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The Gold Standard and the Great Depression (Gold standard: monetary system…
The Gold Standard and the Great Depression
Gold standard: monetary system (started by UK 1819)---- ex. now we live in euro standard
all money in circulation has to be backed by gold
adherence to gold standard (ex. Germany got in 1871 thanks to Franco-Prussian war: huge reparations in gold)
Fixed value in gold for each currency---- fixed value with each other
Price-specie flow mechanism (David Hume): work by itself (WRONG)
ex. England: exports---surplus---+gold---+money in circulation--- less competitive (higher prices, inflation)----- less trade---balance
need for authority intervention (ex. sterelization): lower/raise interests to change consumption and investment
Rules of the Games(interest rate) needed to be followed by Central Banks
Balance
Disadvantages
Does not achieve price stability
Problems to fight unemployement (autocrisis-deflate prices)
Advantages:
Stability of the exchange rates (ex. business)
International seal of approval
Working before WW1
UK had large surplus
UK recycled by investing in peripheries
Peripherial countries run deficits
Peripherial countries hold thanks to investments
Consequences of first globalization:
protectionism
end of gold standard
limited labour/capital mobility
Consequences of WW1:
Financial material costs
Trade losses
Human loss
Reparations
End of 1st glob
Paying for the war
Fiscal policies (taxes, not so used)
National debts (bonds, patriotism)
Monetarization (printing money)
External debt (reparations)------------hyperinflation (stabilization thanks to Plan Dawes and Plan Young, more time to pay/less reparations) BUT 1929: german's default, 80% of GDP
Economic trilemma
Only two at the same time :
Fixed exchange rates
Freedom of capital movements
Monetary autonomy (Rules of the game)
The Great Depression
UK not as affected
Causes:
problems with the reestablishment of gold standards (US leader, didnt recycle as much: young ecconomy, booming, huge local market, unexploited resources----FR and US accumulate gold reserves)
collapse of international markets of primary good (periphery countries didnt have access to money, overproduction after WWI: reduction of prices, recession, rural credit crunch in the 20s)
problems in financial system (all before) + urban banks provided credit to invest in the stock market (not wise)
Extension:
problems from 20s (rural areas mainly)
crash in summer 1929
UK leave GS in 31/ DE in 32 then UK,FR and LA default (toxic actives, fall in GDP US)
shock was partly absorbed by agrarian employment in Europe
Response:
US, Sweden, DE:
Public expenditure in infrastuructures
Fiscal expansionary policies
UK
keep balanced budget
Monitary expansionary policiy (lower investment rates)
France
deflactionary process, restrictive policies