1 / 9

Rethinking the Great Depression

Rethinking the Great Depression. £10.29 mill. $50 mill. The Gold Standard. $20.67 = 1 oz. 1 oz. = £4 .25. 1 oz. = £4 .25. $4.86 = £1. What if American exporters can’t exchange all of the £10.29 million?

fatima-dean
Download Presentation

Rethinking the Great Depression

An Image/Link below is provided (as is) to download presentation Download Policy: Content on the Website is provided to you AS IS for your information and personal use and may not be sold / licensed / shared on other websites without getting consent from its author. Content is provided to you AS IS for your information and personal use only. Download presentation by click this link. While downloading, if for some reason you are not able to download a presentation, the publisher may have deleted the file from their server. During download, if you can't get a presentation, the file might be deleted by the publisher.

E N D

Presentation Transcript

  1. RethinkingtheGreat Depression

  2. £10.29 mill. $50 mill. The Gold Standard $20.67 = 1 oz. 1 oz. = £4.25 1 oz. = £4.25 $4.86 = £1 • What if American exporters can’t exchange all of the £10.29 million? • Suppose they can only exchange £8 mill. at the going rate. . . . receiving only $38,880,000 • They would cash the rest out in gold: £2.29 mill. = 538, 823 oz. • They would redeem in U.S. for dollars: 538, 823 oz. = $11,120,000 • Total value received = $50,000,000

  3. The Gold Standard $20.67 = 1 oz. 1 oz. = £4.25 1 oz. = £4.25 $4.86 = £1 £10.29 mill. $50 mill. • The flow of gold from England to U.S. won’t persist over time. M•V=P•Y  gold =  MS  MS =  P deflation  gold =  MS  MS =  P inflation • U.S. exports fall, British exports rise; trade flows balanced.

  4. Confounding The Gold Standard In England, deflation means an economic slowdown and a (hopefully) mild recession (unemployment). M•V=P•Y To counteract these effects, the Bank of England can raise interest rates. This will attract foreign investment (capital inflows) that will offset the trade imbalance and end the outflow of gold. • If it persists, higher interest rates will cause a recession.

  5. Confounding The Gold Standard In the U.S., expanding the money supply means inflation and falling exports. M•V=P•Y To counteract these effects, the Federal Reserve can “sterilize” gold inflows by acquiring the gold (buy with taxes or sell securities). This prevents inflation and protects exporting firms. • This counteracts what the British are trying to do . . .

  6. Stress on the Gold Standard WWI - Combatant countries go off gold standard to spending. Gold rushes into the U.S. as countries buy war material. Post-WWI, gold stocks insufficient for existing price levels. Worldwide deflation (i.e., depression) is required. Victors can ease burden by acquiringgold stocks. Burden on losers is unsustainable. Eventually, U.S. lends gold to Germany.

  7. Stress on the Gold Standard The Gold Exchange Standard: U.S. & U.K. hold gold Other countries hold gold, $, £ U.K. recession restores gold value by 1925. France devalues currency; gold inflows. 1927 - France redeems pounds; more gold inflows. Fed lowers i; gold flows from U.S.; burden on U.K. lessened. 1927 - 9% of world’s gold; 1929 - 17%; 1931 - 22% Gold inflows sterilized and MS in France was constant.

  8. The Gold Standard Collapses • U.S. monetary policy is erratic: • 1927 - lowers i (3.5%) and gold flows out. • 1928 - raises i to stop gold outflows. • By Sept. 1929, i up to 6%; gold inflows 1929/1930. • After crash, i lowered; down to 1.5% in April 1931. • Gold outflows 1931; raised i to 3.5%. • March 1932 Fed begins OMO which stops deflation. • OMO stop in July 1932. • Devaluation concerns drive gold outflow Jan-Mar 1933. • Hoover pushes for “high wage” policy. • Congress increases taxes, curbs trade. • FDR toys with devaluation.

  9. RethinkingtheGreat Depression

More Related