How the U.S. Once Prospered by Debasing Its Currency -- And Could Again

by: Modeled Behavior

U.S. Rep. Paul Ryan (R-WI), the incoming chairman of the House Budget Committee, has declared: "Name me a nation in history that has prospered by devaluing its currency."

How about the United States?

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See that turning point in 1933? There is a lot of dispute about what caused it, but some people with a long interest in monetary policy have argued that it was Executive Order 6102, drafted as follows:

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It was announced to the public as follows:

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Those of us who think recessions are caused by the hoarding of money would expect this type of thing to have extreme effects. Hard money folks would suspect that this would result in a debasement of the currency. Indeed, unlike the modern metaphorical use of the word "debasement," this was literal debasement. The base of the currency was confiscated at gunpoint, melted down and reissued in a less valuable form.

The transferability of dollars into gold shifted from $20 an ounce to $35 an ounce. This was, again, a literal debasement done by threat of imprisonment. I wish I had ready access to pictures of private safety deposit boxes being torn open and the gold taken out. Nonetheless, there are numerous reports of this happening.

Not exactly a free market move, and vastly more extreme than anything I can contemplate tolerating. However, what was the economic effect?

From April to July of 1933, industrial production in the United States surged 57 percent. The following chart illustrates year-over-year growth in industrial production, from the year before debasement until the year after:

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We move immediately from shrinking to surging industrial production, with year-over-year growth rates reaching 60% in July of 1933.

I don’t want to pick a fight with my more liberal friends, but I would argue that it was this move that made it seem as if President Franklin Roosevelt had magical economic powers -- and gave cover to what were, on the whole, probably ineffectual (at best) industrial policies.

However, even if there are those who are afraid that a more smooth and free-market debasement will likewise paper over what they regard as the poor policies of the Obama administration, I ask you to take another look at that chart above: 60% growth from 30% collapse just a year earlier. You really want to throw that away because you're worried that it might possibly help in a fight over a health care policy less extensive than the one that is “crippling” the budget of our wacky neighbors to the North?

There are a lot of issues here, but if what you're concerned about is piling up government debt, then growth is your friend -- and debasement is the way to get there.