The Gold Standard Disintegration
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Questions and Answers

What was the main factor leading to the global credit crunch in 1931?

  • Dysfunctional Gold-exchange Standard (correct)
  • Capital controls
  • Trade collapse
  • Severe depression

    • Which countries increased tariffs more than others during the Great Depression?

  • Import quota countries
  • Devaluing countries
  • Gold bloc countries (correct)
  • Small open economies

    • What was the primary cause of the trade collapse during the Great Depression according to Perri and Quadrini (2002)?

  • Trade restrictions and real wage rigidities (correct)
  • Foreign debt problem
  • Global monetary contraction
  • Devaluations fueling the trade war

    • What contributed to the lasting disintegration of the world economy according to the summary?

    <p>Capital controls and the trade war</p> Signup and view all the answers

    What did the average protection rates of 30 countries from 1926-1938 illustrate?

    <p>Disintegration of global goods markets</p> Signup and view all the answers

    What fueled the intensification of the trade war after 1931?

    <p>Competitiveness loss vis-à-vis gold leavers</p> Signup and view all the answers

    What was the percentage of nominal expenditures cut in real terms due to deflation between 1930 and 1932?

    <p>14%</p> Signup and view all the answers

    What event led to the introduction of capital controls in Germany in August 1931?

    <p>Austrian Creditanstalt crisis</p> Signup and view all the answers

    What was the first electoral success of the Nazi party in Germany, and in which year did it occur?

    <p>September 1930 (18%)</p> Signup and view all the answers

    What was the impact of a 1% real expenditure reduction on the increase in NSDAP vote share, as per McKee et al (2021)?

    <p>$0.683-0.896$ ppt increase</p> Signup and view all the answers

    What was the effect of the U.S. Smoot-Hawley tariff, implemented in June 1930?

    <p>Initiated a global trade war</p> Signup and view all the answers

    What was the main reason for the collapse of the Sterling bloc?

    <p>Global monetary contraction</p> Signup and view all the answers

    What was the impact of the devaluation on the Sterling bloc?

    <p>Increased gold inflows</p> Signup and view all the answers

    What was a consequence of the gold standard on the global banking crisis in 1931?

    <p>Trilemma conflict between exchange rate stabilization and lender of last resort function</p> Signup and view all the answers

    What was Germany's response to the sudden stop of US capital inflows in 1929?

    <p>Unilateral default on foreign debt</p> Signup and view all the answers

    Why were economic policy options limited for Germany during this period?

    <p>$Sovereign$ default risks and lack of access to private capital markets</p> Signup and view all the answers

    What influenced Brüning's austerity policy in Germany?

    <p>Support from economists like Joseph Schumpeter for deflation and radical change.</p> Signup and view all the answers

    During the Gold Standard, what was the formula for the monetary base (Baset)?

    <p>$Baset = Bt + Pt$</p> Signup and view all the answers

    What did gold outflows lead to during the Gold Standard?

    <p>Decrease in money supply and falling prices</p> Signup and view all the answers

    What did the Gold Standard create a trilemma for central banks, forcing them to choose between?

    <p>Stable exchange rates, capital mobility, and independent monetary policy</p> Signup and view all the answers

    What did the asymmetry problem in the Gold Standard mean for gold outflow and inflow countries?

    <p>Gold outflow countries had to contract their monies while gold inflow countries could not expand their monies without losing their gold cover ratios</p> Signup and view all the answers

    What led to the breaking point of the Gold-exchange Standard in 1931?

    <p>Currency crises and abandonment of the Gold Standard</p> Signup and view all the answers

    What was the consequence of the Bank of France's attempt to increase gold reserves during the currency crises in 1931?

    <p>Further monetary contraction, deepening the Great Depression</p> Signup and view all the answers

    What was the gold coverage ratio typically in terms of legal gold cover ratios?

    <p>25% to 40%</p> Signup and view all the answers

    What was the equation for actual gold cover ratios ($\text{λ}_t$) fluctuating around legal ones?

    <p>$\text{λ}_t = \text{P}_G \times \text{G}_t$</p> Signup and view all the answers

    What was the consequence of the Great Depression, according to the Gold Standard literature?

    <p>Tight monetary policy was an international phenomenon</p> Signup and view all the answers

    How did the Gold Standard work in terms of domestic money and gold conversion?

    <p>Domestic money is freely convertible into gold at a fixed price</p> Signup and view all the answers

    What did the monetary authority fix in the Gold Standard system?

    <p>The gold price of the local unit of account</p> Signup and view all the answers

    What was the typical range for actual gold cover ratios ($\text{λ}_t$) fluctuating around legal ones?

    <p>Around legal ones: $\text{λ}_t = \text{P}_G \times \text{G}_t$</p> Signup and view all the answers

    What was the primary cause of the global monetary contraction according to the text?

    <p>Money multiplier</p> Signup and view all the answers

    What was the consequence of the gold outflows during the Gold Standard?

    <p>Increased net exports</p> Signup and view all the answers

    What was the impact of Brüning's austerity policy in Germany?

    <p>Boosted net exports</p> Signup and view all the answers

    What was a consequence of the trilemma conflict caused by the Gold Standard?

    <p>Exchange rate stabilization</p> Signup and view all the answers

    What contributed to the lasting disintegration of the world economy according to the summary?

    <p>Global banking crisis in 1931</p> Signup and view all the answers

    What was Germany's response to the sudden stop of US capital inflows in 1929?

    <p>Austerity policy</p> Signup and view all the answers

    What was a significant consequence of the trade war intensification after 1931?

    <p>Increase in tariffs and trade collapse</p> Signup and view all the answers

    What was the impact of devaluations on the trade war during the Great Depression?

    <p>Devaluations fueled the trade war</p> Signup and view all the answers

    What factor contributed to a lasting disintegration of the world economy according to the summary?

    <p>Capital controls and the trade war</p> Signup and view all the answers

    What did gold bloc countries do in response to the global financial crisis in 1931?

    <p>Increased tariffs more than others</p> Signup and view all the answers

    What was a key feature of the Great Depression's impact on international trade?

    <p>International trade fell even faster than output</p> Signup and view all the answers

    What did gold remainers try to offset their competitiveness loss vis-à-vis gold leavers through?

    <p>Through tariffs</p> Signup and view all the answers

    What did the Gold Standard force central banks to choose between?

    <p>Stable exchange rates, capital mobility, and independent monetary policy</p> Signup and view all the answers

    What was the equation for the monetary base (Baset) during the Gold Standard?

    <p>$Baset = Bt + Pt$</p> Signup and view all the answers

    What led to a decrease in money supply during the Gold Standard?

    <p>Gold outflows</p> Signup and view all the answers

    What did gold inflows during the Gold Standard lead to?

    <p>Increased money supply and raised prices</p> Signup and view all the answers

    What was the primary reason for the suspension of the Gold Standard during World War I?

    <p>Encouragement for central banks to hold reserves in foreign exchange instead of gold</p> Signup and view all the answers

    What was the consequence of the Bank of France's attempt to increase gold reserves during the currency crises in 1931?

    <p>Further monetary contraction, deepening the Great Depression</p> Signup and view all the answers

    What was the typical range for actual gold cover ratios ($\lambda_t$) fluctuating around legal ones?

    <p>30% to 40%</p> Signup and view all the answers

    What was the formula for actual gold cover ratios ($\lambda_t$) fluctuating around legal ones?

    <p>$\lambda_t = P_G \cdot G_t$</p> Signup and view all the answers

    What did the Gold Standard system involve in terms of domestic money and gold conversion?

    <p>Domestic money was freely convertible into gold at a fixed price</p> Signup and view all the answers

    What was the primary consequence of the Gold Standard according to the text?

    <p>Tight monetary policy</p> Signup and view all the answers

    What did the legal gold cover ratios ($\lambda$) typically range from?

    <p>25% to 40%</p> Signup and view all the answers

    What did two countries on gold with a fixed exchange rate mean in the Gold Standard system?

    <p>They had a fixed exchange rate between them</p> Signup and view all the answers

    What was the percentage of nominal expenditures cut in real terms due to deflation between 1930 and 1932?

    <p>20%</p> Signup and view all the answers

    What was the impact of a credit crunch during the Great Depression in Germany?

    <p>Increase in corporate bond yield</p> Signup and view all the answers

    What was the consequence of the Hoover Moratorium in 1931?

    <p>Suspension of reparation payments for one year</p> Signup and view all the answers

    What led to a fall in imports during the Great Depression in Germany?

    <p>Austerity policies</p> Signup and view all the answers

    What was the primary cause of the political crisis in Germany during the Great Depression?

    <p>Nondemocratic parties gaining power</p> Signup and view all the answers

    What exacerbated the crisis during the Gold Standard era?

    <p>Defending the gold standard resulted in a monetary contraction</p> Signup and view all the answers

    Study Notes

    • The text discusses the rules of the game central banks followed during the Gold Standard of the 1920s and how violations of these rules contributed to the Great Depression.

    • The monetary base (Baset) was the sum of the quantity of monetary gold (Bt) and the currency in circulation.

    • Central banks aimed to maintain a cover ratio, setting interest rates based on the difference between the current price level (Pt) and the expected price level (λt).

    • Gold outflows led to a decrease in money supply, causing prices to fall and improving price competitiveness. Conversely, gold inflows increased money supply, raised prices, and worsened price competitiveness.

    • The Gold Standard was suspended during World War I, and central banks were encouraged to hold reserves in foreign exchange (FXt) instead of gold.

    • The Gold Standard created a trilemma, forcing central banks to choose between stable exchange rates, capital mobility, and independent monetary policy.

    • In the late 1920s, the U.S. raised interest rates despite a high gold cover ratio, triggering a global wave of rate hikes.

    • France became a global gold sink, accumulating a disproportionate share of global gold due to the Poincaré stabilization and the sterilization of gold inflows.

    • The asymmetry problem in the Gold Standard meant that gold outflow countries had to contract their monies to maintain gold cover ratios, while gold inflow countries could not expand their monies without losing their gold cover ratios.

    • The Gold-exchange Standard reached a breaking point in 1931, leading to currency crises and the abandonment of the Gold Standard.

    • Central banks stopped treating FX reserves as equivalent to gold reserves, leading to the contraction of the global monetary base.

    • The Bank of France's attempt to increase gold reserves during the currency crises in 1931 led to further monetary contraction, deepening the Great Depression.

    • In 1931, the U.S. abandoned the gold standard and the Sterling bloc (which included France, Belgium, Netherlands, Switzerland) collapsed, leading to the full disintegration of the gold standard.

    • The Sterling bloc received gold inflows due to the devaluation, which made it a safe haven and increased net exports (beggar-thy-neighbor effect).

    • The Sterling bloc sterilized inflows, passing on the asymmetry problem to countries staying on gold, who increasingly ended up on the contractionary side.

    • The Great Depression spread to the gold bloc after 1931 due to banking crises and a global monetary contraction.

    • The global monetary contraction can be attributed to the Money multiplier, Cover ratio, FX ratio, and the gold ratio.

    • However, the problem with the global monetary thesis is that risk-free rates fell during this period, which is difficult to reconcile with the monetary contraction being the main driver of the Great Depression.

    • In 1931, banking crises erupted all around the world due to financial fragility caused by high debt levels, worsening expectations, and cross-border financial exposure.

    • The gold standard caused the 1931 global banking crisis due to the trilemma conflict between exchange rate stabilization and the lender of last resort function.

    • Germany, which had paid reparations with borrowed US dollars since 1924, faced a sudden stop of US capital inflows in 1929. To pay reparations and service foreign debt, Germany needed current account surpluses, leading to Brüning's austerity policy.

    • Brüning's austerity policy involved reducing government spending and improving price competitiveness through an internal devaluation to boost net exports.

    • Economic policy options were limited for Germany due to sovereign default risks, lack of access to the private capital market, and the conditionality of international stabilization loans.

    • Unilateral default was also a possible option for Germany.

    • The severity of the recession under austerity depended on the slope of the AS and the speed of AS adjustment.

    • Germany already faced severe political constraints and the support of economists like Joseph Schumpeter for deflation and radical change later on.

    • Germany faced renewed sanctions and the Rhineland occupation had only ended in 1930

    • Devaluation was considered to boost exports, but fear of inflation was widespread

    • Germany's fiscal contraction, starting in 1928/29, was significant with public expenditures/GDP at 30%

    • Austerity policies led to export surpluses but also a fall in imports, while exports did not rise due to bad timing

    • Industrial production saw a severe output contraction starting in 1928

    • Germany experienced a political crisis, with nondemocratic parties gaining power in the parliament and the Nazi party's first electoral success in September 1930 (18%)

    • Germany faced a crisis in 1931 due to banking problems and fiscal issues, leading to a currency crisis

    • Defending the gold standard resulted in a monetary contraction, exacerbating the crisis

    • A credit crunch also occurred, with a decline in the credit multiplier and corporate bond yield

    • The global financial crisis led to the Hoover Moratorium, suspending reparation payments for one year in 1931, and the Lausanne Conference effectively ended reparation payments in 1932.

    • German chancellor Brüning's economic policies underestimated the political risks, as shown by studies such as McKee et al (2021) and Stögbauer (2001)

    • The Great Depression in Germany was part of a larger disintegration of the world economy, with the capital controls and trade war leading to financial and goods market disintegration, respectively, starting with the US Smoot-Hawley tariff in June 1930.

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    Lecture 7 - The Spread of the Great Depression PDF

    Description

    Test your knowledge about the disintegration of the Gold Standard after 1931 and its impact on various countries. This quiz explores the reasons behind the collapse of the Gold bloc and the consequences of the Sterling bloc's devaluation.

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