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The Great Depression
Golden fetters
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.
Step 1 of 6
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.
The question
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.
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 scaleBritish 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 scaleThere 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 scaleThe Commons passed the Bill by 275 votes to 112 on 21 September 1931.
Module 3 of 7 in The Great Depression
[1] When recovery began: Federal Reserve History, The Great Depression and Roosevelt's Gold Program.
[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.
[3] The announcement itself: Federal Reserve Bulletin, October 1931, via FRASER.
[4] What the Commons was told: Hansard, HC Deb 21 September 1931, vol 256, Gold Standard (Amendment) Bill.
[5] Who left, and when: World Trade Organization, World Trade Report 2007.
[6] What leaving gold did: National Bureau of Economic Research, Eichengreen and Sachs, Exchange Rates and Economic Recovery in the 1930s, w1498.
[7] How much money there was afterwards: Economic History Association, Randall Parker, An Overview of the Great Depression.
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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