The U.S. Becomes The New Global Economic Stronghold

The destruction brought upon most of Europe because of WWI created a unique opportunity for the United States to become an emerging hegemonic world power. The devastated economies of Europe and the rest of the world propelled the United States into a new position - a prevailing world banker (spearheaded by JP Morgan) and a commanding global economic stronghold. While the once powerful European nations became debtor nations. The United States isolationism policy caused it to enter much later than other European nations into the both world wars. Thus, the US did not experience a comparable level of destruction or economic collapse. The United States bull market of the 1920s has been established as a benchmark with which to compare other stock markets. During the 1920s, a plethora of new products flooded the American market in the 1920s providing increased earnings and growth for numerous new industries, including automobiles, movies, radio, and even electric utilities; and with Europe in chaos, much of the money was kept in the United States. Furthermore, the US readopted the gold standard in 1919, fueling stability and confidence in a strong dollar policy. Once influential European nations like Britain buckled under the post-WWI rise in protectionism given the nature of its trade-based economy and power. All these factors lead to an eventual replacement of the premier financial center from London to New York.

Although the US quickly returned to the gold standard, European currencies remained free-floating for a number of years, as they had during the war. However, the desire to return to the relative stability of the gold standard was strong. The major world powers including Italy, France, Britain, and Japan pledged their commitment to return to the gold standard at the Genoa Conference in 1922. During this year representatives of the major industrial nations met in Genoa, Italy, and instituted the Gold Exchange Standard. According to the agreement, the money supply in each country would no longer have to be based solely on the actual amount of gold held on reserve by each country's central bank. Instead, each central bank would be allowed to count its foreign currency holdings "as if" they were real gold, as long as the currencies were officially redeemable in gold. By this time, the U.S. Dollar was widely held by other nations, so, in practice, the dollar holdings of nations were counted as "good as gold." This, of course, allowed a double counting of paper dollars because the dollars held by foreign central banks were already supporting a certain amount of paper money in these United States. Thus the result of the Genoa Conference was a disater, which should have been fortold with the failure of the US to attend and the omitance of Russia and Germany from the summit. Although, the gold standard was gradually applied in most nations, it was not supported by credibility or cooperation.

In 1925, the UK went back to the gold standard, pegging the pound to the prewar price. This policy exaggerated the impact of capital outflows when British citizens were converting their pounds into USD in order to obtain high interest rates. In order to achieve the overvalued level for the cable, concretionary policies had to be instituted across England. Nationalists argued that such an action was essential to redevelop confidence in the pound and to assert the stability of Britain's finances. These monetary policies contributed to such domestic ills as severe unemployment and depressed exports during a time when the rest of the world was experiencing an economic boom. Following a global economic downturn in the early 1930s, Britain was incapable of sustaining its currency backing and the gold exchange standard experienced its first failure in 1931.

During the interwar period, monetary systems were also less stable. This was partially attributed to unfavorable capital flows. In order to rebuild from the war, European balance of payment deficits soared. These deficits were financed by US capital outflows and loans. Two possible solutions that might have been adopted to stem these tribulations were to either default on loans or deflate the currency, but neither policy was politically acceptable. World governments continued to employ protectionist measures and intervene in trade and financial systems regardless of the sustainability of their actions or more importantly the structural damages they were causing their financial markets. Because of these policies international trade during this time period actually contracted, worldwide markets declined, and trade flows were disrupted. With very little hope for economic prosperity to was just a matter of time before global economic depression.