How Did World War I Combined with the Great Depression

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The Answer is The gold standard eventually collapsed from the impact of World War I.During the war, nations on both sides had to finance their huge military expenses and did so by printing more paper currency.As the currency in circulation exceeded each country's gold reserves, many countries were forced to abandon the gold standard.In the 1920s, most countries returned to the gold standard at the same price level.However, the revival of the gold standard was short-lived due to the Great Depression, which began in the late 1920s.The gold standard limited the flexibility of the monetary policy of each country's central banks by limiting their ability to expand the money supply.Countries could not expand their money supply beyond what was allowed by the gold reserves held in their vaults.World War I had seen the creation of too much money to allow a return to the gold standard without either large currency devaluations or price deflations.In addition, the U.S.gold stock had doubled.There simply was not enough monetary gold in the rest of the world to support the countries' currencies at the existing exchange rates.By 1931, the United Kingdom had to officially abandon its commitment to maintain the value of the British pound.The currency was allowed to float.The U.S.dollar and the French franc were the next strongest currencies and nations sought to peg the value of their currencies to either the dollar or franc.However, in 1934, the United States devalued its currency from $20.67 per ounce of gold to $35 per ounce.With a cheaper U.S.dollar, U.S.firms were able to export more as the price of their goods and services were cheaper vis-à-vis other nations.Other countries devalued their currencies in retaliation of the lower U.S.dollar.Many of these countries used arbitrary par values rather than a price relative to their gold reserves.Each country hoped to make its exports cheaper to other countries and reduce expensive imports.However, with so many countries simultaneously devaluing their currencies, the impact on prices was canceled out.Many countries also imposed tariffs and other trade restrictions in an effort to protect domestic industries and jobs.By 1939, the gold standard was dead it was no longer an accurate indicator of a currency's real value.

How Did World War I Combined with the Great Depression

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