The world’s economic policies and monetary systems have been evolving over time. At some point there was barter trade. In the early 1900s the gold standard took centre stage. The gold standard was later replaced by fiat money, which is the current regulating instrument of all international transactions. Fiat money has made it possible for countries to exchange currencies and conduct international transactions with ease while maintain good balances of payments. This essay delves into myriad issues that relate to the gold standard and its relationship with the great depression.
The great depression is a period that lasted from the 1920s through the 1930s. It is a monetary era in which countries became desperate in their attempt to achieve monetary, fiscal and exchange rate policies (Krugman, Obstfeld & Melitz, 2012, p.506-10). Scholars agree that the great depression may have been an accident. However, a keen analysis of the facts shows that the US economic policies of the 1920s could have exacerbated the occurrence of the great depression. For instance, the use of tariffs barriers that aimed at reducing imports strained economic relations with trading partners ensured that the US alongside France held more than 70 percent of the gold within their economies (Krugman et al., 2012, p.517). the Smoot-Hawley Tariff Act of . Another probable factor is the presidential blunders that were created by both president Hoover and his successor President Roosevelt. While President Hoover implemented restrictive policies of cutting down money supply using both fiscal and monetary policies, Roosevelt adopted a “don’t care” attitude hoping that the economy would solve its own problems. Roosevelt did not tamper with what President Hoover had put in place including his wage cut policy that really contracted economic activity in the US (Beattie, 2008).
The great depression was made worse by the gold standard in that the gold standard rules required that a country’s economic strength be based on the gold reserves held by the central bank of the said country. Therefore currency strength was based on how much of gold reserves were held by the country with respect to the rest of the world (Krugman et al., 2012, p.517). with some countries abandoning the gold standard, the ripple effects of the change of policy by trading partners resulted in the crumbling of the international system of trade. The US was hard hit since its speculator policies within the international trade arena backfired.
The major problem with the gold standard was the requirement that countries should st their exchange rates based on their gold reserves. As such, it forced countries to sell off their fixed assets to offset deficits occasioned by running out gold deposits. The ultimate result was increasing internal interest rates that increased the vulnerability of the market space due to cash influx from abroad. The dilemma existed between holding too much gold hence attracting low interest rates or having less gold and attracting higher interest rates.
The benefits of holding gold without devaluing currency were not certain and it explains why the US, after abandoning the gold standard went back in 1934, by cutting down the value of the dollar with respect to an ounce of gold with approximately $9 (Krugman et al., 2012, p.517). Because of the undue dependence of international trade on the gold standards, some countries abandoned the policy and concentrated on internal economic issues at the expense of international trade. Countries like Britain that dropped the gold standard in time avoided internal market contractions and the deflationary effects that came along with clinging onto the gold standard. On the contrary, France and Poland, which hang onto the gold standard until 1936 suffered economic contractions and deflationary effects than any other member of the international community (Krugman et al., p.518).