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A Manmade Depression
The 1920s and 1930s were a time of extreme economic volatility. The stock market crashed, the economy boomed, and then it all came crashing down again. People couldn’t find jobs; currency was basically worthless; people even used wheelbarrows to carry money around because they didn’t trust banks. The Great Depression was the worst part of this period, but that wasn’t just some random event—it happened because central bankers made poor decisions about monetary policy (interest rates). They kept interest rates too low for too long, which led directly to the Great Depression.
The story of the global economic collapse is tied in part to the gold standard. Backing a currency with gold signaled that a country was a serious player in the world economy. Gold was scarce, so governments on the gold standard could not increase their currency supply by any significant amount. More than one observer commented on how ironic it was: Gold was dug out of African mines and shipped halfway around the world only to be placed underground in central bank vaults. The gold standard checked inflation but it wasn’t perfect because there were still other problems associated with it.
By 1914, the gold standard was a long-established economic tradition. However, central banking was new and Americans were suspicious of centralized power. Woodrow Wilson overcame those doubts with the creation of a Federal Reserve System that had 12 regional banks overseen by one board in Washington D.C. The most influential regional bank is New York’s Federal Reserve Bank because it has more power than other regional banks to influence the economy.
Strong was a natural leader. He was one of four central bankers who played crucial roles in the years leading up to the Great Depression. The others were Montagu Norman, Émile Moreau and Hjalmar Schacht. At the dawn of World War I, gold was a crucial commodity because it had intrinsic value that paper currency lacked. Germany began hoarding gold in anticipation of a costly war with France and Britain while also financing its war efforts by moving its gold from Paris to other locations across France in order to avoid being caught off-guard if there was an attack on Paris’ banks or vaults at any time during the war.
Traditionally, economists believed that any war would be short-lived. The countries involved in the conflict would not want to pay for a long war, because they have too much money invested in international trade. However, it seems like bankers and economists forgot about their own history books when they made this prediction. European central banks protected their gold reserves by keeping them safe during the war; however, there was no way of knowing if this strategy would work out well or not since other wars had lasted longer than expected. As time passed during the war, many governments started printing more currency to raise funds and help with the costs of fighting a battle that seemed endless at times. Eventually, people stopped trusting paper money as much as before and began using gold instead—the only thing that could be trusted since every country’s currency was backed by it before the war started. This change brought severe consequences to all economies involved in World War I since everything became more expensive due to inflation. Once America joined World War I on behalf of Britain, its economy boomed because it supplied materials needed for warfare while also taking advantage of Europe’s crisis by making deals with those countries’ companies. By 1918, America had amassed enough gold so that even Germany couldn’t afford another year of fighting against all its enemies.
