Many economists believe that leaving the gold standard was a necessary first step to putting an end to the Great Depression. The experience of the United States, in particular, is held up as compelling evidence, but extrapolating from one or even a handful of cases can be misleading. 

In a paper in the American Economic Review, authors Martin Ellison, Sang Seok Lee, and Kevin Hjortshøj O'Rourke estimate the true drivers of economic recovery from the Great Depression, using the most comprehensive dataset to date.

They analyze 27 countries, using modern nowcasting methods and a new dataset containing more than 230,000 monthly and quarterly observations for over 1,500 variables.

Figure 11 from the authors’ paper shows what happened to price levels and economic output before and after leaving the gold standard for a sample of twelve countries. The countries chosen in the sample—Belgium, Canada, Denmark, Estonia, Finland, Japan, New Zealand, Peru, South Africa, Sweden, the United Kingdom, and the United States—all left the gold standard on clearly defined dates.

Figure 11 from Ellison et al. (2024)

The chart shows the time series for prices and indicators of economic output for each country in the months before and after leaving the gold standard, marked by the vertical line. The red line represents values for the United States, and the black line represents the average values of the eleven countries excluding the United States. (Peru, New Zealand, Denmark, Estonia, and Finland are excluded from the right panel due to data limitations.)

Before leaving the gold standard, the price level in all twelve countries was on a downward trajectory. After the monetary system changes, prices stabilized rapidly for most countries. Output rebounded significantly for many countries, especially the United States, but output in several others continued to decline, leaving unclear the causal impact of ending the gold standard on output.

The researchers used several techniques to estimate the true impact and ultimately found that leaving the gold standard caused inflation expectations to increase and real interest rates to drop, which led to recovery.

Their work suggests that big shocks to economic systems can boost inflationary expectations and stimulate demand—the end of the gold standard being a paradigmatic example.