The Gold Standard and the Great Depression
Introduction
The great depression in the 1930s is still considered an unsolved mystery by some historians interconnected to series of events including world war, mass unemployment and post war economic policies. The article “Gold standards and the great depression” by Barry Eichengreen and Peter Temin focuses on gold standards and its consequences on business exchanges. The limitation of the gold standard systems crippled many countries as they struggled to keep up with the economic crisis and changes in the economy in the 1930s. Policy makers continued to impose their gold standard mentality that further deepened the economic stress and increased economic instability (Eichengreen & Termin, 1997).
Basic Conflict in 1930s:
Many countries traded on gold standards from 1870 to 1913 with fixed currency exchange rates. This gold standard remained in effect until the start World War 1. Most of the countries restored the prewar gold exchange practice, without considering the gold parity in terms of price as compared to the prewar rates. This resulted in lower ratio of value of gold exchanged, and subsequently a shortage in gold reserves and widespread use of foreign currency exchanges.
The basic conflict to maintain gold standard was to minimize the risk of currency devaluation and exchange rates. Countries dealing in gold exchange could not adopt economic and financial policy that determined their exchange rate based on demand of exports. These countries also feared that increasing the money supply will fuel domestic demand, promote gold exports and weaken their exchange rates (Causes of Global Depression 1930s…). These countries attempted to reduce price through decreased cost of production, of which larger proportion was of labor costs.
Though Britain abandoned gold standard, it could not bring itself to reduce interest rates, as reducing interest rates would trigger unprecedented inflation. Due to which many countries including Germany imposed restrictions on
The great depression in the 1930s is still considered an unsolved mystery by some historians interconnected to series of events including world war, mass unemployment and post war economic policies. The article “Gold standards and the great depression” by Barry Eichengreen and Peter Temin focuses on gold standards and its consequences on business exchanges. The limitation of the gold standard systems crippled many countries as they struggled to keep up with the economic crisis and changes in the economy in the 1930s. Policy makers continued to impose their gold standard mentality that further deepened the economic stress and increased economic instability (Eichengreen & Termin, 1997).
Basic Conflict in 1930s:
Many countries traded on gold standards from 1870 to 1913 with fixed currency exchange rates. This gold standard remained in effect until the start World War 1. Most of the countries restored the prewar gold exchange practice, without considering the gold parity in terms of price as compared to the prewar rates. This resulted in lower ratio of value of gold exchanged, and subsequently a shortage in gold reserves and widespread use of foreign currency exchanges.
The basic conflict to maintain gold standard was to minimize the risk of currency devaluation and exchange rates. Countries dealing in gold exchange could not adopt economic and financial policy that determined their exchange rate based on demand of exports. These countries also feared that increasing the money supply will fuel domestic demand, promote gold exports and weaken their exchange rates (Causes of Global Depression 1930s…). These countries attempted to reduce price through decreased cost of production, of which larger proportion was of labor costs.
Though Britain abandoned gold standard, it could not bring itself to reduce interest rates, as reducing interest rates would trigger unprecedented inflation. Due to which many countries including Germany imposed restrictions on
References: Eichengreen, Barry and Peter Termin 1997, “The Gold Standard and the Great Depression,” NBR Working Paper No. 6060. Cambridge, Massachusetts:National Bureau of Economic Research. Eichengreen, B. E., & Irwin, D. A. (2009, June 1). The Slide to Protectionism in the Great Depression: Who Succumbed and Why?. The National Bureau of Economic Research. Retrieved December 8, 2012, from http://www.nber.org/papers/w15142 The Gold Standard. (n.d.). United States American History. Retrieved December 8, 2012, from http://www.u-s-history.com/pages/h753.html Causes of Global Depression 1930s. (n.d.). Worldology. Retrieved December 8, 2012, from http://www.worldology.com/Europe/Europe_Articles/causes_great_depression.htm