What Saved Us From the Great Depression?

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CaptainDan

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If you ask any grandparent out there what saved the United States from the Great Depression, they'll tell you it was Franklin D. Roosevelt's New Deal. If you aren't aware, the New Deal was a series of programs, public work projects, financial reforms, and regulations enacted in the United States between 1933 and 1939. Your grandparents will tell you that because of all the government spending and good ol' American hard work, we simply sprung out of the depression and enjoyed the greatest bull market the nation had ever seen. Some people will tell you the strong economy originated from World War Two spending, which was sort of like New Deal spending. After all, government spending is government spending. Whatever the cause, it usually stimulates all different types of things.

When you ask your grandparents where they heard these financial and economic theories, they'll likely tell you it was through the newspapers. It wasn't like the nation was saturated with televisions and the internet yet, so most people got their news from word of mouth and the papers. I can see the headlines now. "Roosevelt Wins New Deal!" "The Great Depression is Soon to be Left Behind!" "Let's Move Forward Together - Let's Dig!" All types of headlines poured off the printing presses back then. The question remains though - was it all fake news?

Let's think about what really affects the greater economy. Let's think about the happenings back during the Great Depression. Let's think about global trade and the price of gold. Things that truly mattered.

When the United States Federal Reserve nearly halved the value of gold in U.S. dollars (raised the price by $15) with one fell swoop, prices for goods and services here at home didn't follow suit immediately. They rose incrementally over time. What did occur immediately though were price changes for Americans purchasing foreign goods and price changes for American goods purchased by foreigners. Immediately, the cost of foreign goods for Americans climbed by 70% and the cost of American goods for foreigners dropped by 70%. As you imagine, the effects of these price changes had a dramatic effect on the amount of gold that was held by the U.S. Treasury. In the most basic sense, the outflow of gold from the U.S. was reduced to a trickle and the inflow swelled incredibly. Almost instantly, the United States was extremely gold rich. Why did this happen? Because Americans stopped buying imports (they were too expensive) and began exporting their goods en masse (American goods were really cheap to the rest of the world).

Another thing that occurred had to do with who the gold mining companies sold their gold to. Because the U.S. dollar was pegged to a new gold price, the government was obligated to purchase enough gold to sustain that price and to cover currency transfers for it. So basically, nearly every mining company around the world was, for a time, selling its mined gold to the Americans. This compounded the amount of gold we had stored in our vaults.

When the beginning of World War Two rolled around, something else that had a tremendous effect on the U.S. economy took place. Because of Germany's occupation of Austria, many Europeans were downright spooked. They withdrew their investments from European businesses and placed them in American businesses. Also, because so many factories in Europe had been converted into production houses for ammunition, vehicles, and supplies needed for the war effort, there was a sharp decrease in the production of everyday goods consumed by those nations. The U.S. filled the gap and exported most of what was needed by the Europeans during those years.

Each of these forces played a large part in stimulating the economy of the United States, which pulled it out of the depression. Really, there was no stopping it. We were huge exporters of goods, those goods were very inexpensive for everyone else, and we had a huge demand for many items simply because those items weren't being made abroad any longer. Combined, these factors led to the United States holding approximately two-thirds of the globe's gold reserves. Incredible.

So did the New Deal save us from the depression? No, it didn't. It's just that what I said above isn't common knowledge, unless, of course, you're into investing and looking into global economics. I'm not sure how Roosevelt's New Deal filled the coffers of the United States with a good majority of the gold available on earth. Simply put, we were rich and that richness wasn't derived from government spending.

The Financial Results of World War Two​

The United States of America was and still is a primary trading partner of many European nations. During the war, the U.S. was busy shipping energy, electricity, and ammunition to the Europeans so they could destroy the factories that had once produced these things. Essentially, nations abroad were paying the Americans to destroy themselves (the Europeans, that is). It was a weird, but necessary time. Our manufacturing base had grown by leaps and bounds and theirs was reduced to rubble.

What's worse is that in order for the Europeans to save themselves from utter destruction (from each other), they were forced to liquidate much of their gold. By the time the war had ended, there was a tremendous trade imbalance between Europe and the United States.

Bretton Woods​

The United States had control of the European financial system. It's interesting how things just happen to work out, isn't it? Listen to this. Because of the collapse of the global financial "order," if you will, 44 nations met at the Bretton Woods resort in New Hampshire to hammer out the details of a new one. Really, they had no choice. Their economies were in shambles and they were broke. Many nations also didn't have the wherewithal to rebuild. Their factories and roads were destroyed and they had very little gold to rebuild any of what they once had.

Surprisingly (not), the result of the agreement these nations came to was that each of the nations involved would link their currencies to the U.S. dollar. The central banks of these nations would also have the ability to trade their dollars for gold at $35 per ounce. So really, what happened was that, because of a war they began and fought, the Europeans and other countries were forced to alter their entire financial systems to revolve around the U.S. dollar. I find this incredible. If there was ever a reason for a small group of people to sit in a dark room, devising a way to get the world to destroy itself, this would be it. Nearly total control of the major financial markets and central banks around the globe.

Here are a few questions for you: what do you think saved the world from the Great Depression? What saved just the U.S.? What have you heard? Which version of history did you learn? A lot went on back then and I have a strange feeling that much of what was reported wasn't very accurate. Or, perhaps I should say, it wasn't very thorough. Personally, I don't remember sitting in social studies class discussing the finer points of gold transfers between European and American banks.

This post is part of a series: Guide to Investing in Gold & Silver by Michael Maloney
 
What Saved Us From the Great Depression? was posted on 06-03-2021 by CaptainDan in the Economics Forum forum.
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