Effect on World Prices
In the crisis of 1929-31, however, these tendencies making for readjustment and for the restoration of normal conditions apparently failed to operate. In spite of the decline in prices a shortage of gold continued to prevail owing to the hoarding of gold by a few countries. The lowering of interest rates to a nominal figure failed to stimulate business activity, and lower prices failed to stimulate the demand for the unsaleable surplus stocks of produce
and manufactures. The reason for this is that a further deflation was generally anticipated. There were reasons for supposing that the maldistribution of gold, which was the cause of the decline, would become further accentuated, mainly as a result of the gold-hoarding policy of France. As a further fall of world prices was generally anticipated, low prices were unable to attract buyers, and low interest rates were unable to attract borrowers. By the middle of 193 I the deadlock was complete. Adverse economic tendencies were chasing each other in a vicious circle. The decline of prices inflicted heavy losses upon everybody, and undermined confidence. This again resulted in a withdrawal of credits by the principal creditor countries, which in turn tended to accentuate the maldistribution of gold. The latter factor again tended to accentuate the decline of prices, and so it went on.