The Gold Standard & The Great Depression, Essay Example

In the paper “The Gold Standard and the Great Depression” by Temin and Eichengreen , the authors argue that the gold standard mentality contributed to the severity of the great depression.  The following will go into deeper detail about what the authors mean by “mentality of gold standard” and just how it had such a significant impact on ushering in The Great Depression.

The main issue with the Gold Standard is that it keeps the central bank from having the resources need to combat against an economic recession. It does this by basing monetary policy on the amount of gold that is available in the market at a given time. The amount of gold available on the market directly correlates to the trade balance which in turn is reliant on the amount of gold mined. The gold standard applies value to each dollar  interests rates have to be raised and this happens regardless of the state of the economy not in reaction to the state of the economy, which is more liable to cause another Great Depression. When Termin and Eichengreen refer to the mentality of the gold standard they are referring not just to this flawed system and its vulnerabilities, but to the nature of banks and financial authorities to be hesitant when moments arise where the standard might need to be defended.

The gold standard mentality is described as a blind illogical faith in the effectiveness and durability of the gold standard. The authors note that this blind faith was so irrational that is resulted in inaction, noting that, “the gold standard consequently was not abandoned. Its rhetoric was deflation, and its mentalite was of inaction. Central banks therefore stood ready to withstand financial paniscs like the Baring Crisis but not to preserve production or employment.” (Eichengreen & Termin, 26). The authors mention deflation. Deflationists believe that the gold standard is viable and a sound system because under the conditions of the gold standard, contracting credit results in a form of self feeding liquidation where prices driving downward results in an increased demand for gold. In theory and in practice the gold standard did result in deflation, but the burden of deflation was too great and had an unexpected after effect. The authors note that, “Delfation magnified the burden of outstanding debt, forcing debtors to curtail their spending still further in the effort to maintain their credit wothiness. As the gold-exchange stnadard collapsed back into the kind of pure gold-based system that Moret associated with financial stability, markets were destabilized as never before” (Eichengreen & Termin, 29). Here the authors describe in thorough detail exactly how the gold standard led to the Great Depression through first creating panic and desperation in consumers and then  instability in the market.  The mentality of the gold standard can be seen in how financial authorities passively responded to the panic.

The authors imply that part of the reason The Great Depression occurred is because authorities were hesitant to abandon the system when it was most apparently flawed and not working to recover the economy, because it was clearly unable to do so; but they also state that, when the unemployment rate rose, it marked a period when federal and state governments needed to raise taxes to defend the gold standard, and they failed to make this effort. They also note that central banks were note prepared to raise interest rates when it would have mattered most.

In regards to the gold standard mentality, the authors note that political class combined with a “gold standard ideology” or mentality, are what incited the beginning of the end for the U.S. Economy as it was known to date. They state that, the deflationists and liquidationists of the era leading into the great depression invested too much confidence in their beliefs that the market would endure based on the gold standard. The authors state that limits of the market were not recognized, especially in regards to how much punishment the public could endure. They refer to the public stating that, “they have been run over by a steam roller they had not seen coming, namely, the human equation” (Eichengreen & Termin, 41). Here the authors attribute the cause of The Great Depression as the will of the people to no longer tolerate severe financial disenfranchisement. The authors imply that the mentality of the Gold Standard, or at least one aspect of the mentality, was to sustain obstacles to economic recovery. This can be seen when they state that, “the world paid a high price before the mentality of the gold standard was flattened by this human steam roller, removing the obstacles to economic recovery” (Eichengreen & Termin, 41). Essentially the gold standard was both the driving influence that caused prices to decline and it was also the obstacle standing in the way of recovery, the mentality of blind faith that believed the economy would naturally regain its status through deflationary principals also had to be removed, and the Great Depression represented the grass roots movement of the people collapsing under the pressure imposed on them by this mentality.