The Great Depression and the New Deal (1929-1945)
In October 1929, the long-term stock market foam burst, triggering the collapse of Wall Street and the evaporation of billions of dollars of wealth. This collapse destroyed confidence and affected the banking system, with many institutions collapsing due to exposure of stock loans or securities subsidiaries. Nearly 9000 banks (about one-third of the total number of banks in the United States) have collapsed, and the Federal Reserve has failed to act decisively. Its decentralized structure has led to internal disagreements, prioritizing the protection of the gold standard over expanding credit. Some officials adopt a “liquidationist” stance, believing that weak banks and borrowers should be allowed to fail. The result is a one-third contraction in the money supply, triggering deflation, halving GDP, and a 25% unemployment rate. President Roosevelt announced a bank holiday, created the FDIC through the Glass Steagall Act, and separated commercial banks from investment banks. Through Executive Order 6102, Americans were forced to exchange gold for dollars at the price of 20.67 dollars per ounce, and the gold was actually nationalized to prevent the run on the dollar and realize monetary expansion. The 1934 Gold Reserve Act confirmed this by devaluing the US dollar and raising the price of gold to $35 per ounce. With most of the world’s gold and a stable banking system, the US dollar became the dominant currency, laying the foundation for the post-war global monetary order.
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The Bretton Woods System (1944-1971)
After World War II, the United States rose with unparalleled economic dominance, producing half of global output and holding approximately 70% of official gold reserves, placing it in a unique position to rebuild the international monetary system. The pound has weakened due to massive war debts and a shortage of the US dollar, and many countries have implemented currency controls. Drawing lessons from the failures of devaluation after World War I and in the 1930s, in July 1944, 44 allied countries established a new framework at the Bretton Woods Conference. Led by US Treasury officials Harry Dexter White and British economist John Maynard Keynes, representatives created the Bretton Woods system, established the International Monetary Fund and World Bank, and fixed the exchange rate to the US dollar convertible to gold. This system effectively established the core position of the US dollar in global finance, supported by the US economic strength and gold reserves, which later became known as the “excess privilege”, allowing the US to borrow freely and run external deficits. In the following quarter century, the Bretton Woods system defined international finance until its collapse opened the era of the fiat dollar.