Gold Standart in the Time of The Great Depression - Assignment Example

of the The Great Depression Question One Describe the alternative theories of the functioning of the pre-1914 gold standard As summarized by Eichengreen? The alternative theories elaborating on the functioning of the economic conditions before the gold standards tend to explain the status of the economy in four areas that is changes in production composition, operation of labor markets, international settlements pattern and operation of the international monetary system. In Britain for instance, production is viewed in terms of trade whereby staple trade reduction would lead to low economic performance. The staple trades in Britain involved iron and steel, coal, textiles, ship building and the rise of new industries manufacturing chemicals, electrical equipment and motor vehicles (The Journal of Economic History, pg 214). Similar shifts were experienced in other nations where the rate of the staple trades never reached comparable levels. This rapid pace of structural transformation is characterized by vulnerability to cyclical unreliability. Theory regarding changes in the composition of industrial production has received close attention. Mathews, Feinstein and Odling-Smee find that structural transformation evaluated as the dispersion of the rate of growth across industries, was slower between the two wars than after the Second World War. This theory explains that the slower rate of growth increased cyclical instability of the American economy. Conversely, the operation of labor market is another concept that resulted into change in economic structure. Here, Gordon time series scrutiny shows a decline after the First World War. This is seen in responsiveness of wages to fluctuations in Gross National Product for the United States. This theory explains that an analysis of interwar labor markets is incomplete without a proper discussion of unemployment benefits and other rule-induced labor distortions (The Journal of Economic History, pg 216). The negative name acquired by the hypothesis of benefit-induced unemployment in the United Kingdom is attributable to strong terms in which the agreement has been conducted. Benjamin and Kochin’s concept shows that a larger part of British unemployment between the first and Second World War was caused by extra generous insurance benefits that do not withstand evaluation. However, subsequent research in Britain revealed that the benefits had a small effect on unemployment. Corbett’s theory study of Germany creates a picture similar to the situation that emerged in Britain (The Journal of Economic History, pg 218). This theory elaborates that the main effect of overlying unemployment in Britain would have to increase the equilibrium employment rate. Consequently, the operation of the international monetary system and the patterns of international settlements were other aspects that led to the structural transformation in the great depression in period of pre-gold standards. Question Two Discuss the role that the breakdown of the gold Standard played in causing the Great Depression? The breakdown of the golden age standards and coordination resulted into the failure of the economic performance in the country. This performance deteriorated and a poor macroeconomic structure emerged. This structure undermined the economy in that after the breakdown of the golden standards it resulted into productivity slow down as from 1973(The Journal of Economic History, pg 73).The aspect of low productivity in some nations resulted into low output of capital ration hence decreasing effectiveness of investment in ensuring productivity growth and development. The breakdown of the standards also led to profit squeeze whereby there were no large profits as they were before when there proper rules governing in the golden era. Lack of large profits in the economy led to less development in the economy since there was not capital to start more developments. Increase in profit squeeze resulted into subsequent reduction for wages paid to the people in the country. This led to low economic performance bearing in mind that when an economy has low earning individuals its performance is likely to be low. This emerged as a result of profit squeeze impacting negatively on the income capacity for the citizens (The Journal of Economic History, pg 76). The profit rate and investments reduced during this period making the economy to be a dormant one since there was no adequate performance being experienced. This is because, the profit rate reduced by a third in Western Europe, North America, and Japan in both business and manufacturing therefore resulting into low investments. Lack of proper standards in internationalization currently led to ability of individual countries control their macro economies through demand and exchange rate management. This suggests that the overall economy management did not work out perfectly since there were no proper standards governing them. The breakdown of the gold standards also resulted into inflation causing the rise of real costs of production coinciding with increased capacity of labor costs (The Journal of Economic History, pg 83). This caused a situation whereby the international monetary system could not absorb the strains emerging as a result of increased competition which led to the breakdown of fixed exchange rates. Hence, the combination of these forces made inflation to rise up from 3.0% in 1965 to over 15.10% by 1974. The rules of coordination during this period were not effective enough to curb the challenges the country’s economy was experiencing. The cost and prices rose gradually during the golden age however after he breakdown there was resultant pressures on the growth of real wages due to weak balance of payments (The Journal of Economic History, pg 95). In addition, the breakdown of the standards led to challenges in income maintenance and welfare state whereby income expenditures helped to ensure demand however, the emergence of a marginal of workers outside the central safety net threatened into the effectiveness of the system hence posing the problem of income maintenance in the country’s economy. Question Three What ended the great Depression? The great misery was one major slum in the United States that harmfully affected the economic developments in the country. However, through the implementation of monetary developments in the country this misery was reduced. Fiscal policy, in dissimilarity, contributed almost nothing to the recovery of the economic status before 1942.The rapid growth of money supply as from 1933 resulted into low interest rates and triggered investment spending just as a conventional model of transmission mechanism would discover (The Journal of Economic History, pg 761). The supply of money grew quickly in the 1930s due to huge unsterilized inflow of gold to the United States. However, the inflow of gold was majorly for economic developments in Europe, the highest inflow took place prudently following the re-evaluation of gold mandates by the Roosevelt government in 1934.Realsitically the inflow of gold was due to historic accident and policy. The decision to permit the gold inflow resulted into swelling money supply of the economy of the United States. The administration of Roosevelt decided not to sterilize the inflow of gold since hoped for a great rise in monetary gold stock would arouse the depressed economy. The monetary development policy such as the aggregate demand stimulus led to the recovery of the great depression (The Journal of Economic History, pg 761). The impacts of aggregate demand stimulus in the recovery can be realized by trying to examine whether this policy can explain high rates of real growth at the recovery stage of the great depression through a calculation. Consider the following, decomposing the deviation of resultant growth from normal into the effect of lagged deviances of monetary and fiscal changes from usual and the effect of all other aspects that can influence real growth hence, Output changet =βm (monetary change) t-1 +1 βf (fiscal change) t- 1+1εt (1) Where βm and βf become the multipliers for the monetary and fiscal policy and Εt refers to a residual term that includes supply shocks and changes in animal rights. It includes any tendency that the economy to right itself following a recession (The Journal of Economic History, pg 762). When an annual data is used, this decomposition would hold for a period of one year drag between the changes in policy and output since policy change does not affect real output. Consequently, within this framework when an individual measures the two multipliers, output derivations and policy changes, it is possible to estimate what residual term annually A comparison of the actual path of real output with what would have been without policy changes give a way of quantifying the significance of the policy. This policy can be applied to the recovery phase of the great depression. From the first variable of the rule a deviation of the annual growth rate of M1 from its average rate whereby normal is the average yearly growth rate between 1923 and 1927.Thus, the best growth rate of M1 over the entire period was 2.90%.For the fiscal rule variable when annual change ratio of the federal surplus is applied to real gross domestic product (The Journal of Economic History, pg 764). This evaluation of fiscal policy assumes that the normal variation in the federal surplus is zero. Hence, this is an effective method that when applied quantitatively and applied led to the recovery of the United States economy. The Journal of Economic History (pg 765) elaborates that the monetary development was essential where as the fiscal policy was little problem up to as late as 1942.This suggests an interest twist that world war two caused or accelerated the recovery from the great depression. Since, the economy was significantly back to its level before stimulation by the fiscal policy started in earnest thus it would be difficult to argue that the transformation in government spending resulted from the world war were the main aspects of the recovery. However, Bloomfield’s and Friedman and Schwartz’s analysis elaborates that money supply rose rapidly after the world war was declared in Europe since capital fight from the country entailed in the conflict swelled the United States gold inflow(The Journal of Economic History, pg 766). In this perspective, the war may have helped the recovery after 1938 by increasing the United States money supply. Therefore, world war two did contribute to the culmination of the great depression in America however, its expansionary benefits initially worked through the developments of monetary rather than through fiscal policy. The monetary policy confirms and compliments several analyses of great depression. In 1930s Friedman and Schwartz’s view was very important however, their emphasis on the inaction of the federal reserve after 1933 is somewhat forgotten. What was essential here is how money supply grew rapidly, the fact that the treasury conducted the rise rather than the Federal Reserve. The realization that the fiscal policy minimally contributed to the recovery links to Brown’s finding that fiscal policy was not generally expansionary during mid 1930s.This analysis supports the devaluation of 1933 to 1934 as the main recovery(The Journal of Economic History, pg 768). According to this evaluation, clear change in expectations brought about the turning point in the spring of 1933 resulting to the deflationary regime which was replaced by inflationary monetary policy. This elaborates why the regime shift was gullible and more significantly it explains why the initial recovery was followed by continued rapid expansion. Eventually, without actual inflation and actual declines in the rates if interest, the recovery triggered by a change of expectations would almost been short lived. Similarly, Eichengreen also supports that devaluation can trigger economic recovery from depression by allowing expansionary monetary policy. Hence, the United States devaluation was followed by salutary rising in the money supply (The Journal of Economic History, pg 782). The aggregate demand stimulus monetary policy was the most effective policy that led to the retrieval of the great depression in the United States. Therefore, the great depression does not provide an indication that large shocks are rapidly undone by the mean reversion forces but it suggests that large falls in aggregate demand are sometimes followed by huge rises resulting into an effective economic performance. Work Cited The Journal of Economic History volume 72 issue 1, March 2012: Cambridge University Press Read More