IN DEPTH
P.11
However there are shortcomings of
the gold standard. In 1933 the U.S.
were showing no signs of exiting the
depression. Unemployment was continuing to rise and deflation was
mounting. The U.S. were unable to
stimulate
the
economy.
The
government had to maintain high interest rates in order to deter
consumers from cashing in deposits. It
was too expensive for consumers
and firms to borrow money, limiting
growth and spending. By cutting the
dollar from gold the government was
able to pump money into the economy, and cut interest rates. Liaquat
Ahamed, author of the book ‘Lords of
Finance’ is quoted as saying ‘Most
economists now agree 90% of the
reason the U.S. got out of the Great
Depression was the break with gold’.
Abandoning the gold standard was
not as simple as it may sound. It was
said that by abandoning the gold
standard
the
dollar
would
depreciate, causing exports to be
relatively cheaper and imports dear-
er. Critics argued that this advantage in trade would increase
demand for American goods, causing
uncontrollable inflation. If the U.S. abandoned the gold
standard it would cause Germany
and France to swiftly follow in a
race for the worse currency, due to
the trade benefits it would bring.
When Britain had
earlier abandoned the gold standard in 1931
the pound’s value
depreciated from $5.00 to about $3.60,
making it harder for U.S.
exporters to sell to the UK and its empire.
If more countries followed this lead
the consequences could be much
more widespread. The price stability afforded by the gold
standard
would be completely lost, further
causing consumers to lose faith in
their respective economies, many
of which had thrived under the gold
standard.
It was a controversial and significant decision to drop the gold
standard, which had reverberations
around the world. Thankfully it
yielded
significant benefits, with
lower interest rates bringing the
stimulus the U.S. economy needed.
There were complaints initially, an
example being from Americans living abroad that had to deal with the
unfair exchange rates. However,
the aim of arresting
deflation
was being achieved as the prices of
raw
materials and
common
stock started to rise. The feared
economic collapse did not transpire. The
fundamental
problem of
deflation had been
solved, setting up the chance for
economic revival and the end of the
Great Depression.
The period of the gold
standard
was highly successful for the world
economy. World trade significantly
expanded and many countries
experienced high growth. It is beyond doubt that in part the gold
standard helped to
facilitate
this success, but abandoning the
gold standard was a hugely significant step in economic advancement. Not only did it allow the U.S.
government to stimulate the economy and escape the Great Depression but now monetary policy, the
basis of Keynesian
economics,
is much more flexible. This flexibility should act to prevent any depressions of similar
magnitude in the future.