Essay Example on Following the Great Depression

Following the Great Depression the world witnessed for the second time the interaction between the international monetary regime and trading system which occurred between 1869 and 1913 This previous interaction was a very positive one portrayed by the gold standard system which linked nations for decades through a the agreement of certain exchange rates This pre World War I system allowed the free movement of capital and goods but also facilitated and promoted the growth of trade Lopez Cordova and Meissner 2003 argue that about 1 5 of the growth in trade between 1880 and 1910 is due to the security provided by the gold standard as well as the low trade barriers that were in place over this period Estevadeordal Frantz and Taylor 2003 The gold standard system was put to the side during World War I as all the nations taking part into the war started placing barriers to slow gold exports as much as possible By 1915 all but the United States had shortened the link between gold and their central bank currency By the end of the end of the war the gold standard was reintroduced as the gold exchange standard it relied mainly on the use of foreign exchange reserves at a time where the sterling was no longer the economic leader it was before the war and where the dollar was not ready to become the leader it will become 

The Gold convertibility was resumed bit by bit with countries restoring it from the middle to the end of the 1920s it is Austria and Germany who restored the system the fastest only months after the end of the hyperinflation which lasted until 1923 By the end of the decade the fundamentals of this prewar monetary system where back in use With the restoration of the monetary system many thought it would go back to the stability they had known before As a result of this trade policies were liberalized with tariffs resembling the ones before World War I The 1920s also saw a proliferation of bilateral commercial agreements No one could predict the Great Depression no even the League of Nations who met during the World Economic Conference of 1927 in order to prepare the end of war time trade restrictions The gold exchange system was unfortunately quite weak to the prewar system this was due to the fact gold was not reevaluated from the prewar levels as well as an uneven distribution where nations like France and the United States owned over 60 of the gold reserves To face this issue nations were encouraged to use foreign exchange reserves which made the system more fragile than ever Finally this system was is trouble as it had integrated countries in crisis to be part of gold parities bringing with them crippled economies war debts and reparations 

For all of these reasons the gold standard was violently destroyed as soon as the recession began in 1928 29 The reasons for this sudden destruction are still uncertain but some debate it was mainly due to the French Indeed France took two major decisions in the year 1928 they de jure reevaluated their currency at depreciated rates and decided to convert their foreign exchange reserves all at once into gold since the 2008 crisis this dumping method is illegal Hamilton 1987 Eichengreen 1992 Johnson 1997 These decisions added to an unstable system drained the world s reserves in gold destroying the liberal economic world forcing countries into protectionist systems There were three reactions to this crisis a few countries decided to stick to the gold standard hoping that price deflation combined with readjusted wages would be enough to recreate an economic balance The second reaction some countries had was to put up barriers to control capital outflows putting a leech on their gold and foreign exchange reserves Finally countries with the most fragile economies simply got out of the gold standard system letting their currencies devalue in order to pursue more expansionary financial policies In comparison to the 2008 crisis no interstate coordination was seen pushing the idea of a resolution further than ever It took up to 1936 for nations to quit one after the other the gold standard finally allowing their gold reserves ratio to readjust 

During this slow process the lack of coordination created difficulties for both groups of countries which later led to a long period where trade and finance was approached in an orthodox manner with restriction on imports regulations of foreign transactions and a proliferation of trade tariffs and interest rates The Great Depression of 1929 not only was the biggest financial crisis our modern society lived it also destroyed a system which took years to rise through liberal policies in monetary commercial and political spheres By the end of the 1930s a majority of the prewar leading economies became protectionist economies getting rid of the expansionist system that had been in place for decades