The Great Depression was the longest and most severe economic depression ever experienced by the global economy. It took place during the 1930s, began with the U.S. stock market crash of 1929 and ended after World War II.
Gold Standard and Great Depression
Some economists argue that the rigidities of the gold standard caused or at least contributed to the Great Depression. However, according to the Austrian school, the crisis was caused by excessively expansionary monetary policy conducted by the Fed during the 1920s, which created an unsustainable boom. The Depression was then prolonged by many failed interventions of the Hoover and Roosevelt administrations. These interventions curbed the economy’s ability to quickly adjust after a shock. The global policy of heavy taxation and tariffs didn’t help either, of course.
Great Depression and Gold Price
Since the price of gold was fixed at that time, we cannot analyze its performance during the Great Depression. However, the shares of Homestake Mining, the largest gold miner in the U.S. at the time, surged in the 1930s. If we assume that HM’s performance was representative of the entire gold market, then it means that periods of recessions are positive for the shiny metal as the ultimate safe-haven.
It is also worth pointing out that the Great Depression was a turning point which reduced the faith in the free market and stable money, paving the way for Keynesian economics and fiat money, and the intense demand for gold as insurance against the breakdown of a monetary system based on fiat currencies. The trauma associated with the crisis was also responsible for the central banks’ overreaction to the threat of unemployment in the 1960s, which ultimately led to the stagflation in the 1970s and the resulting gold bull market.
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