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In what area, did we have zero percent interest rates back in 1930? Interest rates were lower, but with deflation, the real interest rate has been estimated to

• wahern 8y ago
  The key thing there isn't the interest rate: it was the deflation rate: 4% in 1930 and a whopping 10% in 1931. The interest rate was more a reflection of the fact that nobody was lending money. The capital markets froze around the world. Deflation is the key to the Great Depression. And why we had deflation was directly a result of the gold standard. Indeed, Europe saw stronger deflation earlier than we did because the U.S. economy of the 1920s was (like China today) a net exporter of manufactured goods: radios, washing machines, etc. The gold standard meant that the fixed supply of gold moved [on the books] inexorably from Europe to the U.S. That brought deflation in Europe and even inflation in the U.S. (reflected most spectacularly in the stock market and the social excesses of the day).[1] Deflation in Europe accelerated the trade inbalance (increasingly stronger European currencies) until, one day, European consumers found themselves jobless and unable to afford basic necessities because domestic real prices were so high relative to earnings. When European trans-Atlantic trade and investment slowed the whole house of cards came crashing down. And all of this was a direct result of the rigidity of the gold standard. The gold standard created a feedback loop that accelerated the global economy into a brick wall--the brick wall being the reality of the finite supply of gold. I can't even begin to do justice to the actual history, which is obviously just a little more complicated than I make it out to be above. For that everybody should read the 2010 Pulitzer Prize for History winning book, Lords of Finance (https://en.wikipedia.org/wiki/Lords_of_Finance https://en.wikipedia.org/wiki/Lords_of_Finance) [1] Gold bugs like to point out the hyperinflation of Weimar Germany. But they were deliberately printing currency to spite the U.K. and France, to whom they owed war reparations. Because of the gold standard reparations were nominally fixed, so the strategy didn't work as you might think. But if they hyper-inflated quickly enough (on the order of weeks or months, the time it took to deliver a payment and before exchange rates fully adjusted), they could technically cheat, not to mention blunt the deflationary impact domestically. Of course, this hyperinflation also created an unstoppable cycle domestically. But because of war reparations and the merciless calculus of the gold standard, Germany was screwed either way. They knew what they were doing. The hyperinflation was knowing and deliberate. It was arguably a consequence of the rigidity of the gold standard.
  • opo 8y ago
    >...And all of this was a direct result of the rigidity of the gold standard. The gold standard created a feedback loop that accelerated the global economy into a brick wall--the brick wall being the reality of the finite supply of gold. Agreed, though like you said it is pretty complicated. The US had about 45% of world gold reserve in the early 20's and even though was a net exporter by 1929 had dropped to closer to 37% due in part to large capital lending to Europe. http://library.intellectualtakeout.org/library/chart-graph/world-gold-reserves-1925-1932 http://library.intellectualtakeout.org/library/chart-graph/w... A major issue though was the hoarding of gold by France: >...While the tightening of U.S. monetary policy in 1928 is often blamed for having initiated the downturn, France increased its share of world gold reserves from 7 percent to 27 percent between 1927 and 1932 and effectively sterilized most of this accumulation. This “gold hoarding” created an artificial shortage of reserves and put other countries under enormous deflationary pressure. https://www.dartmouth.edu/~dirwin/Did%20France%20Cause%20the%20Great%20Depression.pdf https://www.dartmouth.edu/~dirwin/Did%20France%20Cause%20the...