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Tuesday, June 30, 2009

Stocks, Gold and War

My Research magazine article "Stocks, Gold and War," on how World War I's outbreak transformed American finance, is now online. It's a story I find quite relevant to the present. Excerpt:
During World War I, the U.S. became, as William Silber puts it, “a financial superpower.” For a while, the U.S. and Great Britain shared that status. But by the 1920s, the U.S. was looking like the top dog on the financial heap. Britain, its wealth depleted by the war, suspended its gold standard in 1919 and then restored it in 1925. The overvalued pound had to be propped up with high interest rates, further damaging Britain’s economy.
A crucial element of [Treasury Secretary William] McAdoo’s success in handling the financial crisis of 1914 is that his actions were temporary. Emergency currency was issued, but with a tax on banks to ensure they didn’t hand out too much of it. The stock exchange was closed, but only for long enough to allow the dollar to be stabilized and the gold standard secured. Thus, investors were reassured that they were seeing a crisis response, rather than a permanent shift to big government dominating the financial sector.
William Silber, by the way, is no relation. I recommend his book When Washington Shut Down Wall Street: The Great Financial Crisis of 1914 and the Origins of America's Monetary Supremacy, which provided much useful information for my article.

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