The Financial Crisis of 1931 and the Demise of the Gold Standard

Abstract

ALTHOUGH the gold-exchange standard had been adopted to promote and to preserve financial stability, its operation after 1929 showed all its inadequacies. A system of fixed exchange rates, like the gold exchange standard, connects prices and incomes in the different countries which adopt it. Therefore, any major contraction involving a fall in prices in one country must spread to others through the balance of payments. The situation was made potentially more unstable because the countries acquiring gold up to 1931 sterilised it, and, as a result, those losing gold, who often had minimal reserves, found that the full burden of adjustment fell upon their economies. The gold-exchange standard thus made the international financial system more vulnerable to disturbances, not less [Friedman and Schwartz].