The causes of the Great Depression were numerous, and after the stock market crash of 1929, a number of complex factors helped to create the conditions necessary for the longest and deepest economic downturn in modern history.President Franklin D. Roosevelt’s decision to take the United States off the gold standard may have helped to ease the worst effects of theDepression.
What is the gold standard?
Sacks of gold, exchanged by the American people against currency, being stocked in the vaults of a New Jersey bank, 1933.
The gold standard is a monetary system in which a nation’s currency is pegged to the value of gold. In a gold standard system, a given amount of paper money can be converted into a fixed amount of gold. Countries on the gold standard can’t increase the amount of paper money in circulation without also increasing their reserves of gold.
From the late 1800s until the 1930s, most countries in the world—including the United States—adhered to an international gold standard. (Many European countries temporarily abandoned the gold standard during World War I so they could print more money to finance war efforts.)
Bank failures led ordinary citizens to hoard gold.
The U.S. economy boomed during the first part of the 1920s—the Roaring Twenties—with industries such as construction and automobiles driving the post-war recovery. In an effort to combat inflation, the Federal Reserve raised interest rates in 1928.
But European countries that had borrowed money from the United States during World War I had trouble paying off their debts. As a result, demand for U.S. exports slowed.
A slowing economy combined with the stock market crash of 1929 and a subsequent wave of bank failures in 1930 and 1931 led to crippling levels of deflation. Soon, the frightened public began hoarding gold.
European countries began to abandon the gold standard
The United States and other countries on the gold standard couldn’t increase their money supplies to stimulate the economy. Great Britain became the first to drop off the gold standard in 1931. Other countries soon followed.
But the United States didn’t abandon gold for another two years, deepening the pain of the Great Depression.
President Franklin D. Roosevelt as he signs the Gold Bill on his 52nd birthday, surrounded by members of the Treasury Department and the Federal Reserve Board.
FDR bans Americans from owning monetary gold
In 1933, President Roosevelt took the U.S. off the gold standard when he signed an executive order making it illegal for individuals and firms to possess most forms of monetary gold.
People were required to exchange their gold coins, gold bullion and gold certificates for paper money at a set price of $20.67 per ounce.
Abandoning the gold standard helped the economy grow
This exchange of gold for paper money allowed the United States to increase the number of gold reserves at the United States Bullion Depository at Fort Knox. After signing the 1934 Gold Reserve Act, Roosevelt raised the price of gold to $35 per ounce, allowing the Federal Reserve to increase the money supply. The Gold Reserve Act restored parts of the gold standard, allowing the dollar price to remain fixed until Richard Nixon fully abandoned it in 1971.
The economy slowly began to grow again, but it would take the United States most of the 1930s to fully recover from the depths of the Great Depression.
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Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed's actions triggered recessions in nations around the globe. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931.
How did the Gold Standard contribute to the drop in the global economy? The paper money was given more value than it was worth. A piece of paper was worth 5 pieces of gold. This system caused a drop on the economy because more paper money was print than there was gold.
The government had raised the price of gold to $35 per ounce, and given the worth of their stockpiles, the Federal Reserve could start producing more paper money. This was a stepping stone toward reviving the economy, though the impact of the Great Depression was still widely felt.
Because the supply of money (gold) essentially was fixed in the short run, U.S. prices fell. Prices of U.S. exports then fell relative to the prices of imports. This caused the British to demand more U.S. exports and Americans to demand fewer imports.
The cause of the Great Depression was the post-World War I decision to resume the gold standard on prewar terms, after immense inflation during the war.
Because the international gold standard linked interest rates and monetary policies among participating nations, the Fed's actions triggered recessions in nations around the globe. The Fed repeated this mistake when responding to the international financial crisis in the fall of 1931.
What were the major causes of the Great Depression? Among the suggested causes of the Great Depression are: the stock market crash of 1929; the collapse of world trade due to the Smoot-Hawley Tariff; government policies; bank failures and panics; and the collapse of the money supply.
When central banks purchase gold, it affects the supply and demand of the domestic currency and may result in inflation. This is largely due to the fact that banks rely on printing more money to buy gold, thereby creating an excess supply of fiat currency.
Executive Order 6102 required all persons to deliver on or before May 1, 1933, all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve in exchange for $20.67 (equivalent to $487 in 2023) per troy ounce.
Final answer: The trend of buying consumer items on credit contributed to the Great Depression by leading to a rise in consumer demand initially, but ultimately causing drops in profits and employment due to defaults on credit payments and underconsumption.
Despite all the President's efforts and the courage of the American people, the Depression hung on until 1941, when America's involvement in the Second World War resulted in the drafting of young men into military service, and the creation of millions of jobs in defense and war industries.
The major effect of the increase in gold demand by the public and Treasury was to reduce exports of gold and increase the Greenback price of gold relative to purchasing power.
Gold standards create periodic deflations and economic contractions that destabilize the economy. A gold standard would increase the environmental and cultural harms created by gold mining. Returning to a gold standard could harm national security by restricting the country's ability to finance national defense.
The Government and Gold During The Great Depression
By law, the Federal Reserve was allowed to issue currency up to the point that it was 40 percent backed by gold. Therefore, as people redeemed their paper money for gold, it had a multiplier effect of reducing the amount of paper currency in circulation.
Investing in the speculative market in the 1920s led to the stock market crash in 1929 and this wiped out a great deal of nominal wealth. Other factors also contributed to the Great Depression, including inactivity followed by overaction by the Fed.
In the late decades of the international gold standard, mismanagement led to volatile prices. Much of this instability occurred during World War I and the Great Depression. With the start of World War I, the international gold standard ceased to function as it had since its establishment in the 1870s.
Some of the top reasons that historians and economists said why the Great Depression occurred are Stock Market Crash of 1929, Bank Failures, Reduction in Purchasing Across the board, American Economic Policy with Europe, and Drought Conditions.
What benefits did the gold standard provide the nation? The gold standard limited the power of the government banks, and it created certainty in international trade by providing a fixed pattern of exchange rates.
Gold Standard Act. 1900 - This was signed by McKinley. It stated that all paper money would be backed only by gold. This meant that the government had to hold gold in reserve in case people decided they wanted to trade in their money.
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