During the Great Depression, the United States remained on the international gol

Question

During the Great Depression, the United States remained on the international gold standard longer than other countries. This effectively meant that the United States was committed to maintaining a fixed exchange rate at the onset of the Great Depression. The U.S. dollar was pegged to the value of gold along with other major currencies, including the British pound and the French franc. Many researchers have blamed the severity of the Great Depression on the Federal Reserve and its failure to react to economic conditions in 1929 and 1930. Discuss how the policy trilemma applies to this situation.

Explanation / Answer

Plocy trilemma is called as impossiblr trinity in internation economics and states that it is impossiblr to have all the three below:

1. A stable foregin exchnage rate

2. Free capital Movement and

3.An independent monitary ploicy

Application of Trilemma to the Great depression: The great depression ocurred in the context of capital movement and the gold standard of fixing the exchnage rates. This means the exchnage rates could not adjust itself to the correct value based on the demand ans supply. This fixed exchange rate gave an artificial value which did not reperesent the true value of the currency based on demand and supply. In real world, market should self regulating and no imposing constraints should be present. This exchnage rate restriction resulted in higer unemployment and economies of these countires contracted further. It was not known that fiscal stimulus could be used to fight higer unemployment at that stage. Finally in 1931, the Gold standard of fixing exchange rates was removed, however the damage had been done along with the stock market crash and required several years to come to the normal course of self regluating markets. In this manner we can apply the impossible trinity to the great depression of 1929 an 1930.

Related Questions

Navigate

• Browse (All)
• Browse D
• Subjects

Integrity-first tutoring: explanations and feedback only — we do not complete graded work. Learn more.