delanceyplace.com 1/31/12 - the united states dominates

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In today's excerpt - when World War I began in 1914, even though England still behaved as if it was the world's leader, the United States was already the dominant country. In fact, the United States economy was already as large as the economies of England, France and Germany combined—and its banks held as much gold as those three nations combined. And after those countries squandered their resources in the that gruesome war, the United States held three times as much gold as those three nations combined. The U.S. dominance had become even greater, and within the scramble by England, France, and Germany to rectify this imbalance and replenish their gold were the seeds of both the Great Depression and World War II:

"Before the war, the four largest economies—the United States, Britain, Germany, and France—had operated their monetary systems with about $5 billion worth of gold among them. The amount of new gold mined during the war was small, and by 1923, monetary gold had increased only to $6 billion. Meanwhile, prices in the United States and the UK, even after the postwar deflation, were still 50 percent higher than before the war, which meant that in effect the real purchasing power of gold reserves had contracted by almost 25 percent. ... 

 "The [big] concern among bankers after the war was not so much that the world was short of gold, but that too much of the gold was concen­trated in the United States. Before the war, there had been some parity among the major economic powers between the amount of gold in each banking system and the size of its economy. For example, the United States, with a GDP of $40 billion, accounted for about half the output of the four great economic powers and held about $2 billion in gold, a little less than half of the total gold of these four countries. The balance was only rough—France held proportionately more and Britain less—but the system worked with remarkable smoothness.

By 1923, the United States had accumulated close to $4.5 billion of the $6 billion in gold reserves of the four major economic powers, far in excess of what it needed to sustain its economy. About $400 million circulated in the form of coins; the remainder consisted of ingots, small bars the size of a quart of milk, each weighing about twenty-five pounds, stored in the vaults of the Federal Reserve Banks and the Treasury. The largest hoard lay under lower Manhattan, about $1.5 billion in the Treasury repository at the legendary intersection of Broad and Wall Streets, and at the New York Fed. The remainder was scattered among the eleven other Federal Reserve Banks across the country. ... 

  "While the U.S. monetary system was swamped by this enormous sur­plus, Europe, particularly Britain and Germany, suffered a chronic short­age. The three big European economies, which had operated before the war on $3 billion worth of gold, were left with barely half that. Faced with constant demands to pay out gold, European central banks had resorted to a complex of measures, the most important being to withdraw gold coins from circulation. All those solid talismans of turn-of-the-century middle-class prosperity had gradually disappeared from Europe's pockets, to be replaced by shabby pieces of paper. By the mid-1920s, the United States was the only large country where one could still find gold coins.

"The concentration of the world's key precious metal in the United States had left the rest of the world with insufficient reserves to grease the machinery of trade. The world of the international gold standard had become like a poker table at which one player has accumulated all the chips, and the game simply cannot get back into play."