and effect of a government-guaranteed gold standard. For as long as the investing public believes that the government will not break its contract, gold’s price will not rise above or fall below the fixed price in the nation’s currency, except for transportation costs, which are very low in relation to the price of gold.

Under these circumstances, gold’s performance will be the same as money’s performance.

The reason why gold’s price did not fall during the price deflation of 1930—33 in the United States is because gold functioned as money, meaning paper money. Paper money held outside of banks appreciated. This is the meaning of price deflation: money appreciates. This is why there were bank runs, 1930—33. Depositors recognized that currency held outside of banks was safer than deposit receipts from banks, which were uninsured until 1934. They withdrew their money. Over 6,000 banks went under — but no New York City multinational bank. The Federal Reserve made sure of that.

There was a time, earlier than the nineteenth century, when government money was money only because the government redeemed money at a fixed price for gold. Gold supported the value of the government’s money.

After World War I and especially after World War II, gold was no longer money. It was merely a government-rigged commodity because it could be sold at a fixed price to the U.S. Treasury for money. It was illegal for Americans to own gold bullion, from 1933 to December 31, 1974.

There is no government-fixed price for gold today. Therefore, any argument based on the price of gold during the Great Depression, when gold coins were still money, is not just ill-informed; it’s deliberately deceptive. The editors who keep repeating this argument know what I have argued, but they prefer to keep their readers from examining my argument. They do not answer me. That is because they cannot answer me without departing from the logic of free market economics: supply and demand.

Gold was not a free market commodity from 1844, when the notes of the Bank of England were made legal tender and redeemable in gold, until August 15, 1971, when Nixon ended gold’s legal redeemability for foreign governments and central banks. Gold had a price support from the American government after the end of World War I: $20 an ounce through 1933; $35 after.

Roosevelt announced in 1933 that it was illegal for Americans to own gold bullion. He forced law-abiding Americans to turn in their gold to the government at $20 per ounce. Then, when the gold came in, he raised its price by 75%, to $35. The government pocketed the difference.

This was a devaluation of the dollar. The dollar’s gold content was reduced by 40%.

The Great Depression was an era of monetary deflation. Ours is not. The Great Depression was an era of systemic price deflation, 1930—33. Ours is not. The Great Depression was an era of a government-guaranteed floor price for gold. Ours is not.

Gold’s price did not rise until the United States government ceased selling gold at $35 per ounce to foreign governments and central banks. Nixon announced that policy on August 15, 1971.

Gold’s price bottomed in 2001 at $257. Gold was a rotten investment, 1980—2001: $850 to $257. Silver was worse: $50 to $4. Yet consumer prices rose by about 100%.

Fact: gold did terribly in a time of steady monetary inflation and steady price inflation. The precious metals bubble of 1979 popped in January 1980 in response to the FED’s tighter-money policy. Gold has never come back to its January 1980 peak: $2,100 in 1980 dollars.


With the exception of old-line deflationists Martin Weiss and Robert Prechter, today’s deflationists did not show up until a few years ago. The deflationist argument disappeared in the two decades of declining gold prices, 1980—2001.

At the same time, people who were interested in buying gold disappeared. So did the hard-money newsletter market. A lot of the gold bugs died. They left their gold coins or gold mining shares to heirs, who sold them.

The handful of companies that sold gold coins in the great precious metals boom, 1976 to January 1980, went out of business or shrank. There were never many of these firms, probably under a dozen with significant retail sales: Investment Rarities, Blanchard & Co., Camino Coins, and Don McAlvany.

Because gold did so poorly, 1980 to 2001, the number of people who had heard the story of gold in 2001 was tiny. Those who knew anything about it thought — correctly — “popped bubble.”

Then the monetary inflation of Greenspan’s Federal Reserve drove up the price of gold, beginning in the second half of 2001. I began promoting gold once again in October 2001.

The readers of the deflationist sites are newcomers. They were not investors in gold from 1980—2001, let along in 1970. They have no knowledge of the history of gold. They have almost no understanding of basic economic theory, whether Keynesian, Friedmanian, or Misesian. They are babes in the woods. Lambs to the slaughter. They are the blind who the equally blind are leading into the ditch.

They will buy gold because their deflationist guru told them to. This is good. Why? Because their deflationist guru is wrong. There will be price inflation. Their gold will appreciate.


Recently, I wrote a long article on the primary monetary crank of the modern world: John Maynard Keynes. It is titled “Keynes, Crackpots, and Deflation.” I showed how he got his economic ideas from two men who were universally regarded as monetary cranks in Keynes’ era. Keynes even acknowledged that they were regarded as cranks. Still, he praised them. One was an engineer, C. H. Douglas. He founded a movement called Social Credit. The other was Silvio Gesell. He served in the government of the one-week Bavarian Soviet Republic in 1919.

What is a monetary crank? Here is what I wrote in my article:

I define a monetary crank as someone who proposes a system of causation for money different from causation for other market phenomena. Ludwig von Mises subsumed monetary theory under the same logic that governs all market processes: Theory of Money and Credit. In contrast, a monetary crank tells us that private property, entrepreneurship, and the forces of supply and demand explain causation in the overall economy, but then insists that money is different, that government-created and government-planned money is required to balance supply and demand for all other goods and services. He abandons his theory of economic causation when he gets to money.

A monetary crank argues for supply and demand in the general economy. Then he exempts monetary theory from this analysis.

The supreme monetary crank of the twentieth century was Yale professor Irving Fisher. He was a contemporary of Mises. He wanted pure fiat money. He hated the gold standard. His influence is greater today in the realm of monetary theory than anyone else. That is because of the influence of his chief disciple, Milton Friedman.

Keynes tried to move economic theory away from strictly free market explanations of pricing, supply and demand, and employment. In other words, he was less of a monetary crank than Fisher. Keynes did not believe in either the pure free market or the gold standard. Fisher believed in the free market and fiat money. He was schizophrenic intellectually.

Fisher lost his personal fortune in the Great Depression. He was the inventor of the Rolodex. He lost at least $6 million and maybe $10 million. As John Kenneth Galbraith quipped: “This was a sizable sum, even for an economics professor.” He also lost his sister-in-law’s fortune. He became famous for this statement in September 1929. “Stock prices have reached what looks like a permanently high plateau.”

He did not understand monetary theory. He did not understand capital markets. He did not understand gold. But he is still widely regarded as the number-one expert in monetary theory.

In 1933, after he had lost his money, which the academic world knew, he persuaded a high-level academic journal to publish his essay that explained it all retroactively — which he had failed to see coming. This article is still widely quoted and highly regarded by academic economists. It was re-posted on the site of the Federal Bank of St. Louis. Its title: “The Debt-Deflation Theory of Great Depressions.”

Non-hard money economists who worry about price deflation still quote it. Examples:


But by far the most relevant reference to Fisher’s theory was Ben Bernanke’s famous 2002 “helicopter” speech. He cited Milton Friedman on the helicopter filled with currency. But Friedman got the idea of Fisher’s 1933 article. Bernanke wrote this.

Second, the Fed should take most seriously — as of course it does — its responsibility to ensure financial stability in the economy. Irving Fisher (1933) was perhaps the first economist to emphasize the potential connections between violent financial crises, which lead to “fire sales” of assets and falling asset prices, with general declines in aggregate demand and the price level. A healthy, well capitalized banking system and smoothly functioning capital markets are an important line of defense against deflationary shocks. The Fed should and does use its regulatory and supervisory powers to ensure that the financial system will remain resilient if financial conditions change rapidly. And at times of extreme threat to financial stability, the Federal Reserve stands ready to use the discount window and other tools to protect the financial system, as it did during the 1987 stock market crash and the September 11, 2001, terrorist attacks.

Beginning in October 2008, the FED has reacted just as he said it would. Hard-money deflationists say the FED cannot reverse price deflation. Bernanke said they are wrong.

But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation. . . .

Thus, as I have stressed already, prevention of deflation remains preferable to having to cure it. If we do fall into deflation, however, we can take comfort that the logic of the printing press example must assert itself, and sufficient injections of money will ultimately always reverse a deflation.

I agree with him. This is why I think gold is a good long-term investment. That is because I think the FED can and will inflate. It can and will force commercial banks to lend, if only to the U.S. Treasury. Anyone who says there are no solvent borrowers for banks to lend to is out of touch with reality: a $11.5 trillion Federal debt, which is growing by a trillion dollars a year. The Treasury must roll over $250 billion each month. No borrower?


The argument that gold’s price increased in the Great Depression and therefore will appreciate in the coming deflation is the single most misleading argument in the deflationist camp. Do not pay any attention to this argument. I suggest that you pay no attention to anyone who uses it, except as a convenient source of links to other people’s articles.

In short, the guy is either incredibly ignorant about economic theory — a monetary crank — or else he is being paid to sell gold.

July 15, 2009

Gary North [send him mail] is the author of Mises on Money. Visit http://www.garynorth.com. He is also the author of a free 20-volume series, An Economic Commentary on the Bible.

Copyright © 2009 Gary North

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