Cause of the great depression, the gold standard

The great depression 3 of 6 The gold standard

The German currency eventually recovered by introducing the Rentenmark which is equivalent to about 4.2 billion old marks. The Rentenmark was later replaced by the Reichmark having exactly the same value. The miracle of currency debasement slowed inflation, but Germany and countries tied to its currency never fully recovered and at times when economic activity stalls, political extremism is on the rise. The German stock market crashed in 1927 two years before The US crash. France barely escaped the hyperinflation, Belgium never had room to run when the depression hits as it went into a deficit and printed money backed by the anticipated German war reparation payment that never fully materialized. Italy and Portugal experienced great rates of inflation and never put a deflationary policy on the table for their return to the gold standard. The policies of these countries for their return to the gold standard simply required them to suck in more gold that some other countries are also trying to acquire. There is just simply not enough gold for each country’s expanding economy.

Gold was the major form of money since the first widespread use of coins in the ancient city of Lydia. People honored and accepted their value since it can be melted for use on something else and does not corrode. However, as new value is created, Gold has trouble keeping up to match the demand for coins unless a new mine is discovered. Russia and the US jump started the use of paper money in the modern world for convenience and due to the shortage of Gold to back up the newly formed United States of America. To establish trust of the currency they backed it up with a solid government promise that it is legal tender and the government will do what it can to redeem them for gold. This system continued well over until 1971.

If you come to think of it, paper money is faster to make since all you need is ink, paper and a government declaration that its value is really what it states on the denomination to keep up with new commodities being produced. Under the gold standard, countries need sufficient reserves of gold to back their printed currency. If there is too much value created in the economy, paper money can keep up with the demand even if the total stated value of all the paper money does not match with the real reserves of gold that is supposed to back them up upon demand from an individual. This circumstance prevents most governments to print more money if their gold reserves are dangerously low. So even if the economy is expanding, gold functions as an inward pull that prevents it from breaking free.

The great depression 3 of 6 The gold standard

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