The Great Depression and the Gold Standard

            Reversion to the gold standard theory in pre-war America caused significant damage to the economy, and is commonly considered one of the greatest reasons for the depression in the 30s. Economists Sandeep Mazumder and John Wood reference Barry Eichengreen’s book, Golden Fetters, which argues that the reversion to the gold standard following World War I greatly impacted policies that were direct causes for the Great Depression.[1] By definition, the Gold Standard is a system in which many countries fix the value of their currencies to a specific amount of gold. According to the World Gold Council, “The classical Gold Standard existed from the 1870s to the outbreak of the First World War in 1914. In the first part of the 19^th century, once the turbulence caused by the Napoleonic Wars had subsided, money consisted of either specie (gold, silver or copper coins) or of specie-backed bank issue notes.”[2] The Gold Standard is a subject of great inquiry as to its degree of impacting the economic situation leading to the Great Depression.

            Ben Bernanke, former Chair of the Federal Reserve of the United States, posits that a new body of scholarship emerged in the early 1980s which examined the international gold standard during the interwar period. Bernanke states, “First, exhaustive analysis of the operation of the interwar gold standard has shown that much of the worldwide monetary contraction of the early 1930s was not a passive response to declining output, but instead the largely unintended result of an interaction of poorly designed institutions, shortsighted policy-making, and unfavorable political and economic predictions.”[3] In the wake of this economic crisis, many governments rapidly forewent the gold standard. Bernanke states that the countries that abandoned the standard were able to reflate their money after some time passed while the nations that remained on the standard continued to deflate their currency. The former recovered from the Depression faster, thus proving that remaining on the standard was not a path to recovery.[4] Studies show that the underlying continuity amongst nations experiencing monetary contraction was the gold standard.[5]

            The United Kingdom returned to the gold standard 1925, France in 1928, and by 1929 the standard was near universally re-adopted. The return to gold was viewed as a political move to restore the financial stability that existed during the prewar era between 1870 and 1913 when the standard was discontinued with the outbreak of the First World War. The irony of this is explained by Bernanke as the 1931 financial panic and exchange rate crisis was international and the complete system collapse in 1936 left the affected countries’ currency in shambles.[6] Another aspect of the gold issue addressed by Bernanke was the tendency for countries who were devaluing or leaving the standard to pull gold away from other countries still on the standard. For example, the United Kingdom and the United States both had significant amounts of gold coming into the country beginning in 1933, which took away a large quantity of gold from the economies of France and Belgium.[7]

            Mazumder and Wood suggest that resumption of the gold standard according to prewar terms brought about the perfect storm of deflation after a period of incredible currency inflation causes by the war, leading the extreme deflation to wreak havoc on international economies until the standard was suspended.[8] They argue, “So the shortage of gold and downward pressure on prices became more severe the longer the high prices and overvaluations of exchange rates persisted.”[9] After the First World War there were numerous economic and political factors at play which effected the implementation of the gold standard across the globe, and issues with currency were blamed on many of these factors. International cooperation, reparations, national debt, borrowing, and lending all factor into the shift in the gold standard’s effectiveness. Mazumder and Wood argue that the British readoption of the gold standard despite its overvalued exchange rate, which had been heavily influenced by the government’s expectation of foreign inflation while others expected deflation. This was a gross misunderstanding of the conditions surrounding the gold standard that was not solely felt by the British, but by numerous other countries who followed suit in readopting the gold standard.[10]

           

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[1]Mazumder, Sandeep, and John H. Wood. “The Cause of the Great Depression: The Decision to Resume the Gold Standard on Prewar Terms.” The Independent Review 26, no. 1 (2021): 133–51. https://www.jstor.org/stable/48647342. 135.

[2]"The Classical Gold Standard," World Gold Council, https://www.gold.org/history-gold/the-classical-gold-standard

[3] Bernanke, “The Macroeconomics of the Great Depression,” 3-4.

[4] Ibid.,

[5] Ibid.,

[6] Ibid.,

[7] Ibid., 8-10.

[8] Mazumder, “The Cause of the Great Depression,” 135.

[9] Ibid., 143.

[10] Ibid., 144.