The Gold Standard and the Great Depression

  There are multiple economic theories of why the Great Depression occurred. This blog will explain one theory describing how the international gold standard set the stage for the Great Depression. The gold standard heightened the vulnerability of the international financial system. It was the mechanism that transmitted the destabilizing signal from America to the rest of the world. The gold standard was the binding constraint preventing policymakers from containing the spread of financial panic and averting the failure of banks. It was the principal obstacle preventing offsetting actions. Exploring these reasons allows one to understand how the gold standard was the central factor for the Great Depression. [1] For over a quarter of a century prior to the Great War, the gold standard stipulated the basis for domestic and international monetary relations. Global currencies were convertible into gold on demand. This was linked universally at fixed rates of exchange. The balance-of...