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state of Sao Paulo took over. By 1929, the stocks of unsold coffee had
grown to 10 million pounds, while a normal annual crop was only about
7 million pounds. In that year alone, a bumper crop raised the inventories
by another 10 million pounds. The state of Sao Paulo borrowed
£100,000,000 in London to keep on financing the stocks. By the end of
the year, the price had fallen by half.45
By the time the stock market crashed in October 1929, governments had
accumulated huge hidden losses in stockpiles of coffee, rubber, wool, sheep,
wheat, and sugar. The imagination spent in the design of these schemes was
astounding. In Australia, for example, a Labour government elected in the
autumn of 1929, right at the time of the crash, responded to the relentless
downward pressure on wheat prices with a campaign called Grow More
Wheat, which succeeded in increasing wheat acreage by 22%. Because Aus-
tralia did not have enough storage capacity for the additional wheat, it had to
export the artificial bumper crop immediately, further depressing the inter-
national wheat price. Still, the lack of storage capacity was fortunate for Aus-
tralia. Had the country stored it, it would have suffered even greater losses.46
The losses accumulated in the valorization schemes were realized when
they could no longer be sustained for lack of financing. The selling of the
inventories that had been kept off the market further depressed prices,
which in turn dried up the financing of other valorization schemes.
188 MONETARY SOVEREIGNTY AND GOLD
Eventually the entire house of cards collapsed, as the old inventories
swamped the markets and depressed prices to unprecedentedly low levels.
The losses spread all over the world through the financial fallout, and then
again through the unprecedented fall in agricultural commodity prices that
took place after the stock market collapse in October 1929. From 1929 to
1932, U.S. agricultural prices fell by 35%. It was not until 1936 that agricul-
tural prices returned to their 1929 levels.47 Once again, unless it can be
shown that gold makes governments stupid, the collapse of agricultural
prices and its deadly ripple effects cannot be blamed on the metal s role as
money.
banking crises The most critical aspect of the Great Depression is
the series of banking crises that followed the stock market collapse, partic-
ularly in 1931 and 1933, in the United States and elsewhere. Many com-
mentators, prominently among them Milton Friedman and Anna
Schwartz, have argued persuasively that these crises were instrumental in
turning a recession into a Great Depression. But were these crises a result
of monetary policy dictated by the gold standard?
It is important first to note that the depth of the depression was much
worse in the United States than in other countries, particularly Britain, as
reflected in the real-income and employment figures shown in figures 6.7
and 6.11. The evidence strongly suggests that the main factor that made
the depression so much worse in the United States than in Britain was not
the paucity of reserve money supply, but instead the broad collapse in con-
fidence brought about by the bank failures. As shown in Figure 6.12, the
supply of reserve money behaved very differently in the United States and
Britain. In the United States, it fell sharply in 1930, and then rose very rap-
idly for the rest of the decade. In Britain, it declined steadily throughout
the 1920s and then headed moderately upwards after 1931. Based on this
evidence, and the idea that the rigid supply of gold was at the core of the
Great Depression, it would be natural to expect that deflation and the de-
pression would be worse in Britain than in the United States. We know,
however, that it was precisely the other way around.
Furthermore, Figure 6.13 shows how the United States experienced an
enormous contraction of money even as its reserve money was increasing.
The problem was that people lost confidence in the banking system. The
Figure 6.12. U.S. and U.K. reserve money, 1920 1940.
Data source: Friedman and Schwartz (1982: 130 137).
Note: Britain abandoned the gold-exchange standard in September 1931 and the
United States in April 1933.
Figure 6.13. U.S. money multipliers, 1920 1940.
Data source: Friedman and Schwartz (1982: 130 137).
Note: Britain abandoned the gold-exchange standard in September 1931 and the
United States in April 1933.
190 MONETARY SOVEREIGNTY AND GOLD
Figure 6.14. U.S. commercial bank deposits and currency held by the public,
1929 1933.
Data source: Friedman and Schwartz (1963: 712 713).
bottom curve shows how the capacity of banks to create deposits out of
reserve money was increasing through 1929, until they created $6.60 for
every dollar of reserve money in 1930, one year after the market crash.
Then this ratio began to fall sharply, so that by 1932, they created only $4
in deposits out of each dollar of reserve money. This is a contraction
of 40% in the supply of deposit money, the largest component of money.
Almost at the same time, the ratio of nominal income to reserve money,
which measures the ability of reserve money to generate income, fell from
$12 to $5.20 of income per dollar of reserve money. The two ratios kept
falling throughout the decade.
The ability of banks to create deposits out of reserve money collapsed
because people were afraid of bank failures after the crises of 1930, 1931,
and 1933, of which the third one was particularly vicious. Figure 6.14
shows how deposits fell while currency with the public was increasing
fast.48 The ratio of bank deposits to currency in the hands of the public
dropped from 11 in 1929 to 4.7 by April 1933, the month the gold-exchange
MONETARY SOVEREIGNTY AND GOLD 191
Figure 6.15. U.K. money multipliers, 1920 1940.
Data source: Friedman and Schwartz (1982: 130 137).
Note: Britain abandoned the gold-exchange standard in September 1931 and the
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