DID THE GOLD STANDARD CAUSE THE GREAT DEPRESSION?

Published June 18, 2020, 2:50 p.m. by Moderator

 


Over the years historians and economists alike have outlined many reasons why the Great Depression. Some reasons include World War 1, the Treaty of Versailles, the then Republican administration economic policies, Wall Street practices, central bank regulations, Franklin Roosevelt’s New Deal etc. (Payne et al. 2017, 977).


In a 2004 lecture at Washington & Lee University, Governor Ben Bernanke described the gold standard as a system where the value of the currencies were based on a standard weight of gold. In this model, central banks would exchange gold at a determined exchange rate. The gold standard was prone to speculation. Confidence in the currencies depended on the ability of a country to have sufficient gold reserves to maintain their currencies (Bernanke 2004). The system has evolved from the classical gold standard, gold exchange standard, to the current one, Bretton Woods.


In September 1913, Europe was in financial doldrums and confidence for the British pound was at an all-time low. Speculators rushed to the Bank of England demanding their gold back. The bank quickly ran out of gold reserves and had to abandon the gold standard. The British pound was at the mercy of market forces.  In 1931, the United States was in the middle of the Great Depression.  It was at this time that speculators shifted their focus on the US dollar. Central banks and private citizens rushed to turn their dollars into gold significantly reducing the gold reserves held by the Federal Reserve. The Federal Reserve raised interest rates hoping that increased returns would increase public confidence in the dollar. This measure was successful and the United States remained with the gold standard (Bernanke 2004).


However the high interest rates increased the cost of doing business leading to many businesses going bankrupt. Many Americans became jobless and homeless. In 1933 President Franklin D. Roosevelt abolished the gold standard, dollars could no longer be redeemed with gold. The gold standard played a role in making the Great Depression worse but it was not solely responsible for it (Bernanke 2004).


 


References


Payne, P.G. (2017). Book Review: The Midas Paradox: Financial Markets, Government Policy Shocks, and the Great Depression. Enterprise & Society, 18(4), pp. 977-980.


 


 


 


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