What can we learn from the Depression?

In particular, the work of the economic historians such as Mr Eichengreen and Peter Temin has recently stressed the importance of the malfunctioning of the gold standard currency system as the cause of the Depression, as well as its severity.

From the mid-19th century most countries pegged their currencies to a fixed value of gold, an arrangement that became known as the “gold standard”. This system worked whilst countries helped each other with loans to solve periodic balance-of-payments crises (and while gold discoveries made for gentle price-level trends) but World War One disrupted this system. The result was that many countries found themselves with currencies fixed at an inappropriate rate of exchange to those of other countries. While France and America initially gained in the 1920s from holding their currencies at too low a value, countries like Britain and Germany suffered from recurrent balance-of-payments problems as the result their overvalued currencies.