The Gold Standard
1. Gold Standard: Each country set the value of its currency in terms of gold and worked to defend the fixed price.
2. Transmission of America’s Economic Decline to the World
3. Once the U.S. committed to the gold standard, the tendency for the U.S. to receive gold from other countries strengthened. The reason for this was that deflation in the U.S. attracted foreigners to American goods when low income reduced the desire of Americans for foreign goods. In order to stop this, banks all over the world raised their interest rates.
2. Transmission of America’s Economic Decline to the World
- Imbalances in trade gave rise to international gold flows
- While Britain was on the gold standard, their pound was overvalued and that led to shortages of trade and substantial gold outflows. To prevent the gold outflow, interest rates were largely raised. High interest rates degraded British spending and led to unemployment.
3. Once the U.S. committed to the gold standard, the tendency for the U.S. to receive gold from other countries strengthened. The reason for this was that deflation in the U.S. attracted foreigners to American goods when low income reduced the desire of Americans for foreign goods. In order to stop this, banks all over the world raised their interest rates.