1. Rethinking the Great Depression

2. The Gold Standard $20.67 = 1 oz.1 oz. = £4.25 £10.29 mill. $50 mill. 1 oz. = £4.25 $4.86 = £1 What if American exporters cant 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 $50 mill. £10.29 mill. 1 oz. = £4.25 $4.86 = £1 The flow of gold from England to U.S. wont persist over time. gold = MS MS = P inflation MV=PY gold = MS MS = P deflation 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). MV=PY 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. MV=PY 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 worlds 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.Hoover pushes for high wage policy. Congress increases taxes, curbs trade.Congress increases taxes, curbs trade. FDR toys with devaluation.FDR toys with devaluation.

9. Rethinking the Great Depression