Great Depression What
The 1920's
In the United States the decade of the 1920's was a decade of brisk economic growth in the United States that was marked by an expansion of consumer credit. Major innovations in the consumption behavior of households led to the purchase of durable goods such as automobiles, refrigerators, and radios, which utilized the availability of more credit.
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The Gold Standard Monetary Policy
Under a gold standard, a government would trade dollars for gold at a fixed rate. Under such a policy, the dollar is "good as gold." Except that the dollar is only as good as the government's credibility to stick with the standard. If a government can go on a gold standardm then it can go off. The fact that people are aware of this leads to speculative attacks and lowers the governmetn credibility. After suspending gold convertibility in World War I, many countries stayed off gold and experienced chaotic fiscal and monetary policies in the early 1920's. Many people felt that the only way to restore fiscal and monetary policy was a return to the gold standard. This proved to be a disaster, because capital flows became more erratic.
M1 = (M1/BASE) x (BASE/RES) x (RES/GOLD) x PGOLD x QGOLD (1)
where
M1 = M1 money supply (money and notes in circulation plus commercial bank deposits),
BASE = monetary base (money and notes in circulation plus reserves of commercial banks),
RES = international reserves of the central bank (foreign assets plus gold reserves), valued in domestic currency,
GOLD = gold reserves of the central bank, valued in domestic currency = PGOLD x QGOLD,
PGOLD = the official domestic-currency price of gold, and
QGOLD = the physical quantity (for example, in metric tons) of gold reserves. The equation shows that under a gold standard a country's money supply is affected both by its physical quantity of gold reserves (QGOLD) and the price at which its central bank stands ready to buy and sell gold (PGOLD).
