By: Laurie Linscomb
 Labor forces and productive capacity had
been reduced sharply through was losses.
 This caused price levels to be higher
everywhere at the war’s conclusion in 1918.
 Governments financed their purchases
simply by printing the money they needed
which caused a sharp rise in money supplies
and price levels.
 The United States
 Price specie flow
returned to gold in
mechanism is the
adjustment of prices as
gold flows into or out
 Prices tended to adjust
of a country, causing an
according the amount
adjustment in the flow
of gold circulating in
of goods.
an economy, which had
effects on the flows of
 An inflow of gold.
goods and services: the  An outflow of gold.
current account.
 Realizing that gold supplies might be
inadequate to meet central banks’ demands
for international reserves, the Genoa
Conference sanctioned a partial gold
exchange standard in which smaller
countries could hold as reserves the
currencies of several large countries whose
own international reserves would consist
entirely of gold.
 In 1925, Britain returned to the gold
standard be pegging the pound to gold at
the prewar price.
 Britain’s price level had been falling since
the war in 1925.
 The Bank of England was therefore forced to
follow contractionary monetary policies that
contributed to severe unemployment.
 British stagnation in the 1920’s accelerated
London’s decline as the worlds leading financial
 Britain’s gold reserves were limited, however, and
the country’s persistent stagnation did little to
inspire confidence in its ability to meet its foreign
 The onset of the Great Depression in1929 was
shortly followed by bank failures throughout the
 As the depression continued, many
countries renounced the gold standard and
allowed their currencies to float in the
foreign exchange market.
 The United States left the gold standard in
 Countries that clung to the gold standard
without devaluing their currencies suffered
most during the Great Depression.
 The United States returned to the gold standard in
 This is because they had raised the dollar price of
gold from $26.67 to $35 per ounce.
 Recent scholarship shows that the international
gold standard played a central role in starting,
deepening, and spreading the 20th century’s
greatest economic downturn.
 The gold standard was the key culprit of the waves
of bank failures around the world that accelerated
the world’s downward economic spiral.
 Perhaps the clearest evidence of the gold
standard’s role is the contrasting behavior of
output and the price level in countries that left the
gold standard relatively early, such as Britain, and
those that stubbornly hung on.
 The Smoot-Hawley tariff imposed by the United
States in 1930 had a damaging effect on
employment abroad.
 A measure that raises domestic welfare is called
beggar-thy-neighbor policy when it benefits the
home country only because it worsens economic
conditions abroad.
 This realization that inspired the blueprint for the
postwar international monetary system, the
Bretton Woods Agreement.

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