Eichengreen and Temin’s Explanation of the Cause of the Great Depression

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Eight decades has elapsed since the outbreak of the Great Depression, but the continuing mystery of its cause keep provoking academic debates among scholars from various fields. Eichengreen and Temin joint the debates by linking the gold-standard ideology with the cause of the Great Depression. They content that because of this ideology monetary and fiscal authorities implemented deflationary policies when the hindsight shows clearly that expansionary policies were needed. And these contractionary policies consequently pushed the stumbling world economy into the Great Depression. Eichengreen and Temin put heavy weight on analyzing why the prewar gold standard could be a force for international financial stability while interwar gold standard was the force that led the world into economic catastrophe. Their compelling arguments are important contributions to the understanding of the cause. However, by looking into the details of their explanation loopholes can also be found.

My analysis of Eichengreen and Temin’s argument falls into three parts. In the first part, I elaborate their explanation of the cause of the Great Depression and why interwar gold standard failed while its predecessor succeeded. In the second part, I highlight two aspects of the strengths of their explanation. And in the last part, the weaknesses of their studies will be examined

The cause

Eichengreen and Temin attribute the cause of the Great Depression to the mentality amongst central bankers and political leaders that the restoration of pre-WWI gold standard was essential for restoring the healthy international order and economic prosperity. They admit that the initial economic decline may begin from the Wall Street Crash of 1929 in the United Stat...

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...redibility of individual national commitments to gold and the disputed issues of German reparations and war debts increased the distrust between countries which made international cooperation unlikely. Without credibility and cooperation the gold standard was not sustainable. Eichengreen and Temin successfully demonstrate that the success of prewar gold standard was because of the international cooperation rather than the existence of a hegemonic stabilizer. And they also employed compelling evidence to show that gold standard could not be a source of stability in the interwar period. However, there are loose ends in their explanation. First, they didn’t explain the different domestic politics of breaking with gold standard. Second, they also overstated the influence of gold-standard mentality and its power to change economic history through a small group of elites.

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