Gold Standard the Federal Reserve's Thesis

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The economy began to contract still further immediately after the election of Franklin Delano Roosevelt. Fears that Roosevelt would devalue the dollar or even abolish the Gold Standard caused both domestic and foreign investors to once again to "convert dollars to gold, putting pressure on both the banking system and the gold reserves of the Federal Reserve System. Bank failures and the Fed's defensive measures against the gold drain further reduced the stock of money. The economy took its deepest plunge between November 1932 and March 1933, once more confirming the temporal sequence predicted by the monetary hypothesis. Once Roosevelt was sworn in, his declaration of a national bank holiday and, subsequently, his cutting the link between the dollar and gold initiated the expansion of money, prices, and output" (Bernanke 2002).

Roosevelt did not abandon the gold standard wholesale. However, he did devalue the dollar, nationalize gold owned by private citizens, and declared contracts in which payment was specified in gold to be invalid as part of his stabilization policies (Bordo 2002).

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"It is an interesting but not uncommon phenomenon in economics that the expectation of a devaluation can be highly destabilizing but that the devaluation itself can be beneficial," observes Bernanke (Bernanke 2002). Ultimately, the current Fed Chairman's single-minded assessment of past monetary policy, in terms of its assessment of the causes of the Great Depression seems incomplete -- a cash infusion into the economy could doubtfully have circumvented the decline in consumer confidence alone. However, the influence of monetary policy and the gold standard is an important warning about the fact that both fiscal and monetary policy must be examined in conjunction when assessing the causes of depressions and recessions in our nation's history.

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