The Global Impact of the Great Depression, 1929-1939

By Dietmar Rothermund | Go to book overview
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THE TRAGEDY OF THE INTERNATIONAL GOLD STANDARD

In the chaotic times after the First World War, the prewar world appeared to have been paradise and there was a nostalgic feeling that one should return to it as soon as possible. This was particularly true of the international gold standard which had prevailed at that time and which most countries had to abandon during the war. This standard had guaranteed monetary stability and economic growth for several decades, which now looked like a golden age. The advantages of such a standard had already been praised by David Hume and David Ricardo, because it provided an equilibrium by means of a simple mechanism which seemed to work as if governed by a law of nature.

In direct opposition to bullionists and mercantilists Hume and Ricardo recommended the free flow of the precious metals. If they flowed out of a country they would thereby lower the prices and their inflow would increase the prices elsewhere, which would then lead to their flowing back to countries where prices were lower. This process would work best without any interference. Not even a central bank was required, but if it did exist it would work best if it only accentuated the mechanism of the free flow of the precious metals. It would raise the discount rate when the precious metals flowed out of the country, thus lowering prices by enhancing deflation, and it would lower the discount rate whenever precious metals were flowing in, thus providing easy money and increasing prices.

As a matter of fact, the belief in the beneficial qualities of the gold standard was a tragic illusion. This standard did not work automatically at all but depended on the existence of a powerful lender of last resort, an institution which was able to ensure the liquidity and stability of the world market. At the same time the

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