The rise of the greenback - US dollar - The Fortunes of Money

UNESCO Courier, Jan, 1990 by Jan Kregel

The Federal Reserve Board of governors, appointed by the President and based in Washington, D.C., sat rather uneasily over the Federal Reserve Banks which were owned and run by private bankers. It was by no means clear who was responsible for currency policy, but the bankers clearly had the upper hand.

However, the two prerequisites for the subsequent international dominance of the dollar had now been acquired: the massive accumulation of world gold stock in the United States, which obliged the international monetary system to move onto a gold-exchange standard, and the creation of a unified national currency issued by a single authority with lender of last resort capability.

The position of the United Kingdom was weakened by the 1914-1918 war, and the dollar entered the inter-war return to gold on a stronger basis than sterling. Moreover the United States economy, after a short recession, was to prosper in the roaring 20s" of radio and automobiles.

The massive movement of investment funds to the United States, first caused by rapid growth and the stock market boom, then by high interest rates used to try to break the speculative rise on Wall Street, severely disrupted international finance and broke the stability of exchange rates. The stock market crash of 1929 brought about massive bank failures, which were far beyond the ability of the Federal Reserve to offset, and the consequent collapse of investment values was responsible for a worldwide depression.

The evidence of widespread bank fraud which emerged after the Wall Street crash suggested deficiencies in the supervisory function of the Federal Reserve Board and in its ability to regulate monetary policy to prevent even well-run banks from failing. A series of measures, including the nationalization of gold, the devaluation of the dollar to $35 per ounce of gold, and the 1935 Banking Act which gave the Federal Reserve Board control over monetary policy, finally created a system equivalent in its powers and duties to a European central bank.

Thus the inter-war period strengthened both the reserve position of the United States and the domestic financial system. The country was ready to take over London's role as banker to the world when the outbreak of the Second World War made the City unsafe and transformed the United Kingdom from an international creditor to an international debtor. The United States became the world's major creditor. Any country which wanted to buy goods for post-war reconstruction had to acquire dollars, and the dollar thus became the pre-eminent international currency.