The Great depression was an intense worldwide economic depression preceding World War II. This was in the time period of 1930s. This remains to be the most horrible economic phenomenon of the 21st century made of separable but interrelated events. The depression began in USA after the stock market crash of 1929 following the fall in stock prices; Black Tuesday. The resultant was devastating result on all sectors of the economy with employment loss among the employed. The Depression brought about mixed reaction among economists, historians and the political class. The economists’ failure to understand the development of contemporary economies of the time was a show of weakness on their conceptual apparatus (Mankiw, 1997: 103). The state of misunderstanding between scholars in economics and economic history seems to be resolved after remarkable degree of consensus among specialist on the causes of the Great Depression. The current literature has substantially resolved the riddle of the Great depression. The literature majorly focuses on the gold standard as the contributory agent of the Great Depression. However, the constraints of the system limited the ability of the world economy to adapt to changes in the world economy in 1920s. This saw the measure adopted enhance the economic misery (White, 2012: 431).
The basic conflict underlying the 1930s gold standard decision and morality Modern literature on the great Depression lay emphasizes on mentalite, discourse, mass politics and the eclipse of the nation-state. Mentalite means the policy makers’ social mind set shaping the notion of the likely. The gold standard policy makers strongly shaped contemporaries belief of feasible and desirable economic policies. This was developed to cope with the un-existing world sustained by social and political pressures that discouraged its negligence. This resulted to formulation of policy responses that only intensified the situation (Eichengreen, & Temin, 1997: 5). The ability of the government to respond to the adversity was limited by the mentality and the actions and institutions prescribing policies that worsened the condition. As a response measure to balance of payment deficits and gold losses, government deflated the economy restricting credit in order to reduce domestic prices and costs to restore global balance. The fundamental component to the process was the need to reduce wages the largest element in costs. The conventional gold standard adjustment mechanism was crippled by the loss of flexibility in wages, in the increasingly structured and politicized labor markets of interwar period. This was characterized by the limited penetration of the labor market by the spread of unionism, growth of internal labor markets and personnel department in the United States and the neighborhood effect (Eichengreen, & Temin, 1997: 15). The prewar wage flexibility levels were also not sufficient to resolve the 1930s crisis. The 1929 deflationary shock was worsened by the radical shifts in the international settlement patterns calling for overhaul changes in prices and costs in order to restore external balance of payment. Those who clinched to the gold-standard mentalite notion never saw the problem and hence the need to question the advice of employing the deflationary path (Mankiw, 1997: 103). The rhetoric of policy debate and gold standard in particular forms the discourse. This helped to form and sustain the gold-standard mentalite. The monetary system was traditionally attributed to the qualities of prudence, reliability, steadiness and cosmopolitanism as per Victorian and Edwardian. Gold was in the opposite of money as moral, principled and civilized (Eichengreen, & Temin, 1997: 35). Money was preserved by deflation whose intent was to cut wages. This was unanimously agreed with only speculators disagreeing. This limited ability to question the merits of gold convertibility. The impact on financial markets, public policy and the Depression itself on the actions, attitudes and the actors influence excluding the political elites formed the mass politics. The other segments of the society and especially the working class come out strongly opposing the gold-standard ideology and policies in the 1930s (Eichengreen & Temin, 1997: 12). This took place after the Great War given that before then the workers who suffered unemployment as a result of the central banks attempt to raise interest rates had few ways of raising their objections heard. The free will to vote was restricted, and the trade union actions were only allowed in some few trades. Also, the socialist and labor parties were at infant stage. This limited the working class capacity to challenge the financial status quo (Eichengreen, & Temin, 1997: 27). The Great War was a great milestone that transformed the situation by encouraging unionization, impelling extensions of the right to vote, and improving the electoral fairness of the socialist and labor unions. The change in the arrangement of investing and earning classes changed the social basis of prewar gold-standard policies (Eichengreen, & Temin, 1997: 7). This marked the political leaders concern for their political security on repeatedly endorsing standard deflationary corrective measures. Their hesitance to take measures saw the market pounce destabilizing the currency, the exchange rate and the economy. This increased the pressure on the need to defend the gold standard with deflationary events (Lawrence, 2008: 7). The same working class pressure that intensified the Depression by casting doubt on the government willingness to stay on the course heightened the need for deflationary action by providing a way out. The leaders who favored the gold-standard and refused to be enlightened were removed out of the office by the electorate in favor of the leaders who were fewer inclined to the status quo. The new leaders abandoned the gold-standard forcing the central bankers who were reluctant to embrace the new rhetoric of reflation. Lastly, eclipse of the nation-state which refers to the increasing importance of sociopolitical and socioeconomic factors operating at international levels. Many historians and economists link the causes of Depression with the events in the United States. They have neglected the events in the international domain that set the stage for the 1929 downturn and transformed the ordinary recession proceeding into a great depression (Brad, 1996). The changes in the international settlement pattern brought about by World War I and their interaction created a problem in the functioning of the international monetary and financial systems. The long time thought by the historians on the policy makers actions and the severity brought about by it has seen them focus on international issues. They have discovered that there was ideological difference on the views depending on the approach to the international approach to the system (Eichengreen, & Temin, 1997: 37). No one single idea can be single asserted to be the sole cause of the Great Depression. It can be argued that the mentalite of the gold standard is a vital element among the many contributing factors. The Federal Reserve System effort to try and manage the gold standard system after the shift from London where it was managed before brought about the conflict to maintain or abandon the system (Mankiw, 1997: 102).
Economic lesson The gold standard could not help keep the economies afloat but instead helped sink them. The world economy is endowed with powerful self-correcting mechanisms to correct its cycles automatically (Mankiw, 1997: 103). When economic activity turns down, its inner workings provide a tendency for bouncing back. Hence only bad policies can drive it off its path losing its power to make progress. Consequently, merely hegemonic ideology can persuade leaders persistently employ such counterproductive policies like the gold standard scheme (Brad, 1996: 114). The system simply continued to inflict pain on the ordinary people in the society. This created the need for system change. Consequently the economists adopted the mixed strategies of employing both fiscal and monetarist policies under fiat. This has helped avoid a repetition of such economic atrocities and the associated sufferings.
Democratic country and re-introduction of the gold standard today Relying on the atrocities inflicted to the common citizen and the political leader’s sensitivity to their political career, not any democratic country can successfully re-introduce the gold standard in the present day. Thus, considering that human rights watch groups and the labor unions that defend the workers against the salary cut a policy the gold standard employed to cut on the cost. More so the economists of the day are more concerned about the country external trade and cannot and the balance of payment which determine the country competitiveness at international levels (White, 2012: 412). The transition cost of switching to gold standard would be high due to the need to reestablish the gold definition for the dollar. There is also no enough gold to support today’s dollar price level. The free market enjoyed would no longer exist due to excessive involvement of the government in price-fixing. Lastly, no any country can be able to recreate the classical gold standard by itself (Lawrence, 2008: 7).
Brad, D. (1996). “Why Not the Gold Standard”. (pp 112-121)
Eichengreen, B. & Temin, P. (1997) “The Gold Standard and the Great Depression,” NBER Working Paper 6060 (pp 1-45)
Lawrence, H. W. (2008). “Is the Gold Standard Still the Gold Standard among Monetary Systems?” Cato Institute Briefing Papers, No. 100 (pp 1-9).
Mankiw, G. (1997). The Free Silver Movement, the Election of 1896, and the Wizard of Oz. in Mankiw (3rd ed.), Macroeconomics (pp. 102-103), NY: Worth,
White, L. H. (2012). Making the Transition to a New Gold Standard. CATO Journal, 32(3), 412-432.