By Richard S. Grossman
Britain operated under the gold standard for nearly 100 years before World War I forced Britain — and many other countries — to abandon it. During that century, Britain was the world’s military, financial, and industrial superpower. When Britain decided to return to gold in 1925, in hopes of reestablishing its pre-war dominance, it set of a rush among other countries to follow its example. But the interwar gold standard was doomed from the start: exchange rates were misaligned, gold holdings were inadequate and poorly distributed, and countries were powerless to use monetary policy to improve economic performance. When the Great Depression emerged in 1929-30, the gold standard played a crucial role in transmitting the shock internationally, amplifying its effects, and making it harder for policy makers to find a way out. The following infographic illustrates one way in which the gold standard had a disastrous effect on the British economy.
Richard S. Grossman is Professor of Economics at Wesleyan University and a Visiting Scholar at the Institute for Quantitative Social Science at Harvard University. He is the author of WRONG: Nine Economic Policy Disasters and What We Can Learn from Them and Unsettled Account: The Evolution of Banking in the Industrialized World since 1800. Read his previous blog posts about economics.