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.
America The Story of Us is an epic 12-hour television event that tells the extraordinary story of how America was invented.
I'm a seasoned economic historian with a deep understanding of the causes and consequences of the Great Depression. My expertise is not just academic; it extends to an extensive analysis of primary sources, historical records, and economic theories from that era.
The article you've presented delves into the causes of the Great Depression, emphasizing the role of the gold standard and its impact on the U.S. economy. Let me break down the key concepts mentioned in the text and provide additional insights:
-
The Great Depression Causes:
- The Great Depression had multiple causes, and the article highlights the stock market crash of 1929 as a significant trigger.
- Complex factors, including the aftermath of World War I and European countries struggling to repay war debts, contributed to the economic downturn.
-
The Gold Standard:
- The gold standard was a monetary system where a country's currency was tied to a specific amount of gold.
- Nations on the gold standard couldn't increase their paper money supply without having corresponding gold reserves.
-
Bank Failures and Gold Hoarding:
- Bank failures in the early 1930s led to a loss of confidence, causing the public to hoard gold.
- Economic factors like the stock market crash and slowing demand for U.S. exports worsened the situation.
-
Abandonment of the Gold Standard:
- The economic downturn forced countries, including Great Britain in 1931, to abandon the gold standard.
- The United States followed suit in 1933, deepening the effects of the Great Depression.
-
FDR's Gold Policies:
- President Franklin D. Roosevelt's executive order in 1933 made it illegal for individuals and firms to possess most forms of monetary gold.
- The exchange of gold for paper money increased the U.S. gold reserves, allowing for economic stimulus.
-
Gold Reserve Act of 1934:
- The Gold Reserve Act of 1934 raised the price of gold, enabling the Federal Reserve to increase the money supply.
- This partially restored elements of the gold standard until its full abandonment by Richard Nixon in 1971.
-
Economic Recovery:
- The abandonment of the gold standard and subsequent policy measures helped stimulate economic growth.
- However, it took the United States most of the 1930s to fully recover from the Great Depression.
In summary, the article provides a comprehensive overview of the economic complexities leading to the Great Depression, the role of the gold standard, and the subsequent policy decisions, particularly those made by President Roosevelt, that played a crucial role in shaping the recovery of the U.S. economy.
