Economic Outlook

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Not only that, but reserve requirements for the nation's banks were deliberately cut in half, inviting the rapid doubling of the money supply. indeed, total bank deposits, which were $14.0 billion in 1914, reached $29.4 billion by 1920 ... an enormous increase of 110%, or 18.3% per year.

To deal with the global inflation of unprecedented volume that burgeoned both during and immediately after World War I, the Genoa Conference of 1922 was called. There emerged from it not a gold standard, but a more slippery "gold-exchange standard".

The U.S. alone stayed on the old gold-coin standard, where anyone could present notes totaling $20.67 to the Treasury and receive an ounce of gold in return. But the Genoa Accord made the dollar and the British pound as good as gold, even though the English currency was not sound. In fact, Britain began redeeming pounds not just in gold, but in Federal Reserve notes. England now printed its currency with American support ... the U.S. agreeing to inflate enough to keep Britain's reserves of dollars and gold from flowing to America. Nevertheless, many other nations began to use British pounds as backing for their currencies.

Also, around 1922 the Federal Reserve caused a substantial six-year bank credit inflation by buying securities on the open market and printing money to pay for them. This money — bank reserves — was pyramided several — fold by means of the fractional-reserve banking system. In fact, between mid-1922 and April 1928, bank credit expanded by over twice as much as it did during the financing of World War I. As with all inflation, this caused speculative excess ... in this case, new money poured into the stock market and real estate. The speculative fever was cooled — in 1928 — by the government, which finally became afraid of the overheated economy and tightened the money supply. This step, in turn, led to the Great Depression.

The stock market crashed in late 1929, but it wasn't until 1931 that international bank collapses caused the abandonment of gold. The first nation to go was Austria. Its formation of a customs union with Germany in March 1931 was feared by France, which saw it as a step to political union. The French central bank insisted upon immediate repayment of short-term debts from Austria and Germany many. Austrian banks clearly could not meet their liabilities, and in late May went bankrupt, taking Austria off the gold Germany In July, Germany did the same.

As the runs on British gold increased throughout that summer, Britain refused to defend the pound by raising interest rates. Instead, as gold flowed out, the Bank of England,' printed new money to replenish the banks' reserves. Then — on September 20, 1931 — two days after England assured the Netherlands Bank (which had all of its capital in British sterling) that it would not go off the gold standard, that's exactly what that nation did. And since Britain had, for centuries, been the leading financial power, the world was stunned. Despite the spreading crisis — and though the solvency of some U.S. banks was uncertain — few Americans doubted their government's promise to redeem notes for gold. In fact, the platforms of both parties in 1932 included vows that the gold standard would be maintained. In late December of that year, however, rumors grew that President-elect Roosevelt was going to take the nation off gold, and large-scale American hoarding of that metal started for the first time. Runs were made on banks by depositors anxious to get cash and on the Federal Reserve by cashholders eager for gold.

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