The Mystery of Banking

partial gold standard, while other countries moved to purely fiat
standards, gold began to flow heavily into the United States, an
inflow accelerated by the looming war conditions in Europe. The
collapse of the shaky and inflationary British-created gold
exchange standard during the depression led to a dangerous
world of competing and conflicting national currencies and pro-
tectionist blocs. Each nation attempted to subsidize exports and
restrict imports through competing tariffs, quotas, and currency
devaluations. 
The pervasive national and regional economic warfare during
the 1930s played a major though neglected role in precipitating
World War II. After the war was over, Secretary of State Cordell
Hull made the revealing comment that 
war did not break out between the United States and any
country with which we had been able to negotiate a trade
agreement. It is also a fact that, with very few exceptions,
the countries with which we signed trade agreements joined
together in resisting the Axis. The political lineup follows
the economic lineup.
1
A primary war aim for the United States in World War II was
to reconstruct the international monetary system from the con-
flicting currency blocs of the 1930s into a new form of interna-
tional gold exchange standard. This new form of gold exchange
Conclusion
249
1
Cordell Hull, 
Memoirs
(New York: Macmillan, 1948), vol. 1, p. 81.
See in particular, Murray N. Rothbard, “The New Deal and the Interna-
tional Monetary System,” in L. Liggio and J. Martin, eds., 
Watershed of
Empire: Essays on New Deal Foreign Policy
(Colorado Springs, Colo.: Ralph
Myles, 1976), pp. 19–64.
Chapter Seventeen.qxp 8/4/2008 11:38 AM Page 249

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standard, established at an international conference at Bretton
Woods in 1944 by means of great American pressure, closely
resembled the ill-fated British system of the 1920s. The difference
is that world fiat currencies now pyramided on top of dollar
reserves kept in New York instead of sterling reserves kept in Lon-
don; once again, only the base country, in this case the U.S., con-
tinued to redeem its currency in gold. 
It took a great deal of American pressure, wielding the club of
Lend–Lease, to persuade the reluctant British to abandon their
cherished currency bloc of the 1930s. By 1942, Hull could expect
confidently that “leadership toward a new system of international
relationship in trade and other economic affairs will devolve very
largely upon the United States because of our great economic
strength. We would assume this leadership, and the responsibility
that goes with it, primarily for reasons of pure national self-inter-
est.”
2
For a while, the economic and financial leaders of the United
States thought that the Bretton Woods system would provide a
veritable bonanza. The Fed could inflate with impunity, for it was
confident that, in contrast with the classical gold standard, dollars
piling up abroad would stay in foreign hands, to be used as
reserves for inflationary pyramiding of currencies by foreign cen-
tral banks. In that way, the United States dollar could enjoy the
prestige of being backed by gold while not really being
redeemable. Furthermore, U.S. inflation could be lessened by
being “exported” to foreign countries. Keynesian economists in
the United States arrogantly declared that we need not worry
about dollar balances piling up abroad, since there was no chance
of foreigners cashing them in for gold; they were stuck with the
resulting inflation, and the U.S. authorities could treat the inter-
national fate of the dollar with “benign neglect.” 
During the 1950s and 1960s, however, West European coun-
tries reversed their previous inflationary policies and came
increasingly under the influence of free market and hard money