The Gold Standard Mentality: Brief Outline of the Concept

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Table of Contents

Introduction: The gold standard mentality
The gold standard and the great depression
Foreign Investment and the stability of the foreign exchange rates
Gold standard shifts and issues of inflation
Conclusion
Works Cited

Introduction: The gold standard mentality

The concept of the gold standard equates the value of money to a fixed amount of gold. The adoption of this system tethers the economic unit of accounting within any market to a singular amount of gold. The principle of gold standards as a model of exchange infers that the value of the means of the exchange possesses an inherently fixed external value of gold. The constructs of the gold standard mentality have been accused as one of the greatest contributors to the great depression of the 1930s. The fact that most banks preferred to keep currencies anchored on the amount of gold in the market led to incessant adjustments to domestic prices but not currency prices. The result of this mentality was the skyrocketing prices of commodities in the market despite the near-perfect supply (Barry and Temin 22).

Economic stimulation is highly dependent on the supply of money in the market. Regulation of any economic asymmetry in terms of inflation, deflation, and disinflation, is anchored on the fiscal and monetary policies instituted; therefore, the supply of money in the economy is fundamental to the harmonization of the economic vagaries. To achieve balance in the economy, the gold standard ignores the concept of money supply in the economy. It, however, anchors its regulatory approach on the prices of products in the economy (Eichengreen and Temin 29).

The gold standard and the great depression

Gold standard mentality played a key role in the advancement of the upshots of the great depression. As earlier mentioned in this discourse, the epoch of the great depression witnessed an escalation of the wages in the manufacturing and agricultural, and production sectors. The rapid rise in the wage demand was detrimental to the production systems as the cost rose to exorbitant levels while the profit margins stagnated.

The outcome of this was a necessity to slash the wages to a realistic amount with a view to widening the profitability margins of the production process. However, the act of abridging the wages added fuel to the depression effects. Saving and investing became a mirage. In an economy with a limited supply of money, savings and investments form a solid base to mitigate the effects of depression. However, the gold standard model proved quite disastrous in solving the puzzle as was the case witnessed in most Western European countries (Eichengreen and Temin 33).

Foreign Investment and the stability of the foreign exchange rates

Providently, Eichengreen brings a rather interesting issue in the analysis of the gold standard concept in relation to investments. The gold standard, in his analysis, was a curse and a blessing to the investment practice in the post first world war era. The fact that the gold standard ensured the stability of most product prices led to a vast investment spree. The stability of the exchange rates in several nations was considered fodder for foreign investments. The result of this was an investment fling in the foreign markets by several governments (Eichengreen and Temin 40).

The writer asserts that France and Britain alone spent almost a quarter of their revenue in foreign markets. The global economy was broadly expanded. However, the dangers that came with these humongous foreign investments were very real. The international transactions were beginning to fall drastically; the volatility of the market began to crystallize with an unregulated market. Several markets began to shrink since the model of regulating money in the economy was very rigid. The result of this was a breakdown in the economic chain and a total decimation of the free market economy (Ferguson 55).

Gold standard shifts and issues of inflation

The gold standard policy, according to the authors, was seen as a rescript on the external trade balance. It essentially decreed that the concept of external balance was primary in ensuring equilibrium within any economy. The stratagem was indeed very useful, but it ignored the basic rubric of any economic principle forces of demand and supply. The operational template of the gold standards completely ignored the input of these two variants in the economy.

The market, in a self-regulating structure, must take into account these two paramount aspects. What the world economy witnessed during the depression, was an inflexible model unable to regulate itself. The economic situation of Western Germany in the depression era summed up the shortfalls of this concept. In effect, therefore, most world economies could not find a way out of the economic abyss in the globe during the great slump (Eichengreen and Temin 18).

Conclusion

The economic situation during the great depression could not be resuscitated through the armchair models that the gold standard brought forth; the regulation of the effects lay squarely on the fiscal and monetary policies that would have been enacted. Unfortunately, the gold standard mentality was in direct contrast to these policies. The result of these actions was the furtherance of the economic depression witnessed.

Works Cited

Eichengreen, Barry, and Peter Temin. The Gold Standard and the Great Depression. Cambridge, Mass.: National Bureau of Economic Research, 1997. Print.

Ferguson, Niall. The ascent of money: a financial history of the world. New York: Penguin Press, 2008. Print..

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The Gold Standard Mentality: Brief Outline of the Concept

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