What was the gold standard? Why was the gold standard instrumental to the early 20th Century globalized economy? Listen to this piece that defends the Gold Standard. It’s a bit chatty; the most important sections are between 5:00-5:30; 7:00 – 14:00. Many economists make the argument that being on the gold standard provided a kind of emotional security for bankers and capitalists coming out of the Great War. After all, there had been this euphoria associated with the years prior to the war.
The costs of being on gold could be substantial. A government committed to a gold-backed currency could not use monetary policies, such as devaluing or lowering interest rates, to deal with domestic economic difficulties. The rules of the gold standard game—free convertibility of currency into gold, allowing domestic prices and wages to move freely up and down to maintain the gold value of the currency—required governments to give up active monetary policy, even when such a policy was justified by local conditions. (Frieden 44)
When world wheat prices dropped by about half during the late 19th C, the gold standard American price of wheat also fell by half, from a dollar to fifty cents a bushel. But in Argentina, which went off gold and devalued the peso, wheat prices paid to farmers were steady.(Frieden 112)
In the 1930s, wages and prices stopped being so flexible. Why? Because two new bodies had developed:
- Corporations, who were now able to control their own prices (deciding to sell less but at higher prices if that would yield more profit). A good example of this would be the car companies such as Ford and GM.
- Labour Unions could now command fair wages in a way that workers for small businesses had not been able to do previously.
- Bringing Labour Unions and Corporations together, a company like Ford wanted to hold onto its work force, so it would pay better wages and benefits so that its employees would stay with them. (But only large corporations had the capital to be able to do this in tough times).
Just as the world’s richest countries had gone on gold en masse, those countries all left at the same time, as the seriousness of the Depression could no longer be ignored.
- British go off Sept ’31
- Japan went off 1931
- US go off 1933
- Belgium, Poland, France, they go off 1936
- Spanish never went on gold – and it didn’t go into a depression either!
Then listen to this piece that explains why the US left the gold standard. Start it from the beginning, it’s good! Here is Franklin Delano Roosevelt’s Fireside chat of 1933
You can also watch the first episode Commanding Heights where you’ll see debate played out between two key concepts for managing economies in the 20th Century: that of the planned economy and that of the free market and their associated proponents, Keynes and Hayek. The timeline provided by PBS is indispensable.