Generating the Wealth of Nations 22: Two Charts on the US and Gold

The US increased its gold holdings substantially in the 1920s, from $2.88 billion worth in 1920 to $4.47 billion in 1930.  (Keep in mind that the official price of gold was fixed during this time period, at $20.67 per ounce of gold.)  Gold holdings rose at an average annual rate of 4.5% per year.  You can see this in the first chart.  Interestingly, after almost every country in the world went off the gold standard, US holdings of gold skyrocketed, from $4.47 billion in 1930 to $19.85 billion in 1940 (the US was paying $35 per ounce for gold in this period, so we were only sort of off the gold standard).

 

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What's interesting, though, is that US gold holdings as a percentage of nominal GDP were roughly 5% throughout the 1920s.  In terms of how the gold standard was supposed to operate, this was probably an indication that the US was not playing by the rules.  As gold flowed into a country, its money supply was supposed to increase, which was supposed to raise its domestic price level.  This would cause imports to rise and exports to fall, and so put an end to the gold inflow.  In fact, as the final chart below shows, the price level in the US did not rise in the 1920s; the Federal Reserve and the US Treasury (mostly the Treasury, which was the custodian of the gold stock then) engaged in what was called "sterilizing" the gold inflow--not letting it lead to an increase int he money supply or in prices.  (It's worth noting that the Bank of France was even worse in this respect.)

 





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