The Great Depression, Part I


Huts and unemployed, West Houston and Mercer Street, Manhattan
The New York Public Library. Photography Collection,
Miriam and Ira D. Wallach Division of Art, Prints and Photographs.


The Great Depression was the greatest peacetime economic trauma of the 20th century. It was characterized by massive, worldwide, unemployment. Its cause was debated for decades afterwards. Blame, superficially, was directed at the gold standard as its cause. But the classical gold standard had been suspended years before. Even gold standard detractor then-Governor Ben Bernanke, at the H. Parker Willis Lecture in Economic Policy, Washington and Lee University in 2004 observed:

The gold standard appeared to be highly successful from about 1870 to the beginning of World War I in 1914. During the so-called "classical" gold standard period, international trade and capital flows expanded markedly, and central banks experienced relatively few problems ensuring that their currencies retained their legal value. The gold standard was suspended during World War I, however, because of disruptions to trade and international capital flows and because countries needed more financial flexibility to finance their war efforts. (The United States remained technically on the gold standard throughout the war, but with many restrictions.)

After 1918, when the war ended, nations around the world made extensive efforts to reconstitute the gold standard, believing that it would be a key element in the return to normal functioning of the international economic system. Great Britain was among the first of the major countries to return to the gold standard, in 1925, and by 1929 the great majority of the world's nations had done so.

Unlike the gold standard before World War I, however, the gold standard as reconstituted in the 1920s proved to be both unstable and destabilizing.

As summarized in the New York Times “A Short History of the Great Depression” by Nick Taylor:

The Great Depression was a worldwide economic crisis that in the United States was marked by widespread unemployment, near halts in industrial production and construction, and an 89 percent decline in stock prices. …

The start of the Depression is usually pegged to the stock market crash of “Black Tuesday,” Oct. 29, 1929, when the Dow Jones Industrial Average fell almost 23 percent and the market lost between $8 billion and $9 billion in value. But it was just one in a series of losses during a time of extreme market volatility …

The stock market continued to decline despite brief rallies. Unemployment rose and wages fell for those who continued to work. The use of credit for the purchase of homes, cars, furniture and household appliances resulted in foreclosures and repossessions. As consumers lost buying power industrial production fell, businesses failed, and more workers lost their jobs.

The Great Depression caught the world by surprise.  That it lingered  for a decade is evidence of how bewildering its causes were both to authorities and intellectuals.  Economists continued to contend for decades — and contend still — as to the cause.

Lewis E. Lehrman, founder and chairman of the Lehrman Institute, stood before the Parliament of France on November 7, 1996 to speak “On the Occasion of the 100th Anniversary of the Birth of Jacques Rueff.”

In America, the insidious destruction of its historic currency, the gold dollar, got underway in 1922 during the inter-war experiment with the gold-exchange standard and the dollar’s new official reserve currency role.  It must be remembered that World War I had caused the price level almost to double.  Britain and America tried to maintain the pre-war dollar-gold, sterling-gold parities.  The official reserve currency roles of the convertible pound and dollar, born of the gold-exchange standard, collapsed in the Great Depression and so did the official foreign exchange reserves of the developed world – which helped to cause and to intensify the depression.

Rueff’s own observation on this topic, from The Monetary Sins of the West (The Macmillan Company, New York, New York, 1972, p. 84)

It is often said that what we want to avoid is the return of the trouble and the mischief of the gold standard in the twenties. But if you take the balance sheets of the central banks you will see that the mischief was not the mischief of the gold standard but the mischief of the gold-exchange standard. The evolution of the balance sheets of the central banks is exactly the same, exactly parallel in the years 1927, 1928, and 1929 to what it is now, and it is the collapse of this system in 1931 that was responsible for the depth of the depression.

… In 1930 I was financial attaché in the French Embassy in London, and in that capacity I was responsible for the deposits of the French Treasury with British banks. They were the direct result of eight years of the gold-exchange standard, because we had kept the pounds sterling in London, as my colleagues in New York had kept in the American market the dollars that had been pouring into the French Treasury from 1927 onward. Then, in 1931, the failure of the Austrian Creditanstalt caused successive waves of repatriations; and it was this collapse of the gold-exchange standard that, without any possible doubt, transformed the depression of 1929 into the Great Depression of 1931.

It was the “collapse of the gold-exchange standard that, without any possible doubt, transformed the depression of 1929 into the Great Depression of 1931.”

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