The Great Depression era can be divided into two parts. The initial decline lasted from mid-1929 to mid-1931. Around mid-1931, there was a change in people’s expectations about the future of the economy.[1] This fear of reduced future income coupled by the Fed’s deflationary monetary policy resulted in a Mundell effect. This further depressed the economy until Roosevelt stepped into office in 1933 and ended the gold standard, thereby ending the deflationary policy.[2]
A true understanding of the Great Depression requires not only knowledge of the U.S. monetary system but also the implications of the gold standard on its participatory nations. The gold standard made the involved nations interdependent on each others’s monetary policy. Due to a fixed exchange rate, the only way to affect the demand for gold was through interest rates. For example, if interest rates were high in one country, then investors would have no reason to exchange currency for gold and the gold reserves would remain stable. However if interest rates were low in a different country then its investors would elect to move their funds abroad where interest rates were higher. In order to stop this from happening, each nation within the gold standard union had no choice but to raise its interest rates in correspondence with its fellow nation.[2] This interconnectivity of deflationary policy amongst so many nations resulted in the prolongation of the greatest economic downturn.
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France significantly increases its gold reserves
Germany's industrial production declines
Spring 1928: The Fed increases interest rates
U.S. decline in industrial production
August: The recession begins, two months before the crash. Production falls by 20%.
October 24: Stock market crash begins.
October 25: Brief surge on the market.
October 29: 'Black Tuesday'. U.S. Stock market collapse.
Decline in the commodity prices.
February: Federal Reserve cuts interest rates from 6% to 4%
June 17: Smoot-Hawley Tariff Act passed.
September - December: First U.S. bank failures
May: Creditanstalt, Austria's premier bank, goes insolvent.
May-June: Second U.S. bank failures / Change in people's expectation of the economy
July: Germany banking crisis
September 21: Britain goes off the gold standard.
September - October: Substantial amount of dollar assets are converted to gold in the US
September - December: Fed increases interest rates
November - Summer 1932: Foreign trade restrictions / Imperial Preference
April - June: Government conducted open market transactions to increase money supply.
July: The Government discontinued open market operations.
November: Franklin D. Roosevelt elected President.
Executive Order 6102 signed on April 5, 1933 by U.S. President Franklin D. Roosevelt "forbidding the Hoarding of Gold Coin, Gold Bullion, and Gold Certificates" by U.S. citizens. Executive Order 6102 required U.S. citizens to deliver on or before May 1, 1933 all but a small amount of gold coin, gold bullion, and gold certificates owned by them to the Federal Reserve, in exchange for $20.67 per troy ounce. Violation of the order was punishable by fine up to $10,000 or up to ten years in prison, or both. In 1933 approximately 500 tonnes of gold were turned in to the Treasury at the exchange rate of $20.67 per troy ounce
The price of gold from the treasury for international transactions was thereafter raised to $35 an ounce. The resulting profit that the government realized funded the Exchange Stabilization Fund established by the Gold Reserve Act in 1934.
US goes off the gold standard for US currency. Gold continues to be used to settle international debts.