Question

4. Why has the ‘Gold Standard’ been ‘blamed’ for the Great Depression? After the experience of the 2008 crisis, is it still reasonable to attach so much ‘blame’ to the gold standard for the severity of the Great Depression?

Answer 1

Gold standard is a monetary system where a currency of a nation is pegged to the gold value. In this a given amount of paper currency can be coverted to fixed amount of gold. The countries which follow this kind of monetary system cannot increase the value of paper money without increasing the amount of gold reserves.Since late 1800s to 1930's US alongwith many other countries was following this monetary system of International Gold Standard.Initially during early 1920s, the US economy bloomed due to expansion of industries after post war recovery. Later, to combat the inflation, the Federal reserve increase the rate of Interest in 1928 which effect those countries who borrowed money from US during World War I. these countries were facing difficulty in paying off debts which resulted into decline in exports of US.Then the economy faced stock market crash in 1929 due to high interest rates which was followed by bank failures. At the same time European countries started dropping off Gold Standard but US didnot drop off gold for another two years which leads to worson the situation of the economy. Instead of that they increased the prices of gold After two years, US also abondon the gold standard,and this helped the economy to grow. Thus, gold standard been bamed for the Great Depression.

After the 2008 crisis,it is not reasonable to blame Gold Standard for Great Depression because there were also several other factors due to which the situation of Depression arisis. First of all, in 2008, the US economy was not having gold standard as their monetary system. It was mainly arised due to deregulation in the financial sector. ALso at the same time, government reduces the rate of interest.The main reason of the 2008 financial crisis was hgh default rate in US subprime home mortgage sector.