Reply To: Great Depression

#15742
jmherbener
Participant

The Great Depression came as a result of the disruption of the world economy and destruction of the international gold standard in the First World War. For all its faults, the international gold standard did impose some fiscal and monetary discipline on countries. Governments that inflated their currencies to help fund their expenditures lost gold reserves to the more prudent countries and suffered booms and busts in the process of inflating the money stock and then deflating as they lost gold.

The period of suspension of the gold standard during and after the war gave states a taste of the power they could wield unfettered by the old monetary and fiscal constraints. But, they did concede that an international monetary system was conducive to, if not essential to, the restoration of international trade and the world economy. They constructed the gold exchange standard, established in the mid-1920s, to try to restore international trade while allowing exercise of their new powers of monetary inflation. Far from penalizing excessive monetary inflation, the gold exchange standard penalized lack of harmonization of monetary inflation among different governments. That is, its purpose was to foster a coordinated monetary inflation among the member countries. As they all inflated together in the latter half of the 1920s, they all went through the boom (and subsequent bust) together. Even so, the inflation was disparate in different countries and one by one states decided to abandon the gold exchange standard too.

The classic work to read on the international aspects of the Great Depression is Lionel Robbins, The Great Depression.

http://library.mises.org/books/Lionel%20Robbins/The%20Great%20Depression.pdf