Designated fall guys for the Great Depression are Herbert Hoover and the 1929 stock market crash. The true origin, though, of the bursting of the roaring ’20s was immense gold migration into, then out of, the United States.
The “Federal” Reserve notes used as U.S. dollars were once required to have a 40 percent gold backing at issue. This meant that, once upon a time, for every dollar of gold held by the money monopoly, $2.50 of the “Federal” Reserve notes could be issued. At the close of the Great War (World War I), Britain and other European nations confronted enormous debts. Wars are costly, both in terms of lives lost and of money spent. The United States had entered World War I relatively late, so her expenditures had not been as great as those of Europe. Britain, among others, owed a great deal of money. To help repay her war debts, Britain adopted the then-novel idea of breaking the connection between the British pound and gold. (Germany also had huge debts, augmented by harsh terms under the Versailles Treaty of 1919.) Gold began migrating to the United States.
Because “Fed” notes – “dollars” – required a 40 percent gold backing, the sudden influx of gold into the U.S. caused a dollar expansion. Almost overnight, there were a lot more dollars available. Where to put them? Farmers could invest in their farms. There was farmer friendly legislation, making it easier for farmers to borrow money at very generous rates. (“Farm Credits.” Time, 3/3/1923) There was a building boom; “Speculative construction” in the building industry; A Building Tax Exemption Law, considered by Justice Tierney to be unconstitutional. (“The Building Boom.” Time, 3/31/1923 and “Construction Halts.” Time, 5/28/1923) Stocks could be bought on margin, with easy credit.
“We are sitting on a slumbering volcano of excess gold reserves,” warned Time magazine. (“Current Situation.” Time, 2/4/1924) Heavy importations of gold into the U.S. caused a drop in money rates. (More gold –> more “Fed” notes –> increased supply of dollars –> dollars “cost” less, i.e., a drop in money rates.) “Few Reserve Banks are at present earning the 6% dividend payable on their stock.” (“Federal Reserve Dividends.” Time, 9/1/1924)
Then, in January 1925, “Undetected, like a shadow in the dead of night, Governor Montagu Norman of the Bank of England made his way to the U.S.” Norman met with officers of the “Federal” Reserve Bank of New York. “Why had he come? What was he doing?” wondered Time magazine. (“From the ‘Old Lady.'” Time, 1/12/1925)
Still, in February 1925, there was a “continued ease of money.” This “plenty of cheap funds” did not please the “Federal” Reserve banks, “which are at present frequently not earning their dividends.” (“Current Situation.” Time, 2/2/1925)
May 1925. Winston Churchill (image hopefully at top), Chancellor of the Exchequer, abruptly put Britain back on a gold standard. Britain’s Gold and Silver Export Act of 1920 was allowed to lapse. Churchill announced that a 35 percent gold reserve had already been established. (Was this set up by Montagu Norman during his aforementioned hush-hush visit to New York?) Plus, a credit with the U.S. for $300 million in gold was in place. Churchill had been “discreetly” accumulating dollars. But why had Britain gone off gold in the first place? It was a feasible avenue to repay her war debts. Was there a long-range plot, to park British gold in the U.S., pay war debts in paper, then reclaim gold and return to a gold standard? (See “Budget Time.” Time, 5/11/1925) The return to the gold standard by Britain, in 1925, was “perhaps the outstanding event of 1925.” It marked a sea change, in European countries, of a return to gold as backing for their money. (“Gold Money” Time, 5/11/1925)
President at this time was Calvin Coolidge. So-called “Coolidge prosperity” began to “suffer many a blow.” The stream of gold turned away from the U.S. This weakened the “Federal” Reserves ability to manufacture dollars, due to the 40-percent gold limitation. (“Era’s End.” Time 7/23/1928) Did Coolidge see “the writing on the wall”? Is that why “Silent Cal” did not seek re-election in 1928?
By February of 1928, more than a year before the dramatic crash of the stock market, Time magazine was reporting “4,000,000 Jobless?” In New York State, unemployment was at its worst since 1921. The Labor Bureau, Inc., estimated 4 million unemployed throughout the U.S. (Time, 2/20/1928) There was widespread suspicion that banks lacked sufficient reserves. (“Quit.” Time 4/9/1928) The lack of reserves would obviously have been caused by the gold migration out of the U.S., subsequent to Britain’s re-embracing the gold standard in 1925, since given the 40 percent gold reserve requirement for “Fed” notes, less gold meant less notes. In May of 1928, there was frenzied trading on the New York Stock Exchange. “From the floor a ululant howling roared.” It was “the worst break in stock market prices of the present expansion.” (“Stock Market Jamboree.” Time, 5/28/1928)
All this was occurring in 1928. Yet to most people, the erroneous idea that the stock market crash of October 1929 caused the Great Depression persists. The 1929 Crash serves as a useful myth hiding deeper circumstances: it is the Lee Harvey Oswald of the Great Depression.
(A version of the above first appeared at my old Conspiracy Nation web site on January 30, 2005.)