Do you mean that abandoning the gold standard caused the Great Depression?
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More that the abandonment of the gold standard, the Depression, and the Crash of '29 were all part of the same problem. It’s hard to say one caused another, but the definitely did affect each other.
Slightly OT question:
Does anyone know why Lebanon uses the American dollar? I believe you can choose between the Lebanese pound and the dollar when you go to a bank in Lebanon-- but I could be wrong. I know from experience that you can pay anywhere with dollars. From what I’ve been told, the use of the dollar started when the Lebanese pound lost almost all its value during the civil war. But I sure was surprised to learn that even though the war is over people still use dollars to pay for everything.
Sorry for being off topic…
Buenos Aires apparently cannot take the political heat of the spending reductions demanded by Argentina’s central government and has therefore invented a new currency to pay government workers. Here is a link (note that NYTimes links become inaccessable after a few days because their archives charge a fee for older stuff). This seems very strange from a US perspective where we have some law somewhere (don’t we?) which gives the federal government a monopoly on currency (this wasn’t always the case, of course).
Um, yes, we call that “some law somewhere” …the Constitution 
Article 1, Section 10: "No state shall enter into any treaty, alliance, or confederation; grant letters of marque and reprisal; coin money; emit bills of credit; make anything but gold and silver coin a tender in payment of debts; pass any bill of attainder, ex post facto law, or law impairing the obligation of contracts, or grant any title of nobility.
You know, that clause, when you look at it real close, seems to give the states the right to make gold and silver coin legal in the payment of debts.
Why is this interesting? Well, Roosevelt outlawed private possession of gold back during the Depression, a restriction that was only recently lifted. Given this clause, it would appear that this move may have been unconstitutional. Maybe.
Shameless hijack, I know. Just a thought.
I rarely do this, but … cite, please? If nothing else, I can point you to my grandmother’s wedding ring - 24k gold, purchased for her marriage during the Depression.
Sua
The Emergency Banking Act (scroll down) was part of the New Deal legislation which gave Roosevelt extraordinary monetary authority (and has been the target of conspiracy theorists every since), and under it Roosevelt ordered citizens to turn in gold coins and bullion. This may be what pantom is referring to. Other forms of gold were not banned from private ownership. Lots of people thought the New Deal legislation was unconstitutional; the Supreme Court eventually settled the issue after lots of political theatrics.
Well shut my mouth. Thanks, pantom and Humble for the education.
One question (the link didn’t work for me) - you said the Supremes “settled” the issue. I assume you mean they found the law unconstitutional. Is that the case?
Sua
The link works for me, but here are a couple of other ones anyway: a pbs timeline of the New Deal era; and a numismatic page. I can actually remember back to 1975 when gold coin ownership became legal again and we were first flooded with advertisements for krugerrands. (BTW, the confluence of gold standard conspiracy theorism with commodity investment hucksterism make this a very interesting topic to google for.)
What I meant by the Supreme Court “settled things” is lazy talk for the Supreme Court eventually starting to uphold New Deal legislation after the infamous court-packing plan had caused one of the Four Horseman conservative justices to switch his voting stance. The US’s exit from the gold standard and the ban on private ownership of gold coin and bullion were part of this New Deal legislation and were not struck down. I haven’t checked whether there is actually a Supreme Court case on the gold laws (I think there may be), but I meant New Deal legislation as a whole.
nothing personal, but this is patently incorrect. I was an investment banker from 1991 to 1998 in Asia, and the Asian conflagration is what eventually ended my career.
Indonesia did not peg their currency to the US dollar. Perhaps what you are thinking of is that that set the exchange rate for the Rupiah against the USD. That is not the same as a currency board system or a pegged system. Crudely speaking, under a pegged system, a note issuing entity (usually a local bank) has the exact amount of USD on deposit as they have in local currency in issue. There is zero latitude. These banks must adopt the interest rate policy of the US or whatever currency they are tied to. It is a synthetic US dollar. Indonesia did not have such a system. Rather, Indonesia arbitraily set the rupiah against the US dollar and printed more money like it was going out of style.
It was Peregrine and not Jardine Flemings. Peregrine went bankrupt and Jardine Flemings was later taken over by Citicorp. My company, Nikko Securities, owned USD100 million worth of Peregrine bonds, so they were on the road to insolvency before Solomon Smith Barney bought them out.
Investors in Thailand and Indonesia thought they had limited risk because those governments supported the currency. That is, when the market started selling the currencies, the government supported the currency or bought it. Governments have billions of dollars, but if the whole market is against you, you run out of money eventually and it all comes crashing down. Just look at the Bank of England and the defense of the pound. That is pretty much what happened in Asia. It was NOT a failure in a currency board regime or a peg.
The only country in Asia that had/has a currency board regime is Hong Kong. You will find that this was instituted during a very rough political time between England and China, IIRC 1985. It held up during the Asian crisis, and several players had a go at cracking the system. It is still in place at USD1=7.78
Under a true pegged or currency board regime, once the market exchange rate moves too far, then the currency issuing banks have a natural arbitrage. Buy low, sell high, that drives the exchange rate back towards the official designation. Under a worst case scenario, a country would abandon the local currecy (which is really a synthetic US dollar anyway) and go 100% US dollars. IIRC Argentina threatened exactly this in the 1980’s and overnight the attacks on the currency disappeared.
OK, one by one…
China Guy No offense taken. Sua already took me to task on this one, though that was an informative post.
I still think pegs are prone to blowing up too, and even before they blow up they do a lot of damage to the local economy IMO, but I know you can’t prove that by Hong Kong.
Sua: The restriction by Roosevelt was on ownership of bullion, not something like your or your grandma’s wedding ring. Along with pegging gold at $35 per ounce at that time, bullion ownership was made illegal and the “gold clause” in contracts up to that time, which stated that payment could be made in gold or dollars, was made null and void. No online cite, but the book “Money of the Mind” by James Grant goes through the history. Also, it was big news back in the seventies when the restriction on bullion ownership was lifted. I’m old enough to remember this.
Humble Servant, I missed your posts between the Sua and China Guy ones. Thanks for the online support.
In order to work, the country in question must give up monetary policy and blindly follow whatever the Fed does. As alluded to earlier, this means that what’s right for the US economy may not be right for the pegged economy. Hong Kong is the best example of a modern currency board system. Detractors would say that the HK$ is overvalued vis-a-vis other currencies in the region and that it should be “repegged” (read devalued) or abandoned all together. Again, under a currency board system, the central banks give up free will that is monetary policy.
One can argue either side of this. However, currency board regimes do exactly what they are designed to do, and that is provide a stable and reliable exchange rate. IMHO for a lot of countries it is a good thing to take the politicians out of the equation and to remove the fear of a devaluation.
I used to travel to Argentina frequently for business. At the time, at least you could use pesos or dollars, up to you. I thought that I would somehow “lose” if I ended up with pesos and tried to reconvert to dollars, but no problems at all. IIRC this was in 1996/1997.
Whenever you handed a cab driver $20 he would hold it up to the light to inspect it. One day I was in a taxi with a bilingual colleague who resided in BA, and asked her what are they looking for? She asked the driver, in Spanish. Even I could understand the response, in Spanish, which was “I don’t know”, as he continued to look. Somehow they seemed to think that if the bills were fake they would magically know by looking.
My last stay in the country I travelled with a colleague who insisted that we stay at a hotel other than the one which I normally frequented. IIRC it was the Marriott. About 1 year later I got a huge charge on my American Express from them. I protested, since I couldn’t imagine what they were charging me for after all of this time. It turned out that they had a policy to intentionally hold charges that were against US bank accounts as a hedge against inflation. Moral of this story: even though the peso is tightly pegged to the dollar, and the two currencies are in fact used interchangeably, the financial community there still lives in fear of runaway inflation.
Just my two cents.
That’s because Argentina has not made it emphatically clear that they will stay with the currency board system. Translation of that is DEVALUATION is a real threat.
Currency board systems work only if a) they are strictly adheered to b) note issuing banks perform their arbitrage function and c) the government has credibility in “dollarizing” the economy as a last resort.
Actually the HK dollar was propped up by the HK governemt, which dipped into its foreign currency reserves, just like every other country in the region (like Thailand), but it has lots of foreign currency (unlike Thailand). It also supported the Hang Seng by buying into local listed companies. Sounds like China Guy knows this better than me…
Back to the US dollar. Using the US dollar in East Timor strikes me as a reflexive thing: Australian dollars would have made more sense simply because of the geography. Does anyone know anything about this?
Yep, the East Timor thing sounded funny to me too. Here’s the most explanatory link I could find–the IMF apparently favors the dollar in light of a recent devaluation of the Australian dollar(?), but it looks like dollarization has not been fully effectuated (as we sometimes say when we can’t think of a better word).
I can understand this in respect of the rupiah, which has been well and truly deep sixed. The Australian dollar has been prey to currency speculators, but it still doesn’t make sense to me. Its fundamentally sound and geographically and politically convenient. By this, I mean that the Australian government is likely to continue to take an active role in the integration of East Timor as a country. There was some talk a while ago about Australian busniess setting up resorts there in the future.