Submitted by Noa Rodman on February 26, 2017


The world economic crisis of 1929-1933 exerted a tremendous influence on the world monetary system. The crisis was not confined to the overproduction of goods. While some national markets were glutted with commodities that could find no buyers, others could have presented an effective demand for certain goods. What made the situation so complicated was the fact that the world market, which was the connecting link between national markets, was disorganised by the derangement of the credit system. One of the main causes of the latter was that creditor countries, and especially the United States, by their monetary and financial policy created a situation in which debtor countries could pay only in gold, and could not utilise their export potentialities in full measure.

Stimulated by dollar credits, the economic boom in the United States and some other capitalist countries in the long run ran up against the shortage of gold for the repayment of debts. Even if there had been much larger world reserves of monetary gold than there were at the moment of the crisis, mutual settlements on war and postwar debts could not proceed smoothly because the war debt arose under an entirely different level of commodity prices expressed in gold. A general re-evaluation of values was required, and in some cases also the full annulment of wartime debts to bring back stability to world trade and the credit system.

Yet the US ruling circles continued to stimulate economic development by easy credits right up to the time when the crisis broke. They also increased foreign loans with the object of further subordinating the economies of European countries to US finance capital. Thus, the issue of new securities for making additional investments in various sectors of the economy rose from $ 4,000 million in 1923 to $ 10,000 million in 1929. In the same year the United States had the smallest unemployment rate–only 0.9 per cent–during all the war and postwar years. It seemed as though the much-vaunted ``prosperity'' was functioning faultlessly and monetary and financial policy was following a correct course. But before the end of that year the American stock exchanges were overwhelmed by the crisis and the prices of securities dropped precipitously. Commodity prices in the world market, where disturbing fluctuations had been observed even earlier, began to decline swiftly.

In 1930, when no doubt whatsoever remained that the economy of the United States, like that of other countries, faced a serious crisis, and not just a slight recession, the American ruling circles continued their attempts to maintain business by artificial means. This was also expressed in President Hoover's calls to municipalities to increase the issue of bonds for financing public works to maintain employment and purchasing power. But these calls remained pious wishes.

In 1930 unemployment rose to 7.8 per cent or more than seven times as compared with the preceding year. In subsequent years it continued to mount, reaching the maximum of 25.1 per cent in 1933. In other words, one out of every four industrial workers employed before the crisis lost his job.

The credit system of the United States was so upset that many banks went bankurpt. In 1930 out of more than 24,000 banks 1,352 closed down. In 1931 this number increased to 2,294, and in the next year another 1,456 banks failed.

In view of the swift disappearance of gold from circulation, the exchange of bank notes for gold was stopped on March 6, 1933. All American citizens and corporations were ordered by the government to hand over to the Treasury monetary gold in their possession above $ 100. This was the first step towards the nationalisation of gold. Preconditions for the devaluation of the dollar were also created. The US ruling circles were in a hurry to receive payments in gold and dollars from US debtors prior to devaluation and to invest available money in foreign enterprises, to buy shares or invest capital in import operations.

The removal of gold from the private sector by the US Treasury through the issue to the owners of Treasury gold certificates was legalised at the end of January 1934. This action predetermined the devaluation of the dollar. The gold content of the dollar was reduced by 40 per cent under the law. The President's decision of January 31, 1934 fixed the gold content of $ 1 at 1/35 of a troy ounce (0.888671 g) or $ 35 per ounce of gold instead of $ 20.67 prior to devaluation. This sent up the value of the gold reserves of the USA after devaluation to $ 7,877 million instead of $ 4,652 million prior to devaluation. At the price of $ 35 per ounce of gold the new gold content of the American dollar amounted to 59.06 per cent of that prior to devaluation.

The principal European countries did not at once follow the American example. What was more, France, Belgium, the Netherlands, Italy and Switzerland formed the so-called "gold bloc" to preserve the gold basis of their currencies. The preservation of the old gold parity by a number of European countries was apparently dictated by economic considerations–the desire to keep foreign capital in their countries and to attract new capital as a way of saving the credit system from disintegration. In the long run, however, the gold bloc could not withstand the onslaught of the crisis. But for a certain time it played its part, hampering the repatriation of American capital from Europe in the form of gold. Highly indicative in this respect is the movement of the gold reserves of the principal capitalist countries during the world economic crisis. (See table 5.)

Table 5 Gold Reserves of Major Capitalist Countries in the First Half of the 1930s(Millions of US Old Gold Dollars) at the End of the Month Indicated

United States .... 4,593 3,997 4,012 4,640 5,060 5,725 +24.6

Gold bloc countries . 3,056 4,581 4,525 4,480 4 517 3 887 -L.97 8 Comprising:
France . . . 2,211 3,183 3,015 3,117 3,238 2,830 +28.0 Belgium . . 200 372 380 369 314 345 +72.0
Netherlands 200 309 371 338 327 237 +18.5
Italy . . . 283 356 373 340 308 207 –26.9
Switzerland 162 361 386 316 330 268 +65.3

Britain . . 800 927 933 935 940 952 +19.0
Germany . . 354 62 109 34 36 38 –89.3
Japan . . . 424 212 212 227 235 247 –42.0
Spain . . . 468 436 436 437 438 436 –6.8
Argentina 349 248 238 238 238 238 –31.8
Other countries . . . 1,347 1,483 1,554 1,597 1,652 1,265 –6.3

Source: S. E. Harris, Exchange Depreciation. Its Theory and Its History, 1931-1935, With Some Consideration of Related Domestic Policies, Cambridge, 1936, p. 145.

The table shows that the gold reserves in the United States began to rise after 1933 when the dollar was devalued and gold was concentrated in the Treasury. The situation was different in the gold bloc countries. It was during the first years of the period we are examining–prior to 1933 and 1934, i.e., prior to the devaluation of the American dollar, that the gold reserves in these countries rose. Subsequently this growth was either stopped or the reserves decreased somewhat. On the whole, however, the gold reserves in the gold bloc countries rose by 28 per cent from June 1931 to October 1935, while in the United States they increased by 24.6 per cent during the same period. Losses of gold were sustained by Germany (89.3 per cent), Japan (42 per cent), Argentina (31.8 per cent), Italy, which was a member of the gold bloc, (26.9 per cent) and Spain (6.8 per cent). Moreover, the sharp decrease in Italy's gold reserves occurred in a brief period, from March to October 1935, when the gold bloc actually ceased to function and, moreover, the devalued American dollar became stable on the new gold basis.

The world economic crisis did tremendous damage to the capitalist countries, especially the United States. It put an end to relative stabilisation and only memories remained of the much-publicised ``prosperity'' in the USA. Chronic unemployment persisted and even in 1939 it amounted to 16.7 per cent of the labour force. It could not be otherwise because of the general sharp decrease of business activity in the United States in the 1930s.

After 1933 and up to the 1940s there was not a single year in which the issue of securities, an indicator of business activity in capitalist countries, was above 50 per cent of the 1923 level. In 1934 the issue of new securities was only 7 per cent of that level; in 1935 15 per cent; in 1936-1937 it rose to 46 per cent, but in 1938 and 1939 it again dropped to 33 and 14 per cent respectively. It is not surprising that stagnation in US industrial production continued. Free capital, finding no profitable employment in the country, hastened to migrate to countries where there were favourable investment conditions. As for the influence of the crisis on the economy and money circulation of other capitalist countries, all of them felt its impact to one extent or another. The gold bloc gradually collapsed under the hammer blows of the crisis and even France, which was the bloc's mainstay, devalued the franc on October 2, 1936. France's example was followed by Italy three days later. Belgium had devalued its currency even earlier, in March 1935. In September 1936 the Netherlands and Switzerland stopped exchanging bank notes for gold; the export of gold for international settlements and the maintenance of the rate of their currencies was kept up.

In effect, after a number of devaluations and the discontinuation of the internal exchange of bank notes for gold, currency circulation was normalised to a certain extent in the second half of the 1930s. A considerable part in this respect was played by the fact that instead of the indirect defence of the rate of national currencies practised prior to the crisis, most countries began to employ gold on a wider scale in reciprocal settlements. The United States, too, contributed substantially to normalising the situation. After the devaluation of the dollar in 1934 it began to apply a rigid policy of securing with gold both the Federal Reserve notes put into circulation and also the deposits of its member banks. Other countries followed the same line of enhancing the role of gold in currency circulation. Thus, a temporary period set in when economic activity was not overstimulated through the excessive issue of liquid assets and credits as was the case prior to the world economic crisis.

On October 12, 1936 the US Treasury announced its intention of selling bullion gold at $ 35 per ounce (plus 0.25 per cent for operating expenses) if the banks of issue of other countries assumed a similar obligation to sell gold. Britain, France, Switzerland, Belgium and the Netherlands, as it were, officially legalised the extensive use of gold in settlements between states.

Countries with tne gold exchange standard began to ensure the stability of their currencies with the help of the convertible currency of countries which entered into an agreement on interstate circulation of gold. The use of American dollars for these purposes became particularly widespread. Since payments in gold were made through international banking channels, the numbers of private capitalist businessmen in the sphere of foreign trade and economic relations were thus restricted. As a rule, a high ceiling for the total quantity of bank notes to be exchanged for gold bullion was set in international payments of private capital. This automatically made foreign trade ties more difficult for small-scale capital and intensified the monopolisation of foreign trade by Big Business.

There was a greater tendency towards state-monopoly control and regulation of foreign trade through various monetary and other measures: foreign exchange restrictions, the establishment of definite quantities of imported goods, the issue of licences for the import of goods, limits on the exchange of foreign currency, differentiation of customs duties according to countries, preferences, restrictions, and so on.

Differentiation between capitalist countries themselves was deepened according to the degree of their monetary independence.

Big capitalist countries which possessed sufficient reserves of gold were able to maintain the rates of their currency with the help of gold (to prevent a drop in the rate of their currency by exchanging it for gold bullion). Countries which had no gold reserves had to be satisfied with setting up reserves of stable convertible currencies of countries more powerful financially and, with the help of these reserves, to maintain the exchange rate of their own currencies, i.e., to exchange their currency for that of the richer countries whenever necessary. Such mediated (through foreign exchange) regulation of the rate of national currencies by the economically weaker capitalist countries of itself made them dependent on the monetary and financial policy of the highly developed countries. Moreover, the economically weak countries with a gold exchange standard, wittingly or unwittingly, had to have some reserve of foreign exchange for maintaining the rate of their currency in international payments. From the economic point of view, this means that the economically weaker countries credit the richer states with the entire sum of foreign liquid assets in their reserves. But in the second half of the 1930s, after the world economic crisis, the economically less developed countries had no other choice.

In an effort to eliminate the consequences of the crisis at the expense of other countries the major capitalist powers stepped up the organisation of financial economic and trading blocs. This was the path taken not only by Great Britain, France and Japan, but also by fascist Germany and Italy.

The more intensified setting up of economic blocs, stemming from the changes in the trade and monetary and credit policy of the principal capitalist countries, curtailed multilateral trade, extended trade within the bounds of economic blocs and bilateral trade. This was undoubtedly a display of capitalism's general crisis. These tendencies threatened sooner or later to produce a new military explosion, a new world war. The crisis, as it were, spurred on inter-imperialist rivalry over colonies and the desire to extend the financial and economic blocs and areas. Thus, early in the 1930s imperialist Japan forcibly incorporated Manchuria into her Asian ``co-prosperity'' sphere. Italy was out to build up its own ``area'', including in it Abyssinia and some other regions of North Africa, ousting France and Britain from there.

Britain, employing diverse financial and economic instruments, extended and consolidated the sterling area. This was facilitated by the fact that during the 1929-1933 crisis the pound, relying on British capital's foreign investments and the stock of monetary gold, remained relatively stable and was widely employed in international payments. "For many countries which had previously based their currencies on sterling the choice was virtually automatic, their reserves were invested in London, the bulk of their trade was transacted with Great Britain, and there was no real alternative to keeping in step with sterling,"1 The Economist wrote.

The United States and Germany were in a somewhat different position. Owing to economic stagnation, the US monopolies found no sufficiently profitable sphere for capital within the country. Therefore, they sought spheres for investment abroad, particularly in industrial countries of Europe. Germany was of particular interest from this point of view. Through Germany, which held a central place in Europe, US capital expected to obtain superprofits in other European countries.

International reactionary forces assumed that fascist aggression would be directed principally against the Soviet Union. Proceeding from such a prospect, international, particularly US, finance capital obviously regarded nazi Germany with favour, giving her a free hand in trade aad financial relations with Southeastern European countries. Germany, in effect, formed a trade and financial-economic bloc with these countries.

Germany's specific monetary and financial policy became strikingly pronounced after Hitler's rise to power. It was marked by the inflationary stimulation of exports and the war industry, the separation of internal money circulation from world monetary; circulation and the mobilisation of internal resources by non-economic methods, including the confiscation of gold. In Germany itself all measures were employed to mobilise foreign exchange and prevent its outflow from the country. Let us recall, for example, that on German ship$ sailing to other countries special ship money was used which could not be spent elsewhere, while on board ship ordinary marks were not accepted.2

Some foreign exchange, restrictions were also applied in a number of countries in which Germany gained economic influence*. But the function of gold "as a means of payment in the settling of international balances" (Karl Marx) remained unchanged. Therefore, the accumulation of monetary gold remained an object of special concern for capitalist governments prior to the Second World War.

The role of the state in regulating currency exchange rates increased. Treasuries and the central banks of issue began constantly to participate in foreign exchange operations in the open markets so as to regulate the rate of their own currency (to lower or raise it depending on the circumstances) and to push the rates of other countries' currencies in a desired direction. This was achieved by the tried and tested method of intervention in the open market. Since the current exchange rate of any currency, even with solid gold backing, is determined by supply and demand at a definite period, by easing or making more difficult the satisfaction of the demand, governments sought to influence the exchange rate of their own and other currencies.

The gold basis remained generally recognised. Moreover, after the devaluation of the American dollar in 1934 the US ruling element took special care to maintain the established gold content of the dollar. This was comparatively easy to achieve because the balance of US visible trade was invariably favourable. And although the balance of invisible trade (freight, insurance, transfers of immigrants and tourist travel) was invariably in deficit, this was compensated for by the annual receipts of interest and dividends on investments abroad. Thus, the nature of the US balance of payments was ultimately determined by the movement of longand short-term capital. Before and during the 1929-1933 world crisis, owing to the excess of the export of capital over its import, the United States usually had an unfavourable balance of payments. But since the investments of capital were made in various forms in dollars, this balance-ofpayment deficit was not accompanied by a big outlow of gold.

The US balance of payments remained unfavourable during the five crisis years (1929-1933)–in three years gold was imported and in two years (1931, 1933) exported.

From 1934 onwards the balance of the movement of long and short-term capital became positive and the USA imported gold to the value of more than $ 8,800 million over the five years (more than 3,000 million dollars in 1939). The war-fraught economic situation made itself felt in world currency circulation. After the second half of 1938 the war danger in Europe again caused a strong migration of capital to the United States. This also led to a big influx of gold which amounted to$ 1,657 million in 1938 and $'3,018 million in 19393 .

Indeed, during the second half of the 1930s the US gold reserves increased by leaps which cannot be explained by ordinary causes. Thus, in 1934 the gold reserves in devalued dollars amounted to $ 7,877 million, in 1935 to $9,116 million, in 1936 to $ 10,667 million, in 1937 to $ 12,487 million, in 1938 to $ 13,007 million, and in 1939 to $ 16,195 million. Particularly big was the leap in 1940 when the reserves reached $ 20,049 million.4 This was no doubt caused by Hitler's attack on Poland on September 1, 1939, followed on September 3 by the British and French declarations of war on Germany. In this situation European money capital in the form of gold began to seek refuge across the Atlantic. Table 6 shows that direct American investments and investments in securities, bonds, loans and so on amounted in 1938 to about $ 11,500 million, while the liabilities were $7,000 million. Thus, US investments exceeded US liabilities by about $4,500 million, which characterises it as a creditor country. Of the $7,000 million of US liabilities, $4,500 million were portfolio investments, which is also characteristic of capital fleeing from Europe. Direct foreign capital investments in the USA were about $ 1,900 million. The US had direct investments abroad amounting to $7,100 million, i.e., 3.7 times greater than foreigners had in the United States.

In search of a quiet haven in which to weather the war storm, not only free European capital flowed to the United States from countries over which the armoured fist of nazi Germany was poised, but also repatriated American capital which had been in Europe in a liquid form. For these reasons the concentration of gold in the United States subsequently led to the shifting of the biggest part of the world stock to this country. The USA turned into the monetary centre of the capitalist world.

If we trace the movement of the US gold reserves since the devaluation of the dollar in 1934, on the whole it was on the ascendency up to 1942. The increased war spending and the purchase of strategic materials by the United States brought about a slow decrease in the American gold stock towards the end of the war. Then the United States again began to pump out gold in payment of war debts and for the export of goods to the markets of countries which had not yet recovered from the war. The end of the 1940s witnessed a record accumulation of gold in the United States.

Table 6 American Long-Term Investments and Obligations Abroad in 1938 (million dollars)
Direct Investment5

US obligations Portfolio Total
Europe .......... 1,422 954 2,376 5,384
North America. . . 2 582 1,872 4 454 1 214
Central America and the West Indies ...... 862 115 977 68
South America ..... 1 551 968 2 519 40
Asia and Oceania ..... Africa .......... 587 139 410 19 997 158 182 15
Not identified ....... 10 10 104
Total 7 143 4 348 11 491 7 007 Year

Source: C. Lewis, Debtor and Creditor Countries: 1938, 1944. Washington, 1945, p. 8.

Table 7 Stock of Monetary Gold in the USA After the Devaluation of the Dollar and up to the End of the 1940s (at the end of the year)

Million dollars* Million dollars**
* In devalued dollars: $35=1 troy ounce of gold.
** In dollars prior to devaluation: $20.67 = 1 troy ounce of gold.

1934 7,877 4,652
1935 9,116 5,384
1936 10,667 6,300
1937 12,487 7,375
1938 13,007 7,682
1939 16,195 9,565
1940 20,049 11,841
1941 22,713 13,414
1942 22,759 13,441
1943 22,339 13,229
1944 21,194 12,517
1945 20,294 11,986
1946 20,341 12,013
1947 21,417 12,649
1948 23,740 14,021
1949 24,637 14,551

Source: Ph. Cagan, op. cit., pp. 340-41.

This table shows that during the 15 years after the world crisis, notwithstanding some fluctuations, gold was accumulating in the United States. This was a result of the favourable balance of trade, the influx of capital frightened by the war (including that from countries which underwent socio-economic changes owing to the war which ruled out its repatriation), the return of American capital to the USA and gold production in the United States itself.

The total sum of centralised gold in the banks of issue and treasuries of the capitalist world reached $23,815 million in mid-1938, of which $12,963 million was in the United States. In other words, even prior to the Second World War more than half of the centralised gold stock of the capitalist world was concentrated in the USA. At the end of August 1939, when the war became inevitable, 62 per cent of the world stock of monetary gold ($28,483 million) was in the United States. Subsequently this proportion further changed in favour of the USA. Its reserves were swelled by the previously mentioned sources during the war not only absolutely, but also relatively, rising to 70 per cent of the world stock.

It was natural that the American dollar, based on such reserves, was becoming the most reliable reserve currency for countries with the gold exchange standard. While during the war many countries in their internal money circulation were compelled to resort to inflation to one degree or another, they sought to utilise the American dollar as a reserve currency for maintaining the exchange rate of their liquid assets in external payments. The dollar started to be used in so-called stabilisation funds.

It was this new role of the American dollar during the war that was taken as a model in transforming the world monetary system.

The situation in Germany was different. The nazi state machine placed the financial resources of its allies under its control. Since settlements between Germany and her allies were made by way of clearings, the gold and exchange reserves controlled by the nazi Government were utilised to pay for the goods and services of neutral states. Only paper money circulated in nazi Germany and the countries under her military and political control during the war. Owing to uncurbed inflation, money circulation was completely disordered towards the end of the war.

The postwar currency system was built up without the participation of the countries which fought on the side of German fascism. The main role in creating it was played by the Anglo-Saxon countries. Moreover, the leading part was played by the United States, whose finance capital received stimuli for broad expansion during the war.

US finance capital played an important part in financing the war. Internal loans given the Federal Government by the American banks enabled the state not only to build up and technically equip land, naval and air forces many times larger than in peace-time, but also to render material assistance to the allies, and so on. Naturally, what happened was that, in financing the Government's military spending, the US monopolies gave credits with one hand and with the other received profitable war contracts. Ultimately it was the taxpayers of the United States and other countries who had to foot the war bill. But during the war this socio-economic question was not probed.

The following figures illustrate the gigantic mobilisation of resources for war: between June 30, 1939 and December 31, 1944 holdings of government securities by commercial banks grew by $ 59,500 million (from $ 18,000 million to $ 77,500 million). Correspondingly government security holdings by the Federal Reserve banks increased by $ 16,500 million over the same period.6

During the war the amount of media of circulation, chiefly Federal Reserve notes, was unusually expanded. At the end of June 1939 the total quantity of them in circulation was $7,000 million, while in April 1945 it reached $ 26,000 million.

The credit expansion of American capital during the war could not be confined to national boundaries. But during the war private American capital could not take the risk of furnishing loans without Government guarantees. That is why the Government, which drew resources for waging the war from internal state loans, often assumed the role of creditor with regard to other states. Thus, large amounts of Federal Reserve notes given to the Government under its loan obligations were used not only in internal circulation, but entered along different channels (loans, payments for imported strategic materials, and other Government spending abroad) into world monetary circulation and the foreign exchange reserves of other countries. During the war the American dollar as currency of the chief creditor country, the United States, became the principal international medium of circulation, in a certain way more convenient than gold (the transportation of the latter in wartime involved high risk and expense). It is not surprising that already in wartime the US ruling element, with the help of countries within the orbit of American financial influence, began to work for the establishment of a united world monetary system in which the American dollar would dominate. The foundations of this system were laid in the Bretton Woods Agreements prior to the end of the Second World War.

  • 1The Economist, May 1, 1948, p. 699.
  • 2See Benjamin Anderson, op. cit., pp. 428-29.
  • 3See L. I. Frei. Mezhdunarodnye raschoty i finansirouanie vneshnei torgovli kapitalisticheskikh stran (International Payments and the Financing of Foreign Trade by Capitalist Countries), Moscow, 1960, p. 153.
  • 4Ph. Cagan, Determinants of Change in the Stock of Money, 1875- 1960, New York, 1965, p. 341.
  • 5(I cannot guarantee to have always correctly copied these tables - note by NR.)
  • 6Benjamin Anderson, op. cit, p. 45.