Re-inclusion of gold prices in the database of the St. Louis Fed is yet another indication of the rehabilitation of gold.
Civil servants commonly have a donnish sense of humor.
The Library of Congress named its database Thomas, after Jefferson. The SEC's: EDGAR.
The Federal Reserve Bank of St. Louis? FRED, for Federal Reserve Economic Data.
Business Insider breathlessly reports:
A huge development happened in the world of economic chart-making today. FRED, the brilliant economics data and charts site that's run by the St. Louis Federal reserve, has finally added gold prices to the database.
Now at the tip of your fingers is gold priced in dollars and pounds going back to 1968, and gold priced in euros going back to 1999.
Not only is gold a fascinating commodity/quasi-money in its own right, there are so many myths about what gold is, and what its price represents, the inclusion of gold in this very easy-to-use database will prove to be incredibly useful.
To celebrate the introduction of the gold data, we've whipped up a handful of charts we've been wanting to make for awhile.
Here is the FRED rendition of average hourly earnings priced in gold (what fraction of an ounce of gold you can get for working one hour) as generated by BI:
Re-inclusion of gold prices in the database of the St. Louis Fed is yet another indication of the rehabilitation of gold. Gold emerges from its status as a commodity outlawed in the 1930s to a recognized factor in the world financial system. This represents further evidence of the resurgence of the gold standard as having been reestablished as a respectable proposition in monetary policy circles.
That is the sort of thing that only happens in heaven. I think the facts I have stated will constitute an absolute answer to the particular set of nightmares which are usually felt by those who fear we shall be thrown into convulsions by American gold. -- Winston Churchill
As noted elsewhere, Winston Churchill, was baffled and misled by the misguided experts of his day into resuming the gold standard at pre-war parity.
From his speech upon the subject, full of characteristically magnificent, if, in this case, badly misguided, eloquence:
When the present Opposition formed a Government, they formally expressed themselves in favour of a return to a gold standard at the earliest opportunity. The Prime Minister of those days - I have the quotations here, but I shall not trouble the House with them - announced that policy of carrying out the recommendations of the Cunliffc Committee, and returning to the gold standard at the earliest possible moment - and then the Chancellor of the Exchequer, the right hon. Member for Colne Valley (Mr. Snowden), went further and was even more explicit, not only in office but in opposition. He has repeatedly urged upon the Government that the right policy for this country is to return to the gold standard at the earliest possible moment.
My right hon. Friend the Member for Hillhead (Sir R. Home), in his most powerful and effective speech, a speech which might almost have relieved me of the duty of intervening at all in the Debate, dealt with the late Chancellor of the Exchequer, and quoted the article which he wrote, only two months ago, in the "Observer" newspaper, and he pointed out that not only had the right hon. Member for Colne Valley advocated a return to the gold standard, but he had pressed it as a matter of haste and urgency. He had pressed it as a matter so important that, to quote his words –
“Risks must be run for the sake of the benefits which success would bring. England could give a lead in this matter which would result in a general return to the gold standard”.
Well, Sir, we have taken the advice of the late Chancellor of the Exchequer, but we shall hardly be encouraged to repeat the experiment, having regard to the treatment we receive when we do fall in with his views. We have taken his advice, we are actually on the gold standard, and what does he do? Speaking with the full responsibility of the official spokesman of the Opposition in matters of finance, what is it he proposes that we should do? I quite recognise the moderation of his speech, the restraint and sobriety of all that he said on this subject, and on both sides of it. But what is the course which he recommends to the House of Commons this afternoon?
He proposes, now that we are on the gold standard, to deprive us of the precautionary measures and safeguards which, after long thought and patient preparation, we regard as vital to the success of the operation which he himself has counselled. Well, if you are looking for grounds of opposition, you can nearly always find some reasons, and so the blessed words "undue precipitancy" have been discovered to bridge the gap between the late Chancellor of the Exchequer's past and the views which some of his supporters in his party hold at the present time.
Undue precipitancy! I understand the difficulties to which ex-Ministers and the leaders of a party in opposition are subjected. I wish to make every possible allowance for them, but I must say, speaking quite frankly, and, I hope, without offence, that this incident makes it difficult, not for the Government merely, but for the House, to place full reliance on the character of the advice given by responsible leaders of the Opposition in regard to grave and complicated matters of public policy. They advise a certain course publicly and repeatedly. We adopt the course, we take a decision in accordance with their advice, and then immediately they move an Amendment, not only to condemn us for what we have done, but to deprive us of those practical safeguards by which alone what we have done can be carried through successfully.
One may approve of the principle, one may even agree as to the urgency, and yet one may dislike the method. I heard nothing in the speech of the late Chancellor of the Exchequer which indicated any serious disapproval of the specific method we have adopted. It is a method which the highest experts have advocated. In carrying out the policy recommended by the late Chancellor of the Exchequer, we have taken every precaution which forethought, and patience, and long preparation could suggest.
Undue precipitancy! Where is the undue precipitancy in acquiring discreetly, over a considerable period of time, the 166,000,000 dollars required to cover our payments to the United States for the whole of this year? Where is the undue precipitancy when we began these arrangements with the United States, upon which these trans-Atlantic operations were founded, before Christmas last year? There never has been any step of this character taken by any Government which, so far from being marked by undue precipitancy, has been more characterised by design, forethought, careful and laborious preparation.
Mr. B. Smith: See the results.
Mr. Churchill: The late Mr. Bonar Law once, in reply to an interjection of that kind, made a very pertinent quotation, and said: It is no use trying to argue with a prophet. One can only disbelieve him.
Mr. Smith: I only said, Wait the results.
Mr. Churchill: There is perhaps one ground on which we might have been accused of undue precipitancy. I was waiting to hear the right hon. Member for Colne Valley, whom I am glad to see in his place, perhaps say that he would have approved of all that we had done but for the fact that, instead of declaring last week that we would return to the gold standard on the 31st December, we had in fact returned to it at the moment of my declaration. It is, of course, a question which requires careful balancing-whether you should give a long notice in advance, or whether you should act instantaneously by giving a general licence to the Bank of England to resume gold exportation.
I was advised that, if we had waited the eight months before the end of the year, before the expiry of the present Act, everyone would have had all that time to perfect arrangements for the export of bullion. Everyone during those months could under the existing law, have withdrawn and hoarded gold against the day when the free export of gold became lawful, and all this pent-up volume, which you could not measure, which might be very small, or might be very large, but, in any case, would have been uncertain, would have been awaiting the automatic cessation of the existing law, and would have fallen upon us on the 1st January, 1926. That is a season when the normal demand for dollars is high, a season usually unfavourable to our Exchequer, and at the unfavourable moment all this pent-up strain would have fallen upon our gold reserves. No one would have been able to predict what would have happened. Personally, I am not convinced that anything very serious would have happened, but there are many people who would have been alarmed, and these vague fears and uncertainties affecting the whole position of our trade and finance, would have been deeply detrimental to our material well-being.
If you are going to return to the gold standard, if that principle is to be carried into effect at all, now is, from every point of view, the moment which should be seized. This charge of undue precipitancy has enabled the right hon. Gentleman to present a consistent, or comparatively consistent, front, but his argument as to undue precipitancy runs counter to all the most solid reasons which the Government can produce. I must contrast the position of the right hon. Gentleman with the position of Mr. Keynes, who is, I suppose, by far the most distinguished and able exponent of the opposition to the return to gold. He is the great advocate of a managed currency, the most powerful and persuasive advocate. While the right hon. Gentleman opposite was writing in the "Observer" newspaper, articles demanding the return to gold -
Mr. Snowden: Not demanding.
Mr. Churchill: Advising or suggesting. While the right hon. Gentleman was writing in the "Observer" articles which might easily have been interpreted to mean that he was ready to approve of a return to the gold standard, urging that risks should be run, and that no time should be lost, Mr. Keynes was writing in the "Nation" a series of searching and brilliant articles, formidable and instructive, in favour of a managed currency. You could not have had a greater difference than was exhibited between the writings of the right hon. Gentleman and the articles of Mr. Keynes.
What has happened in the event? The right hon. Gentleman, who advocated a return to the gold standard at the earliest moment, when we return to the gold standard attacks us. But Mr. Keynes says:
“If we are to return to gold, and in the face of general opinion that is inevitable, the Chancellor and the Treasury and the Bank have tried to do so along the most prudent and far-sighted lines which are open to them”.
That is the statement which was made by, I say, the most able, most powerful opponent of the return to gold. Here is the right hon. Gentleman, who is one of the strongest advocates of the return to gold, confronted with the same facts as Mr. Keynes, accusing the Government of undue precipitancy.
Mr. Snowden: May I also quote this from Mr. Keynes:
“There remains, however, the objection, to which I have never ceased to attach importance, against the return to gold, in actual present conditions, in view of possible consequences and the state of trade”.
Mr. Churchill: Certainly, I say he is the most capable exponent of the opposite view, and absolutely disagrees with the right hon. Gentleman on the principle. And yet, so fair-minded is he in judging this matter, that, apart from the principle, if you are going to do it, he says this is much the best way. What is the explanation of the difference between the two? The explanation is that the right hon. Gentleman, unlike Mr. Keynes, has to consider party manoeuvres and party exigencies, and it is not thought prudent, in regard to a matter of this kind, about which many people entertain conflicting views, that the official Opposition should take up any attitude which, if unsatisfactory results accrued in the future, would prevent them from being able to say, "I told you so."
The right hon. Gentleman is really in an excellent position. He is, in sporting parlance, "standing on velvet." If everything goes successfully, and no evil consequences arise, not even temporarily; if there are no spasms of any kind, he will be able to say, "Ah! we were always in favour of the return to the gold standard; the Labour party in office declared itself strongly in favour of it." If, on the other hand, there should be, in some few months' time, some spasm or some stringency, and momentary agitation is raised in the Press, he will again be able to rise in his place, or write another article in the "Observer," saying that he had foretold it.
Let us see what would happen if the official Labour Amendment were carried. We should find ourselves deprived of every effective means of making the transition safe. We should not be able to secure the credits in the United States which are intended to warn off speculators-in the excellent phrase Lord Oxford used last week, to "warn off the international banditti of finance" from making attempts to overturn our gold standard. If we were left unprotected, and such attempts succeeded, we should have to make very heavy shipments of gold, and we should certainly have to raise the Bank rate.
At the very time that we were exposed to this strain, we should, if the Amendment now before the House were carried, have to pay out sovereigns from the gold reserves to everyone who chose to ask for them, and, in order that there should be no risk of a shortage, the Mint would be under an obligation of minting into sovereigns all gold tendered to it. I can understand condemning the principle of a return to gold, but to approve the principle, and then to leave this country defenceless in a vital matter of this kind, when it is already committed, is a course which I am quite sure very few responsible Members in this House will care to support in the Lobby. I do not know whether there will be a Division or not on this issue. If there is, well and good, but if there should be no Division, on the whole, possibly, some national, apart from party, advantage would be gained thereby.
No doubt it is a serious matter for a Minister and a Government to have to take the responsibility for a Measure of this kind. I will tell the House quite simply on what authority I base myself, and what reasons have influenced me. I do not pose as a currency expert. It would be very absurd if I did; no one would believe me. I present myself here, not as a currency expert, but as a Member of Parliament with some experience in dealing with experts and weighing their arguments, as the Minister who has behind him what, I believe, is, and what, I daresay, the right hon. Gentleman believes is, upon the whole the finest expert opinion in financial matters, in Treasury matters, in the whole world. We have behind us the unbroken opinion of every Government while it was responsible. We have every Prime Minister and every Chancellor of the Exchequer, except, with some recent modification, the right hon. Gentleman. We have every Committee and every Conference that has been held since the War. We have the Currency Committee's Report, which has been available for several days in the Vote Office, and gives all our general reasons.
That is the basis and the foundation on which we rely, not only as regards the principle, but generally as regards the method. Apart from the principle, I had to rely on the best expert advice I could get as to method and time. The advocates of a managed currency say: "Why do you not continue to manage the currency? See how successful it has been. See how well it has been done. Why do you not continue a managed currency?" I agree that the experts at the Treasury and the Bank of England who have managed the currency during the past few years have been wonderfully successful. This is all the more remarkable, because those years have been years of violent political fluctuation and disturbance, in spite of which they have managed to steer a steady course, maintain a fairly stable financial policy, and promote and enhance British credit.
That is a great achievement. But surely the experts, to whom this achievement belongs, must be very high authorities on the subject. Surely they are the people who ought to know most about it. Surely their opinion counts more than the clever arguments of academic theorists or the interested attitude of party politicians. I, as Minister, and the Government take full responsibility. I am not setting our opinion up, but I am saying we are right to be guided by the statements of opinion we have received from them. Surely if you can rely upon a body of expert opinion which has actually conducted financially the affairs of this country with success, and tendered advice to their Ministers-a long and changing succession of Ministers-you are entitled to base yourself with real assurance upon the advice you receive from them. When the men who have managed the currency so well, according to the opponents of the present Bill, tell me that they can manage the currency no longer upon this basis, and tell me it would have been impossible to have managed it so far as they have unless they had always had the return to the gold standard as a goal to steer towards, and that if we were now to repudiate the gold standard, and introduce legislation for the purpose of prolonging the embargo, an immense injury would be done to the whole structure of British finance, surely their opinion should carry great weight. That is the advice upon which I have to rely, and to which I am bound to pay the greatest attention.
I have endeavoured, of course, to the best of my ability to think out the problem for myself, and I will give the House a few non-technical reasons why I think we are bound to take this step and take it now and take it in this particular way. The first of these reasons is the position of this crowded island, which could not support its present population by the unaided exertions of its agriculture, its manufactures, or even its shipping, unless these exertions were supplemented by the world-wide interests of this country in finance and business. The great working-class population such as we have here requires, above all things, and our economic problem requires, above all things, close and continuous contact with reality. There is no country in the world that can less afford to see its policy diverge from economic facts than our own. If we tried, whatever Government was in power, to inflate our currency or credit in order to produce hectic expansion not warranted by underlying facts, the consequence of that action would be widespread misery among the population and probably lasting injury, perhaps even fatal injury to the structure of our trade.
We are often told that the gold standard will shackle us to the United States. I will deal with that in a moment. I will tell you what it will shackle us to. It will shackle us to reality. For good or for ill, it will shackle us to reality. That is the only basis upon which we shall be standing, and I believe it to be the only basis which offers any permanent security for our affairs. That is my first broad reason. The foundation of Great Britain's economic policy must be, as far as possible, based upon reality.
Now the second reason is one which I think the Labour party, the official Opposition, might consider. We are not a self-supporting country. We have this immense working-class population. We have a population twice as dense as that of France. These people are dependent mainly on overseas food and our industries are dependent on overseas raw material. What is one of their principal interests? It is surely stability of prices. When prices fluctuate violently, as in the year 1919, and when, as in 1920, there is a slump, the real wages of the work-people are continuously affected and almost every step in the wage movement either up or down is attended by industrial fighting. This fighting wastes an enormous quantity of wealth, and injures the whole community.
On the whole, when there is inflation and undue expansion, I believe it to be true that wages follow with somewhat slower footsteps the swiftly rising scale of prices. Great disadvantage is caused in such circumstances by the decline in the value of money. Great strikes occur in the process of adjustment. Then when prices fall, another set of quarrels begins, and serious wage reductions are demanded which it is regarded as a point of honour to resist. There, again, you get friction, disturbance and sometimes the long arrest of production in important industries. Some fluctuations are perhaps inevitable, but we must reduce them to the minimum. We should endeavour to keep as steady a level of prices as possible, and we are far more likely to get that steady level if we are not drawn into over-trading and inflation, and we regulate our arrangements by one common standard of value. Therefore, I say that what is wanted in the general interest of the wage-earning classes of this country is a steady, trustworthy, honest, and, if possible, uniform standard of value.
What is my third reason? We are not only the financial centre of the world; we are also the centre of a wide Empire. If we detached ourselves from the great self-governing Dominions, which are nations in themselves- the unique glory of this country, the like of which no other nation has been able to show if we detach ourselves from their movements, we run the great risk of becoming isolated and loosening those bonds, the continuance and the fortification of which are indispensable to our well-being.
When the first governors of the Board complained to the president that the State Department expert on protocol had decided that as the most recently created of the government agencies, they should come last in social precedence, (Woodrow) Wilson had replied that as far as he was concerned, "they might come right after the fire department."
Immediately after World War I, things began to go badly wrong in reestablishing a world financial order. According to Liaquat Ahamed's Pulitzer Prize winning The Lords of Finance (The Penguin Press, New York, 2009)
After the war, there was a universal consensus among bankers that the world must return to the gold standard as quickly as possible. The almost theological belief in gold as the foundation for money was so embedded in their thinking, so much a part of their mental equipment for framing the world, that few could see any other way to organize the international monetary system." (p. 156)
That is not, of course, what happened.
Keynes was the first to recognize and articulate that, for all the public rhetoric about reinstating the gold standard, the new arrangements were in fact very different from the hallowed and automatic prewar mechanism. As he put it in the Tract, "A dollar standard was set up on the pedestal of the Golden Calf. For the past two years, the US has pretended to maintain a gold standard. In fact it has established a dollar standard."
It meant, in effect, that the Federal Reserve was so flush with gold that it had gone from being the central bank of the United States to being the central bank of the entire industrial world. Keynes's main concern was that Britain and other major European countries would find themselves being dictated to by a Fed that focused primarily on the needs of the domestic U.S. economy, yoking the gold-starved Europeans to U.S. credit policy. (Benjamin) Strong was in the process of constructing a one-legged gold standard, whose European limb would be firmly tied to classical rules while the American limb would be run by the Fed according to its own set of goals and constraints.
Oxygen is an excellent metaphor for the gold standard. In the political community there is some resistance to thinking about the mechanics of monetary policy.
Why? Because money is so fundamental as to be almost invisible. This invisibility may have been what Keynes was referencing when he observed that "to debauch the currency... engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose."
And because of its invisibility, talking about monetary policy risks being taken as arcane, or banal. Pure oxygen is colorless, odorless and tasteless. But without it we cannot breath, and the fires of industry cannot combust. Just as the fires of industry cannot impart their power to the world economy without good money. Repeated experience, documented by extensive data, shows that there is a strong correlation between the gold standard and economic growth -- and between fiduciary paper money, such as federal reserve notes, and economic stagnation.
It is therefore deeply ironic that one of the gold standard's most valiant and vociferous foes, Prof. Paul Krugman, would, as he did, write of Austrian economics (classical liberalism with a strong affinity for gold money), as “a theory that I regard as being about as worthy of serious study as the phlogiston theory of fire.”
The Wikipedia nicely sums up the picturesque history of the phlogiston theory of fire:
"Phlogisticated" substances are those that contain phlogiston and are "dephlogisticated" when burned; "in general, substances that burned in air were said to be rich in phlogiston; the fact that combustion soon ceased in an enclosed space was taken as clear-cut evidence that air had the capacity to absorb only a definite amount of phlogiston. When air had become completely phlogisticated it would no longer serve to support combustion of any material, nor would a metal heated in it yield a calx; nor could phlogisticated air support life, for the role of air in respiration was to remove the phlogiston from the body."
Thus, phlogiston was described in a way that was basically the opposite of the role of oxygen in combustion.
History of the theory
In 1667, Johann Joachim Becher published his Physical Education, which was the first mention of what would become the phlogiston theory. Traditionally, alchemists considered that there were four classical elements: fire, water, air, and earth. In his book, Becher eliminated fire and air from the classical element model and replaced them with three forms of earth: terra lapidea, terra fluida, and terra pinguis. Terra pinguis was the element which imparted oily, sulphurous, or combustible properties. Becher believed that terra pinguis was a key feature of combustion and was released when combustible substances were burned. In 1703 Georg Ernst Stahl, professor of medicine and chemistry at Halle, proposed a variant of the theory in which he renamed Becher's terra pinguis to phlogiston, and it was in this form that the theory probably had its greatest influence.
Challenge and demise
Eventually, quantitative experiments revealed problems, including the fact that some metals, such as magnesium, gained weight when they burned, even though they were supposed to have lost phlogiston. Mikhail Lomonosov attempted to repeat Robert Boyle's celebrated experiment[clarification needed] in 1753 and concluded that the phlogiston theory was false. He wrote in his diary:
Proponents of defining money as a fixed weight of gold rely, emphatically, on the empirical data -- the equivalent to quantitative experiments -- that show, unequivocally, the superior job creation, economic growth, and benefits to the Main Street (in preference over Wall Street) of the gold standard. It is the advocates of fiduciary paper money, like Prof. Krugman, who rely instead on dogma, invective, and sophistry thereby causing economics to resemble alchemy rather than chemistry. Johann Joachim Becher would likely have recognized Prof. Krugman, as a kindred spirit in his persistent attempts to conjure, by incantation, a value into the inherently valueless inconvertible paper -- anachronistically continuing the alchemical quest to convert base materials into gold.
"Experience is the name we give to our past mistakes, reform that which we give to future ones." -- Henry Wallich, used as the epigram to The Rules of the Game, by Kenneth W. Dam.
As noted in the Wikipedia, "Kenneth W. Dam served as Deputy Secretary of the Treasury (the second highest official in the United States Department of the Treasury) from 2001 to 2003, where he specialized in international economic development. He is currently a senior fellow of the Brookings Institution and a professor emeritus and senior lecturer at the University of Chicago Law School.
Image courtesy of Wikipedia
Dam held a number of government positions during various Republican administrations while on leave from the University of Chicago:
Kenneth Dam, in his 1982 classic of monetary policy The Rules of the Game: Reform and Evolution in the International Monetary System, University of Chicago Press, 1982, , writes (p.64),
The Vulnerability of the Gold Exchange Standard: An Unlearned Lesson
Not all of the lessons that might have been drawn from the interwar experience were learned by the Bretton Woods planners. Problems leading to its eventual demise were overlooked in the construction of the Bretton Woods system. These problems involved the fundamental vulnerability of any gold exchange standard.
The essence of the gold exchange standard as actually practiced was that central banks might hold their international reserves in two forms--gold and foreign exchange--in whatever proportion they chose. Indeed, central banks might change that proportion as they saw fit. Moreover, they were not required to maintain the foreign exchange component in any one currency but might switch from one "reserve currency" to another. The vulnerability of the gold exchange standard may thus be discussed under two headings. The first, involving the weakness arising out of the ability of a central bank to vary the proportion of foreign exchange and gold, materialized as soon as France began to convert some of its claims on London into gold in 1927. The second, involving the ability of a central bank to shift its foreign exchange assets held in the form of claims on one reserve center to claims on another foreign exchange center, became a steadily increasing factor as New York became a rival of London as a financial center.