Eichengreen and Temin’s Explanation of the Cause of the Great Depression

The Gold Standard was the framework by which the value of cash was characterized in terms of gold, for which the money could be traded. The Gold Standard ended up being deserted in the Depression of the 1930s. Friedman felt that,“The gold standard is not feasible because the mythology and beliefs required to make it effective do not exist. This conclusion is supported not only by the general historical evidence referred to but also by the specific experience of the United States” ( “The Gold Standard:Please Stop”).Economists who contradict the Gold Standard may perceive what must be accomplished with a specific end goal to make a centrally controlled paper standard better than a decentralized Gold Standard. Milton Friedman poses the key question: "How can we establish a monetary system that is stable, free from irresponsible tinkering, and

First of all, the great advantage of the gold standard is that it portrayed long-term price stability. It was used as the buffer against risk for both monetary policy and inflation expectation as it restrict the government's power to inflate prices by printing excessive money. Under the gold standard, further money printed must correspond to amount of gold available in the economy. Thus, it was nearly impossible for the countries to experience hyperinflation. Another worthy benefit of the gold standard is that it sets up a fixed exchanged rage among participating counties as well as abolishes exchange rate volatility. Thus, the system provides a favorable economy in promoting international trade and investment. Historically, if the price levels in the participating countries were not balanced, it would be offset by the "price specie flow mechanism." which is the automatic balance-of-payment adjustment mechanism. For imports country, the use of gold to pay for the goods will suddenly decrease its money supply and therefor lead to deflation, making to country more competitive. In contrast, the gold receiving in exchange for goods for the exporters country will increase money supply and lead to inflation, making the country less

Cecchetti, Stephen G. "Understanding the Great Depression: Lessons for Current Policy ." Monetary Economics (1997): 1-26.

The economic expansion of the 1920’s, with its increased production of goods and high profits, culminated in immense consumer speculation that collapsed with disastrous results in 1929 causing America’s Great Depression. There were a number or contributing factors to the depression, with the largest and most important one being a general loss of confidence in the American economy. The reason it escalated was a general misunderstanding of recessions by American policymakers of the time.

This made the policy fine until WW 1 when the gold standard was torn up in 1914 because countries needed to print money to fight World War I. When World War I was over and the world entered the early 1920s, countries wanted to go back to the gold standard but they didn’t quite know how to do it. Before World War I started with parity, meaning there was a certain amount of gold and a certain amount of paper money backed by gold. Then, the paper money supply was doubled. That left only two choices if countries wanted to go back to a gold standard. They could’ve doubled the price of gold — basically cut the value of their currency in half or they could’ve cut the money supply in half. They could’ve done either one but they had to get to the parity

“With the rise if Fascism in western Europe and a world shaken by a massive economic depression.” (Aldous Huxley). The Great Depression, had very devastating effects on everyone, rich or poor. Cities worldwide were the worst to suffer from the Great Depression. In the 21st century, the example of the Great Depression is used to show us how bad the world’s economy can decline. A huge gratitude is given to President Franklin Roosevelt, he initiated several acts the improved the economy drastically. He started with the banks and then helped the American people to obtain job’s easier. “With freer markets, balanced budgets, and lower taxes…The Great Depression was over”. (Burton

Piecing together the events of the Great Depression is like putting together a jigsaw puzzle. As Ben S. Bernanke expressed,

With exchange rates now set in stone (fixed), the gold standard made sure that price levels around the globe move together. This dual movement occurred automatically with a balance-of-payments/ adjustment process also known or called the price-specie-flow mechanism. This is how the flow mechanism worked. Suppose that a grand technological innovation produced faster economic growth in the United States. Now because the supply of money (gold) was fixed/set in the short run, U.S. prices dropped. This lead to the Prices of U.S. exports falling in relation to the prices of our imports. This caused other countries to demand more U.S. exports and Americas demand for imports fell. This resulted in the United States creating a balance of-payments surplus,

According to the textbook, one of the underlying causes of the Depression was the crash of the stock market in 1929. On October 29, 1929 the U.S. Stock market crashed and is known today as Black Tuesday. During that time the most common credit extended to people was what was called a “call loan.” The stock buyer would put down 10 to 50 percent of what the stock was worth and borrow the rest to make full payment. If the stock dropped below a certain price the lender could “call back” the loan, demanding immediate payment in full. Billions of dollars were lost by a great many people, sending the economy into a tail spin.

The reason I chose this as my second cause of the Great Depression is because these markets control both the flow of money and the rates that money can be borrowed at. The credit market was in trouble according to Brinkley because large banks had been making bad loans and small banks were having customers default on their loans. The debt structure at the time was also in shambles according to Brinkley as American banks held large European debts that stemmed from World War One, which also left the economies of the European nations involved in pieces. With these nations’ economies not being strong enough to off their debts the allied nations made Austria and Germany pay reparations to them for the damage caused by the war. However this plan failed because both the German and Austrian economies were also in trouble as well and couldn’t pay the reparations they owed.

When talking about any topic regarding American history, it would be hard not to mention the 1930’s great depression. Authors in those times and even in the present times, devoted their works to this topic. The Great Depression is referred to by many studies and researches as one of the world’s worst economic depressions. This happens so that it can be used as a case study to describe how low world economy can fall.

The Great Depression was an economic depreciation in Europe, North America and other industrialized areas globally that commenced in 1929 and endured until about 1939. The depression stirred severe effects in the U.S.A that left its economy on the brink of a downfall. The research investigates the causes and reasons that influenced the great recession in the United States of America. The causes comprise of the hazardous decline of the Stock Market in that occurred in 1929 which sent the Wall Street in a panic turmoil that wiped out the main investors. Similarly, the declines of over 9000 banks influence the great depression. Purchasing powers of the population decreased drastically as the citizens from all walks of life stopped purchasing items due to economic fears and the fall of the stock market. The nation’s financial strategy that increased trade tariffs with Europe was also a significant impediment that triggered the great economic depression. International debts were a major aspect as well since the World War drove most European nations into dept with America.

The reasons for the Great Depression in the mid twentieth century have been broadly talked about by financial analysts and remain a matter of dynamic open deliberation. They are a piece of the bigger level headed discussion about monetary emergencies. The particular monetary occasions that occurred amid the Great Depression are entrenched. There was an underlying securities exchange crash that set off a "frenzy auction" of

The last contributing factor to the great depression was the Americas position in the international trade. Ironically “in the 1920s the European demand for American goods began to decline.” The American tariffs were so high they “ dramatically lowered U.S. exports, from $7 billion in 1929 to $2.4 billion in 1932, and a large portion of U.S. exports were agricultural; therefore it cannot be assumed that the microeconomic inefficiencies were evenly distributed.” It is easy to assume that the economic decline was due to the emergence of European industry and agriculture, but that was not the only raw material America produced. America suffered from worldwide retaliation their minerals. After the collapse of the Wingfield chain of banks the U.S

1. The gold standard and the money supply. Under the gold standard all national governments promised to follow the “rules of the game”. This meant defending a fixed exchange rate. What did this promise imply about a country’s money supply? A country’s money supply was limited to the amount of gold held by its central bank or treasury. For example, if a country had 1,000,000 ounces of gold and its fixed rate of exchange was 100 local currency units per ounce of gold, that country could have 100,000,000 local currency units outstanding. Any change in its holdings of