How did the gold standard and monetary policy impact the Great Depression? Flashcards
1
Q
How did the gold standard and monetary policy impact the Great Depression?
A
- The GS and Economic Rigidity
o Fixed Exchange Rates - tied to gold so couldn’t adjust ER in downturns
o Deflationary Pressures - CB raised IR to keep gold reserves = harder to borrow = slowed economy = prices and wages fall, also made debt more expensive = bank failures - GS constraints on mon pol -
o Lack of monetary flexibility - prevented CB from lowering IR or increasing MS to boost economy
o Global transmission of economic downturns - countries interconnected under GS - US increase IR to attract gold = gold shortages in other countries - Impact of mon pol mistakes in the US -
o Tightening of mon pol in late 1920s - US raised IR = slowed ER and harder to borrow
o Failure to act as lender of last resort - bank failure in 30s = Fed Res didn’t provide enough liquidity = banking crisis, collapse in MS, and worse deflation - Role of GS in Global Economic Contraction -
o Spread of Deflation - GS cause economic downturns in one country to spread
o Currency devaluations - those that left GS earlier allowed them to devalue their currency, adopt looser policies, and recover faster from GD - Debt Deflation and GS -
o Debt deflation dynamics - deflation made debts harder to pay
o Constraint on recovery - countries still on GS couldn’t implement policies to reduce debt burdens - Shift away from GS and recovery - countries in early 30s abandoned GS - allowed them to devlaue their currencies, boost exports, and use more flexible mon pol - quicker recovery
