Scholarly Comments on Academic Economics

Gold Standards and the Real Bills Doctrine in U.S. Monetary Policy


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This paper provides a reassessment and a restatement of the essential properties of gold standards. Second, it emphasizes the role of the Real Bills Doctrine in Federal Reserve policy as the primary cause of the Great Contraction of 1929-1933. It takes issue with recent articles and books that have assigned major fault to “the” gold standard for the disastrous decline of employment, prices, production, income, and welfare that characterized the Great Contraction and the ensuing Great Depression. The Real Bills Doctrine was the guiding principle for passage of The Federal Reserve Act. It proposed that the creation of money would be geared automatically to the output of real goods and services if banks and the central bank adhered to a policy of providing credit only on short-term, self-liquidating loans for legitimate business purposes. The gold standard was to continue as the fundamental determinant of the economy’s stock of money, but real bills principles would take care of seasonal and cyclical variations in the demand for money. The new system, however, never operated under a true gold standard. U.S. gold stocks burgeoned after World War I, allowing the quantity-theoretic policies of the New York Fed under Benjamin Strong to fashion a stable price level policy for the monetary system until an authentic gold standard could be become operational. After Strong’s death in 1928, real bills advocates on the Fed Board and in some Fed Banks controlled Fed policies. Their avowed purpose was to oversee no monetary expansion until the real economy provided the proper impetus for monetary rejuvenation. In recent decades studies analyzing the Great Contraction have overlooked, first, the fundamental properties of a true gold standard, second, the quantity of gold stocks available for credit expansion by Federal Reserve policies in the early 1930s, third, the statutory power of the Federal Reserve Board to nullify for an indefinite period the gold reserve requirements facing the Federal Reserve Banks, and, fourth, the dominating influence that the Real Bills Doctrine had over both monetary beliefs and monetary policy in that era. This paper attempts to correct these omissions, and to demonstrate that the Real Bills Doctrine, not “the” gold standard, was the intellectual and operational basis for the disastrous Fed policy of 1929-1933.

Podcast related to this article: Richard Timberlake on the Gold Standard (EJW Audio, March 2010).