The Gold Standard and the
Great Depression
BARRY EICHENGREEN AN D P ETER TEMIN
The Great Depression typically appears in the historical literature like an earthquake
or plague. Its effects are noted, but its causes are neither explained nor located in
conditions under the control of historical ®gures. We think this is a mistake: the
Depression was the result of actions taken by historical personages for reasons that
are explicable using the techniques of historical research. Even if the initial impulse
behind this contraction was beyond the control of individuals, the reasons why
those caught up in the catastrophe could not or did not arrest it in the years
following its onset are tied up in their positions and views. We argue that the most
important barrier to actions that would have arrested or reversed the decline was the
mentality of the gold standard. This world view, held by the those making
economic policy, sharply restricted the range of actions they were willing to
contemplate. The result of this cultural condition was to transform a run-of-the-mill
economic contraction into a Great Depression that changed the course of history.
The gold-standard mentality and the institutions it supported limited the ability
of governments and central banks to respond to adversity; they led to the adoption
of policies that made economic conditions worse instead of better. In response to
balance-of-payments de®cits and gold losses, governments could only restrict credit
with the goal of reducing domestic prices and costs until international balance was
restored. Critical to this process was the effort to reduce wages, the largest element
in costs. As the English economist F. C. Benham summarized the conventional
understanding in 1931,
The loss of gold or the higher bank rate, then, can restore international equilibrium only by
reducing internal prices. Of these, the most important is the price of labour. Wages and other
incomes from labour may be reduced. This will have a double effect. On the one hand,
wage-earners and