Economic history · The Great Depression
Six steps, about nine minutes, a question at each. You need no economics and no preparation, only a willingness to guess before you are told.
America's economy fell for forty-three months, and about one worker in four had no job by the end of it. Nine thousand American banks shut, taking roughly a third of the country's money with them.
Before 1931 the large economies all promised to swap their money for gold at a fixed price. Britain had gone back to that promise in April 1925, at its pre-war exchange rate against gold. The title of this module uses an old word for chains, because that is what the promise was: it tied a government's hands.
The promise was one-sided. A country losing gold in 1930 had to raise its interest rates, and that pushed its own wages and prices down. A country gaining gold had no matching duty, so falling prices spread from country to country and nothing pushed back. Britain broke the promise in September 1931, the United States in April 1933, and France not until 1936.
Six steps cover the promise, why it spread the damage, the week Britain broke it, and what happened to the money afterwards.
What this module covers
Written for every level. Tap any underlined word for what it means, and open the boxes below for the economics behind each decision. If you already know the theory, skip both and the history reads straight through.
Step 1 of 6
Going back to gold meant promising to swap pounds for it whenever anyone asked. The hard part was choosing how much gold a pound would buy.
Britain went back onto the in April 1925, at its pre-war against gold.
It meant the government promised that anybody could bring in paper money and take away a fixed weight of gold for it. Gold could move freely in and out of the country. Two currencies both tied to gold were tied to each other, so exchange rates were fixed. The cost is that a country cannot issue more money than its gold will cover: the gold in the vaults sets the limit on the money in the shops.
Britain had left the gold standard during the First World War. The exchange rate it went back to in 1925 was the exchange rate it had used before that war.
The promise was that anybody could hand in paper money and take away a fixed weight of gold, and that gold could move freely between countries.
The pre-war exchange rate put the pound high against other currencies, so British goods cost more abroad than they had.
The promise fixed that exchange rate by law, so the exchange rate itself was the one thing that could not move.
Take a guess. You are not expected to know the answers, and being wrong is what makes a number stick.
The pre-war exchange rate priced British goods high abroad. What did the government have to do to make them sell again?
For scale. British membership ran from the end of April 1925 to September 1931.
A country losing gold in 1930 had to cut back.
Because gold was leaving. When more money went out of a country than came in, gold went with it. The promise meant the central bank had to protect what was left, and it did that by raising interest rates. Borrowing became more expensive, spending fell, and wages and prices fell with it until the country's goods were cheap enough to sell abroad again. The mechanism worked by making people at home poorer.
A country whose gold was draining away in 1930 had to raise its to hold onto it. Higher interest rates then pushed that country's own wages and prices down.
A country losing gold in 1930 had to act, and a country gaining gold was under no matching duty to do the opposite.
Falling prices therefore travelled outwards from wherever the trouble started.
Under the gold standard, what did a country gaining gold have to do?
For scale. There was no symmetry between gold-gaining and gold-losing countries in 1930.
Britain stopped exchanging pounds for gold in September 1931, after months of losing gold it could not replace.
The British government announced the suspension on Sunday 20 September, and the House of Commons debated the proposed law the next day.
Members of Parliament were told the pound had already dropped below its set value, and the Bill passed by 275 votes to 112.
Britain was not alone: other countries gave up the same promise during 1931.
Britain broke the promise in September 1931. How many countries left gold or cut their currency's value against it during that year?
For scale. The Commons passed the Bill by 275 votes to 112 on 21 September 1931.
Gold is leaving Britain faster than the Bank of England, Britain's , can hold it. You are the Chancellor, the minister in charge of the government's money.
The pound has dropped below the value the promise says it has, and every day of defending that promise costs more gold.
Holding the promise means raising interest rates and cutting spending until British prices fall far enough for the gold to come back.
You are the Chancellor in September 1931. Gold is going out and the pound is below its set value. What do you do?
Britain broke the promise. The government announced on Sunday 20 September 1931 that it would stop exchanging pounds for gold, and the Commons passed the Bill the following day by 275 votes to 112.
What followedOnce the pound was no longer held at a set value, interest rates could come down and the money in the country could grow instead of shrinking. Britain's recovery is dated to early 1932, a few months later.
The same holds for the world: recovery began in the leading industrial countries at the time they suspended the gold standard and let their money grow again.
The later a country left gold, the later its recovery came, and no country recovered while it stayed on gold.
The countries which cut their currency's value early grew much more rapidly than the ones that held on.
The United Kingdom, Denmark and the Scandinavian countries were the early cutters.
Britain, America and France left gold at different times. They then recovered in that same order, which is the closest thing the 1930s offer to a test.
Put these four in the order they happened.
For scale. Sixteen countries left gold or cut their currency's value in 1931 alone.
American money grew sharply once the promise was gone: the monetary base rose 52 per cent between April 1933 and April 1937.
The measure that moved is the monetary base: the notes, coins and central bank balances that the whole money supply is built on.
The wider moved over the same four years.
The money in America had fallen by roughly a third while the promise held. It could only grow again once the promise had gone.
The monetary base grew 52 per cent between April 1933 and April 1937. How far did the wider money supply grow with it?
For scale. The money in America fell by roughly a third between 1929 and 1933.
Module 3 of 7 in The Great Depression
Britain on the
April 1925 to September 1931The Commons vote on leaving gold
275 to 112, 21 September 1931Countries leaving gold in 1931
sixteenWhen each left
Britain 1931, America 1933, France 1936American monetary base, 1933 to 1937
up 52%Wider , 1933 to 1937
up 49%You met five terms in this module
, , , ,
Britain broke the promise first and recovered first. What that was worth, and what it cost, comes next.
[1] When recovery began: Federal Reserve History, The Great Depression and Roosevelt's Gold Program. On the turn: "Economic recovery in the United States and in most of the world's leading industrial nations began at the time they suspended the gold standard and reflated their economies", and "Scholars believe Roosevelt's reflation accelerated America's recovery from the Great Depression."
[2] When Britain was on gold: Bank of England Quarterly Bulletin 1970 Q1, Bank of England's holdings of gold and foreign exchange 1924-31. "the United Kingdom was on the gold standard (from the end of April 1925-September 1931)". The Bank gives no day in September, which is one reason no day is printed anywhere. The Bank's 2010 Q4 bulletin adds that recovery came early in 1932 after the suspension, with a depreciation of the exchange rate of around 20 per cent.
[3] The announcement itself: Federal Reserve Bulletin, October 1931, via FRASER. "Announcement was made by the British Government on Sunday, September 20, that a decision had been reached to suspend the gold standard which had been resumed in April, 1925." This is the closest thing to a dated record of the decision in the declared source set.
[4] What the Commons was told: Hansard, HC Deb 21 September 1931, vol 256, Gold Standard (Amendment) Bill. "On Thursday night the pound had dropped to 18s. 6d. instead of its par value of 20s." The Bill passed its Second Reading the same day by 275 votes to 112, and the closure was carried 271 to 148.
[5] Who left, and when: World Trade Organization, World Trade Report 2007. "Sixteen countries devalued or left the gold standard in the course of 1931." The report dates the United Kingdom's exit to 21 September 1931 and the United States' to 20 April 1933. France held on until 1936.
[6] What leaving gold did: National Bureau of Economic Research, Eichengreen and Sachs, Exchange Rates and Economic Recovery in the 1930s, w1498. "Countries which devalued at an early date (the United Kingdom, Denmark and the Scandinavian countries) grew much more rapidly." The paper is the standard cross-country comparison of exit dates against recovery dates.
[7] How much money there was afterwards: Economic History Association, Randall Parker, An Overview of the Great Depression. "Romer (1993) reports an increase in the monetary base in the United States of 52 percent between April 1933 and April 1937. The M1 money supply virtually matched this increase... with 49 percent growth over the same period." The entry also records the asymmetry of the 1920s and 1930s gold standard under its own heading.
Country data from the World Bank (CC BY 4.0) and the UNDP Human Development Report (CC BY 3.0 IGO)
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