Financial History 139 (Fall 2021) - Page 25

these commodities expressed in gold coin . England was on the gold standard during most of these years , so these lines should be expected to follow one another , and the lines diverged only during the Napoleonic and Great War periods , when England discontinued gold convertibility .
Gold and commodities can certainly be observed going up and down together because of shortages of both , but this is rare . More often their concerted movement is because the currency in which they are priced is either declining or increasing in value . Prices expressed in that currency then naturally move together . Simply put , gold is just another commodity being influenced by a third variable , namely the market assessment of the value of the currency in which gold and other commodities are being priced .
A thorough reading of Prices tells a different story . The charts and graphs that show the paper currency price of gold moving up in tandem with wholesale prices do so in countries like France and Italy as they devalued their currencies in terms of gold in the 1920s . In gold standard countries like Britain and the United States , Warren opined that wholesale prices rose up and down not with the price of gold but inversely with the value of gold , a value he measured by the size of a basket of commodities that could be purchased with a certain amount of gold .
Warren was perhaps too sanguine about the adverse effects of inflation , but he was quite accurate as to its causes . Inflation was caused by “ large issues of paper money , reducing the weight of metal in the monetary unit , reduced demand for the monetary metal or large additions in supplies of metal .” Nowhere does he suggest a rise in the price of the metal — a step consistent with increased , not reduced , demand — would inflate other prices .
Warren ’ s verbiage is a little strange to us now . The first two of these causes of inflation we can understand well enough , and the fourth refers to the inflation caused by big gold mine discoveries that add to the supply of gold and , therefore , the supply of money .
The third of these causes , the one having to do with reduced demand for a monetary metal such as gold , could be confusing . Warren postulated that as demand for gold falls , the value of gold falls , and as it does commodity prices increase . Such a drop in demand , Warren asserted ,
George Warren was not an official member of the Roosevelt administration , yet he was influential enough that he appeared on the cover of Time magazine , November 27 , 1933 .
occurred in 1850 – 1856 and again in 1897- 1906 as gold flowed into the country , first from the mines in California and later from Alaska and South Africa , but these drops in demand might today be described as increases in the supply of gold rather than a drop in demand .
Warren found a similar drop in gold “ demand ” in the United States in 1914 – 1920 , as monetary gold flowed from Europe to the United States when war broke out . In each case , “ gold demand ” declined , in Warren ’ s parlance , with increased supply . To associate such events with “ reduced demand for the monetary metal ” is a clumsy way of expressing things . However , with each such drop in “ demand for the monetary metal ,” prices in the United States did indeed surge .
These fine points were lost in the excitement surrounding Warren ’ s possible connection between the price of gold and farm prices .
The gold buying program failed to raise farm prices during those six weeks in late 1933 , but this did not cause Warren to be expelled from Roosevelt ’ s inner circle , perhaps because he had warned that the experiment of intervening in the gold market might not work . Such bidding up of the price of gold in daily trading did not increase farm prices , but an accurate reading of Prices did not really suggest it would .
Warren was much more optimistic that “ reducing the weight of metal in the
Collection of the Museum of American Finance monetary unit ” would do the trick , and the Roosevelt administration did just that in early 1934 . The exchange value of the dollar into gold was changed from $ 20.67 to $ 35 per troy ounce , a 59 % reduction in value of the dollars in the pockets of Americans . This is what had been done in France , Belgium and Italy a few years earlier — steps that received the blessing of Warren in Prices . President Roosevelt took Warren ’ s advice , in the process ignoring 140 years of US monetary history , and simply changed the value of the dollar in terms of gold .
The Roosevelt dollar devaluation , a step fully consonant with Warren ’ s views expressed in Prices , did finally halt the deflationary slide . Prices stopped declining and began to increase : corn nearly doubled in 1934 , and wheat rose almost 50 %.
Consumer prices had declined by 5.2 % in 1933 , but following devaluation they reversed course , increasing by 3.5 % in 1934 and by another 2.6 % in 1935 . These price-level increases were not perhaps all as rapid as Warren had predicted , but the President wanted to stem the deflationary tide . The advice George Warren offered in Prices had finally done just that .
Daniel C . Munson enjoys reading and writing economic and scientific history . His writings have appeared in Barron ’ s , Financial History and other publications .
Brooks , John . Once in Golconda : A True Drama of Wall Street , 1920 – 1938 . New York : Harper & Row . 1969 .
Diary of Henry Morgenthau , from the section entitled “ Farm Credit Diary .” April 27 – November 16 , 1933 .
Edwards , Sebastian . American Default : The Untold Story of FDR , the Supreme Court , and the Battle Over Gold . Princeton , NJ : Princeton University Press . 2018 .
Folsom , Burton W . Jr . New Deal or Raw Deal ? How FDR ’ s Economic Legacy Has Damaged America . New York : Simon & Schuster . 2008 .
Grant , James . Money of the Mind : Borrowing and Lending in America from the Civil War to Michael Milken . New York : Farrar Straus & Giroux . 1992 . Time Magazine . November 27 , 1933 . Warren , George F . and Frank A . Pearson . Prices . New York : John Wiley & Sons , Inc . 1933 .
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