Editing Gold standard (section)

=== The Gold Standard and the Great Depression ===
{{main|Causes of the Great Depression}}

Economists, such as [[Barry Eichengreen]], [[Peter Temin]] and [[Ben Bernanke]], allocate at least part of the blame for prolonging the [[Depression (economics)|economic depression]] on the gold standard of the 1920s. The [[Great Depression]] started in 1929 and lasted for about a decade.{{sfn|Eichengreen|1995|loc=Preface}}<ref>{{Cite journal|last1=Eichengreen |first1=Barry|last2=Temin|first2=Peter|date=2000|title=The Gold Standard and the Great Depression |journal=Contemporary European History|volume=9 |issue=2|pages=183–207|doi=10.1017/S0960777300002010 |jstor=20081742|s2cid=158383956|issn=0960-7773|url=http://www.nber.org/papers/w6060.pdf |archive-url=https://ghostarchive.org/archive/20221009/http://www.nber.org/papers/w6060.pdf |archive-date=2022-10-09 |url-status=live}}</ref><ref>{{Cite book|last1=Bernanke|first1=Ben |last2=James|first2=Harold|author-link=Ben Bernanke|year=1991|chapter=The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison|pages=33–68|publisher=University of Chicago Press|location=Chicago|chapter-url=https://books.google.com/books?id=MEfUi2H4cqwC|editor=R. Glenn Hubbard|title=Financial markets and financial crises |isbn=978-0-226-35588-7 |oclc=231281602 |editor-link=Glenn Hubbard (economics) }}</ref><ref>{{cite journal |last1=Eichengreen |first1=Barry |last2=Temin |first2=Peter |title=The Gold Standard and the Great Depression |journal=Contemporary European History |date=July 2000 |volume=9 |issue=2 |pages=183–207 |doi=10.1017/S0960777300002010 |s2cid=150932332 |url=https://www.nber.org/papers/w6060}}</ref><ref>{{Cite journal |last1=Crafts|first1=Nicholas|last2=Fearon |first2=Peter|date=2010|title=Lessons from the 1930s Great Depression|url=https://academic.oup.com/oxrep/article/26/3/285/374047|journal=Oxford Review of Economic Policy|language=en|volume=26|issue=3|pages=285–317 |doi=10.1093/oxrep/grq030|issn=0266-903X|quote=The key element in the transmission of the Great Depression, the mechanism that linked the economies of the world together in this downward spiral, was the gold standard. It is generally accepted that adherence to fixed exchange rates was the key element in explaining the timing and the differential severity of the crisis. Monetary and fiscal policies were used to defend the gold standard and not to arrest declining output and rising unemployment.|doi-access=free|s2cid=154672656}}</ref> The gold standard theory of the Depression has been described as the "consensus view" among economists.<ref name=":11">{{Cite journal|last1=Bordo|first1=Michael D.|last2=Choudhri|first2=Ehsan U. |last3=Schwartz|first3=Anna J.|date=2002|title=Was Expansionary Monetary Policy Feasible during the Great Contraction? An Examination of the Gold Standard Constraint |url=http://www.sciencedirect.com/science/article/pii/S0014498301907788|journal=Explorations in Economic History|language=en|volume=39|issue=1|pages=1–28 |doi=10.1006/exeh.2001.0778|issn=0014-4983}}</ref><ref name=":13">{{Cite SSRN |last=Irwin|first=Douglas A.|date=2011-11-21|title=Anticipating the Great Depression? Gustav Cassel's Analysis of the Interwar Gold Standard |ssrn=1962488}}{{doi|10.3386/w17597}}{{s2cid|153294427}}</ref> This view is based on two arguments: "(1) Under the gold standard, deflationary shocks were transmitted between countries and, (2) for most countries, continued adherence to gold prevented monetary authorities from offsetting banking panics and blocked their recoveries."<ref name=":11" /> However, a 2002 paper argues that the second argument would only apply "to small open economies with limited gold reserves. This was not the case for the United States, the largest country in the world, holding massive gold reserves. The United States was not constrained from using expansionary policy to offset banking panics, deflation, and declining economic activity."<ref name=":11" /> According to Edward C. Simmons, in the United States, adherence to the gold standard prevented the Federal Reserve from expanding the money supply to stimulate the economy, fund insolvent banks and fund government deficits that could "prime the pump" for an expansion. Once off the gold standard, it became free to engage in such [[money creation]]. The gold standard limited the flexibility of the central banks' monetary policy by limiting their ability to expand the money supply. In the US, the central bank was required by the [[Federal Reserve Act]] (1913) to have gold backing 40% of its demand notes.<ref>{{cite journal|title=The Elasticity of The Federal Reserve Note |first=Edward C. |last=Simmons |journal=The American Economic Review |publisher=American Economic Association |jstor=1807996 |volume=26 |issue=4 |date=December 1936 |pages=683–690}}</ref> A 2024 study in the ''[[American Economic Review]]'' found that for a sample of 27 countries, leaving the gold standard helped states to recover from the Great Depression.<ref>{{Cite journal |last1=Ellison |first1=Martin |last2=Lee |first2=Sang Seok |last3=O'Rourke |first3=Kevin Hjortshøj |date=2024 |title=The Ends of 27 Big Depressions |url=https://www.aeaweb.org/articles?id=10.1257/aer.20221479 |journal=American Economic Review |language=en |volume=114 |issue=1 |pages=134–168 |doi=10.1257/aer.20221479 |s2cid=266612576 |issn=0002-8282}}</ref>

Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.S. banks. Commercial banks converted [[Federal Reserve Notes]] to gold in 1931, reducing its gold reserves and forcing a corresponding reduction in the amount of currency in circulation. This [[speculation|speculative]] attack created a panic in the U.S. banking system. Fearing imminent devaluation many depositors withdrew funds from U.S. banks.<ref name="federalreserve2004">{{cite web|url=http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/default.htm |title=FRB: Speech, Bernanke-Money, Gold, and the Great Depression |publisher=Federal Reserve |date=2004-03-02 |access-date=2010-07-24}}</ref> As bank runs grew, a reverse multiplier effect caused a contraction in the money supply.<ref>{{cite web|url=https://mises.org/rothbard/AGD/chapter10.asp |title=1931—'The Tragic Year' |date=January 1963 |publisher=Ludwig von Mises Institute |access-date=December 24, 2011|quote=The inflationary attempts of the government from January to October were thus offset by the people's attempts to convert their bank deposits into legal tender&nbsp;... Hence, the will of the public caused bank reserves to decline by $400 million in the latter half of 1931, and the money supply, as a consequence, fell by over four billion dollars in the same period.}}</ref> Additionally the New York Fed had loaned over {{US$|150 million|long=no}} in gold (over 240 tons) to European Central Banks. This transfer contracted the U.S. money supply. The foreign loans became questionable once [[United Kingdom|Britain]], Germany, Austria and other European countries went off the gold standard in 1931 and weakened confidence in the dollar.<ref>{{cite web|url=https://mises.org/rothbard/AGD/chapter10.asp |title=1931—'The Tragic Year' |date=January 1963 |quote=Throughout the European crisis, the Federal Reserve, particularly the New York Bank, tried its best to aid the European governments and to prop up unsound credit positions. ... The New York Federal Reserve loaned, in 1931, $125 million to the Bank of England, $25 million to the German Reichsbank, and smaller amounts to Hungary and Austria. As a result, much frozen assets were shifted, to become burdens to the United States. |publisher=Ludwig von Mises Institute |access-date=December 24, 2011}}</ref>

The forced contraction of the money supply resulted in deflation. Even as nominal interest rates dropped, deflation-adjusted real interest rates remained high, rewarding those who held onto money instead of spending it, further slowing the economy.<ref>{{cite web|url=http://www.eh.net/Clio/ASSAPapers/Hanes.pdf |title=The Liquidity Trap and U.S. Interest Rates in the 1930s |first=Christopher |last=Hanes |quote=In the 1930s, the United States was in a situation that satisfied the conditions for a liquidity trap. Over 1929–1933 overnight rates fell to zero, and they remained on the floor through the 1930s.|url-status=dead |archive-url=https://web.archive.org/web/20040722174808/http://www.eh.net/Clio/ASSAPapers/Hanes.pdf |archive-date=2004-07-22}}</ref> Recovery in the United States was slower than in Britain, in part due to Congressional reluctance to abandon the gold standard and float the U.S. currency as Britain had done.<ref>Feinstein, Temin, and Toniolo. ''The European Economy between Wars''.{{full citation needed|date=April 2022}}</ref>

In the early 1930s, the Federal Reserve defended the dollar by raising interest rates, trying to increase the demand for dollars. This helped attract international investors who bought foreign assets with gold.<ref name="federalreserve2004"/>

Congress passed the [[Gold Reserve Act]] on 30 January 1934; the measure nationalized all gold by ordering Federal Reserve banks to turn over their supply to the U.S. Treasury. In return, the banks received gold certificates to be used as reserves against deposits and Federal Reserve notes. The act also authorized the president to devalue the gold dollar. Under this authority, the president, on 31 January 1934, changed the value of the dollar from {{US$|20.67|long=no}} to the [[troy ounce]] to {{US$|35|long=no}} to the troy ounce, a devaluation of over 40%.

Other causal factors, or factors in the prolongation of the Great Depression include [[trade wars]] and the reduction in [[international trade]] caused by barriers such as [[Smoot–Hawley Tariff]] in the U.S.<ref>{{Cite news |last=Stein |first=Ben |date=2009-05-09 |title=The Smoot-Hawley Act Is More Than a Laugh Line |language=en-US |work=The New York Times |url=https://www.nytimes.com/2009/05/10/business/10every.html |access-date=2023-10-06 |issn=0362-4331}}</ref><ref>{{Cite web |date=2018-09-20 |title=The Great Depression Lesson About 'Trade Wars' |url=https://www.history.com/news/trade-war-great-depression-trump-smoot-hawley |access-date=2023-10-06 |website=HISTORY |language=en}}</ref> and the [[Imperial Preference]] policies of Great Britain, the failure of central banks to act responsibly,<ref>M. Friedman: "the severity of each of the major contractions&nbsp;– 1920–21, 1929–33 and 1937–38 is directly attributable to acts of commission and omission by the Reserve authorities".{{quote without source|date=April 2022}}</ref> government policies designed to prevent wages from falling, such as the [[Davis–Bacon Act]] of 1931, during the deflationary period resulting in production costs dropping slower than sales prices, thereby injuring business profits<ref>{{cite web |first=Robert P. |last=Murphy |url=https://mises.org/daily/3778 |title=The Gold Standard and the Great Depression |date=30 October 2009 |quote=Another major factor is that governments in the 1930s were interfering with wages and prices more so than at any prior point in (peacetime) history |publisher=Mises.org |access-date=2012-07-09 |archive-date=2012-07-09 |archive-url=https://web.archive.org/web/20120709100220/http://mises.org/daily/3778 |url-status=dead }}</ref> and increases in taxes to reduce budget deficits and to support new programs such as [[Social Security (United States)|Social Security]]. The U.S. top marginal income tax rate went from 25% to 63% in 1932 and to 79% in 1936,<ref>{{Cite web|url=http://www.cato.org/pubs/tbb/tbb-0303-14.pdf |archive-url=https://ghostarchive.org/archive/20221009/http://www.cato.org/pubs/tbb/tbb-0303-14.pdf |archive-date=2022-10-09 |url-status=live|title=High Taxes and High Budget Deficits – The Hoover–Roosevelt Tax Increases of the 1930s|publisher=Cato Institute|access-date=3 March 2022}}</ref> while the bottom rate increased over tenfold, from .375% in 1929 to 4% in 1932.<ref>{{cite web |url=http://mjperry.blogspot.com/2008/11/10x-increase-in-taxes-during-great.html |work=Mark J. Perry's Blog for Economics and Finance |title=10X Increase in Lowest Tax Rate in Early 1930s |first=Mark J. |last=Perry |publisher=Mjperry.blogspot.com |date=2008-11-09 |access-date=2012-07-09}}</ref> The concurrent massive drought resulted in the U.S. [[Dust Bowl]].

The [[Austrian School]] argued that the Great Depression was the result of a credit bust.<ref>{{cite web |last1=Eichengreen |first1=Barry |last2=Mitchener |first2=Kris |title=The Great Depression as a Credit Boom Gone Wrong |url=http://elsa.berkeley.edu/~eichengr/research/bisconferencerevision5jul30-03.pdf |archive-url=https://ghostarchive.org/archive/20221009/http://elsa.berkeley.edu/~eichengr/research/bisconferencerevision5jul30-03.pdf |archive-date=2022-10-09 |url-status=live |date=August 2003 |access-date=December 24, 2011}}</ref> [[Alan Greenspan]] wrote that the bank failures of the 1930s were sparked by Great Britain dropping the gold standard in 1931. This act "tore asunder" any remaining confidence in the banking system.<ref>Alan Greenspan (1966). ''Gold and Economic Freedom''. "Great Britain fared even worse, and rather than absorb the full consequences of her previous folly, she abandoned the gold standard completely in 1931, tearing asunder what remained of the fabric of confidence and inducing a world-wide series of bank failures."{{full citation needed|date=April 2022}}</ref> Financial historian [[Niall Ferguson]] wrote that what made the Great Depression truly 'great' was the [[European banking crisis of 1931]].<ref>{{cite web|last=Farrell |first=Paul B. |url=http://www.marketwatch.com/story/our-decade-from-hell-will-get-worse-in-2012-2011-12-13?link=MW_story_popular |title=Our decade from hell will get worse in 2012 |quote=As financial historian Niall Ferguson writes in Newsweek: 'Double-Dip Depression&nbsp;... We forget that the Great Depression was like a soccer match, there were two halves.' The 1929 crash kicked off the first half. But what 'made the depression truly "great"&nbsp;... began with the European banking crisis of 1931.' Sound familiar? |publisher=MarketWatch |date=December 13, 2011 |access-date=December 24, 2011}}</ref> According to Federal Reserve Chairman [[Marriner Eccles]], the root cause was the concentration of wealth resulting in a stagnating or decreasing standard of living for the poor and middle class. These classes went into debt, producing the credit explosion of the 1920s. Eventually, the debt load grew too heavy, resulting in the massive defaults and financial panics of the 1930s.<ref>Robert B. Reich (2010). ''Aftershock''. Chapter 1: Eccles's Insight.</ref>

====Trying to return to the Gold Standard====
:See also: [[Financial crisis of 1914]], [[World War I reparations]], [[Herbert Hoover#Mining engineer|Herbert Hoover gold mining engineer]]
During [[World War I]] many countries suspended their Gold standard in varying ways. There was high inflation from WWI, and in the 1920s in the [[Hyperinflation in the Weimar Republic|Weimar Republic]], [[Hyperinflation#Austria|Austria]], and throughout Europe. In the late 1920s there was a scramble to deflate prices to get the gold standard's conversion rates back on track to pre-WWI levels, by causing [[deflation]] and high unemployment through [[Quantitative tightening |tight monetary policy]]. In 1933 [[Franklin D. Roosevelt|FDR]] signed [[Executive Order 6102]] and in 1934 signed the [[Gold Reserve Act]].<ref>{{cite web |url=https://www.cato.org/blog/world-war-i-gold-great-depression#:~:text=The%20result%20was%20a%20second,4%20years%20in%20a%20row. |title=World War I, Gold, and the Great Depression |date=23 August 2018 |first=Hu |last=McCulloch |publisher=[[Cato Institute]] |archive-url=https://web.archive.org/web/20241203011703/https://www.cato.org/blog/world-war-i-gold-great-depression |archive-date=3 December 2024 |url-status=live}}</ref>
{| class="wikitable" 
|+ Gold Standard Policies by Country<ref>{{cite web|url=https://www.nber.org/system/files/chapters/c11482/c11482.pdf |title=Financial Markets and Financial Crises, "The Gold Standard, Deflation, and Financial Crisis in the Great Depression: An International Comparison" |first1=Ben |last1=Bemanke |first2=Harold |last2=James|date=January 1991}}</ref>
! Country !! Return to Gold !! Suspension of Gold Standard !! Foreign Exchange Control !! Devaluation
|-
| Australia || April 1925 || December 1929 || — || March 1930
|-
| Austria || April 1925 || April 1933 || October 1931 || September 1931
|-
| Belgium || October 1926 || — || — || March 1935
|-
| Canada || July 1926 || October 1931 || — || September 1931
|-
| Czechoslovakia || April 1926 || — || September 1931 || February 1934
|-
| Denmark || January 1927 || September 1931 || November 1931 || September 1931
|-
| Estonia || January 1928 || June 1933 || November 1931 || June 1933
|-
| Finland || January 1926 || October 1931 || — || October 1931
|-
| France || August 1926-June 1928 || — || — || October 1936
|-
| Germany || September 1924 || — || July 1931 || —
|-
| Greece || May 1928 || April 1932 || September 1931 || April 1932
|-
| Hungary || April 1925 || — || July 1931 || —
|-
| Italy || December 1927 || — || May 1934 || October 1936
|-
| Japan || December 1930 || December 1931 || July 1932 || December 1931
|-
| Latvia || August 1922 || — || October 1931 || —
|-
| Netherlands || April 1925 || — || — || October 1936
|-
| Norway || May 1928 || September 1931 || — || September 1931
|-
| New Zealand || April 1925 || September 1931 || — || April 1930
|-
| Poland || October 1927 || — || April 1936 || October 1936
|-
| Romania || March 1927-February 1929 || — || May 1932 || —
|-
| Sweden || April 1924 || September 1931 || — || September 1931
|-
| Spain || — || — || May 1931 || —
|-
| United Kingdom || May 1925 || September 1931 || — || September 1931
|-
| United States || June 1919 || March 1933 || March 1933 || April 1933
|}