Eight decades has elapsed since the outbreak of the Great Depression, but the continuing mystery of its cause keep provoking academic debates among scholars from various fields. Eichengreen and Temin joint the debates by linking the gold-standard ideology with the cause of the Great Depression. They content that because of this ideology monetary and fiscal authorities implemented deflationary policies when the hindsight shows clearly that expansionary policies were needed. And these contractionary policies consequently pushed the stumbling world economy into the Great Depression. Eichengreen and Temin put heavy weight on analyzing why the prewar gold standard could be a force for international financial stability while interwar gold standard was the force that led the world into economic catastrophe. Their compelling arguments are important contributions to the understanding of the cause. However, by looking into the details of their explanation loopholes can also be found.
My analysis of Eichengreen and Temin’s argument falls into three parts. In the first part, I elaborate their explanation of the cause of the Great Depression and why interwar gold standard failed while its predecessor succeeded. In the second part, I highlight two aspects of the strengths of their explanation. And in the last part, the weaknesses of their studies will be examined
Eichengreen and Temin attribute the cause of the Great Depression to the mentality amongst central bankers and political leaders that the restoration of pre-WWI gold standard was essential for restoring the healthy international order and economic prosperity. They admit that the initial economic decline may begin from the Wall Street Crash of 1929 in the United States, but argue that it was through the propagation system---the gold standard that magnified the initial economic shock and turned the decline into the Great Depression ; therefore, they believe, in the context of global depression, abandoning the gold standard and allowing major currencies to depreciate were the remedies for recovery. This view is in contrast to Kindleberger’s stance that after WWI it was important to get the exchange rates fixed at equilibrium levels and it was the collapse of interwar gold standard that brought about the world depression.
One of the characteristics of gold standard defined by Temin is that the adjustment mechanism for a trade deficit country was deflation rather than devaluation, that is, a change in domestic prices instead of a change in the exchange rate. In the event of a balance-of-payment deficit, countries on the gold standard could not devalue their currencies or expand the money supply to stimulate domestic demand, because by doing so would push up good prices, encourage more gold exports, and weaken the currency. Instead, they could only tighten monetary conditions with the goal of reducing domestic prices and costs until international balance was restored. “Critical to...