Emergence of financial globalization: 1870–1914
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
The world experienced substantial changes in the late 19th century which created an
environment favorable to an increase in and development of international financial centers.
Principal among such changes were unprecedented growth in capital flows and the resulting
rapid financial center integration, as well as faster communication. Before 1870, London and
Paris existed as the world's only prominent financial centers.[6]: 1 Soon after, Berlin and New
York grew to become major centres providing financial services for their national economies. An
array of smaller international financial centers became important as they found market niches,
such as Amsterdam, Brussels, Zürich, and Geneva. London remained the leading international
financial center in the four decades leading up to World War I.[2]: 74–75 [7]: 12–15
The first modern wave of economic globalization began during the period of 1870–1914,
marked by transportation expansion, record levels of migration, enhanced communications, trade
expansion, and growth in capital transfers.[2]: 75 During the mid-nineteenth century, the passport
system in Europe dissolved as rail transport expanded rapidly. Most countries issuing passports
did not require they be carried, and so people could travel freely without them.[8] The
standardization of international passports would not arise until 1980 under the guidance of the
United Nations' International Civil Aviation Organization.[9] From 1870 to 1915, 36 million
Europeans migrated away from Europe. Approximately 25 million (or 70%) of these travelers
migrated to the United States, while most of the rest reached Canada, Australia and Brazil.
Europe itself experienced an influx of foreigners from 1860 to 1910, growing from 0.7% of the
population to 1.8%. While the absence of meaningful passport requirements allowed for free
travel, migration on such an enormous scale would have been prohibitively difficult if not for
technological advances in transportation, particularly the expansion of railway travel and the
dominance of steam-powered boats over traditional sailing ships. World railway mileage grew
from 205,000 kilometers in 1870 to 925,000 kilometers in 1906, while steamboat cargo tonnage
surpassed that of sailboats in the 1890s. Advancements such as the telephone and wireless
telegraphy (the precursor to radio) revolutionized telecommunication by providing instantaneous
communication. In 1866, the first transatlantic cable was laid beneath the ocean to connect
London and New York, while Europe and Asia became connected through new landlines.[2]: 75–76
[10]: 5
Economic globalization grew under free trade, starting in 1860 when the United Kingdom
entered into a free trade agreement with France known as the Cobden–Chevalier Treaty.
However, the golden age of this wave of globalization endured a return to protectionism between
1880 and 1914. In 1879, German Chancellor Otto von Bismarck introduced protective tariffs on
agricultural and manufacturing goods, making Germany the first nation to institute new
protective trade policies. In 1892, France introduced the Méline tariff, greatly raising customs
duties on both agricultural and manufacturing goods. The United States maintained strong
protectionism during most of the nineteenth century, imposing customs duties between 40 and
50% on imported goods. Despite these measures, international trade continued to grow without
slowing. Paradoxically, foreign trade grew at a much faster rate during the protectionist phase of
the first wave of globalization than during the free trade phase sparked by the United Kingdom.
[2]: 76–77
Unprecedented growth in foreign investment from the 1880s to the 1900s served as the
core driver of financial globalization. The worldwide total of capital invested abroad amounted
to US$44 billion in 1913 ($1.02 trillion in 2012 dollars[11]), with the greatest share of foreign
assets held by the United Kingdom (42%), France (20%), Germany (13%), and the United States
(8%). The Netherlands, Belgium, and Switzerland together held foreign investments on par with
Germany at around 12%.[2]: 77–78
Panic of 1907
In October 1907, the United States experienced a bank run on the Knickerbocker Trust
Company, forcing the trust to close on October 23, 1907, provoking further reactions. The panic
was alleviated when U.S. Secretary of the Treasury George B. Cortelyou and John Pierpont
"J.P." Morgan deposited $25 million and $35 million, respectively, into the reserve banks of
New York City, enabling withdrawals to be fully covered. The bank run in New York led to a
money market crunch which occurred simultaneously as demands for credit heightened from
cereal and grain exporters. Since these demands could only be serviced through the purchase of
substantial quantities of gold in London, the international markets became exposed to the crisis.
The Bank of England had to sustain an artificially high discount lending rate until 1908. To
service the flow of gold to the United States, the Bank of England organized a pool from among
twenty-four nations, for which the Banque de France temporarily lent £3 million (GBP, 305.6
million in 2012 GBP[12]) in gold.[2]: 123–124
Birth of the U.S. Federal Reserve System: 1913
The United States Congress passed the Federal Reserve Act in 1913, giving rise to the
Federal Reserve System. Its inception drew influence from the Panic of 1907, underpinning
legislators' hesitance in trusting individual investors, such as John Pierpont Morgan, to serve
again as a lender of last resort. The system's design also considered the findings of the Pujo
Committee's investigation of the possibility of a money trust in which Wall Street's concentration
of influence over national financial matters was questioned and in which investment bankers
were suspected of unusually deep involvement in the directorates of manufacturing corporations.
Although the committee's findings were inconclusive, the very possibility was enough to
motivate support for the long-resisted notion of establishing a central bank. The Federal
Reserve's overarching aim was to become the sole lender of last resort and to resolve the
inelasticity of the United States' money supply during significant shifts in money demand. In
addition to addressing the underlying issues that precipitated the international ramifications of
the 1907 money market crunch, New York's banks were liberated from the need to maintain their
own reserves and began undertaking greater risks. New access to rediscount facilities enabled
them to launch foreign branches, bolstering New York's rivalry with London's competitive
discount market.[2]: 123–124 [7]: 53 [13]: 18 [14]
Interwar period: 1915–1944
Economists have referred to the onset of World War I as the end of an age of innocence
for foreign exchange markets, as it was the first geopolitical conflict to have a destabilizing and
paralyzing impact. The United Kingdom declared war on Germany on August 4, 1914 following
Germany's invasion of France and Belgium. In the weeks prior, the foreign exchange market in
London was the first to exhibit distress. European tensions and increasing political uncertainty
motivated investors to chase liquidity, prompting commercial banks to borrow heavily from
London's discount market. As the money market tightened, discount lenders began rediscounting
their reserves at the Bank of England rather than discounting new pounds sterling. The Bank of
England was forced to raise discount rates daily for three days from 3% on July 30 to 10% by
August 1. As foreign investors resorted to buying pounds for remittance to London just to pay
off their newly maturing securities, the sudden demand for pounds led the pound to appreciate
beyond its gold value against most major currencies, yet sharply depreciate against the French
franc after French banks began liquidating their London accounts. Remittance to London became
increasingly difficult and culminated in a record exchange rate of US$6.50/GBP. Emergency
measures were introduced in the form of moratoria and extended bank holidays, but to no effect
as financial contracts became informally unable to be negotiated and export embargoes thwarted
gold shipments. A week later, the Bank of England began to address the deadlock in the foreign
exchange markets by establishing a new channel for transatlantic payments whereby participants
could make remittance payments to the U.K. by depositing gold designated for a Bank of
England account with Canada's Minister of Finance, and in exchange receive pounds sterling at
an exchange rate of $4.90. Approximately US$104 million in remittances flowed through this
channel in the next two months. However, pound sterling liquidity ultimately did not improve
due to inadequate relief for merchant banks receiving sterling bills. As the pound sterling was the
world's reserve currency and leading vehicle currency, market illiquidity and merchant banks'
hesitance to accept sterling bills left currency markets paralyzed.[13]: 23–24
The U.K. government attempted several measures to revive the London foreign exchange
market, the most notable of which were implemented on September 5 to extend the previous
moratorium through October and allow the Bank of England to temporarily loan funds to be paid
back upon the end of the war in an effort to settle outstanding or unpaid acceptances for currency
transactions. By mid-October, the London market began functioning properly as a result of the
September measures. The war continued to present unfavorable circumstances for the foreign
exchange market, such as the London Stock Exchange's prolonged closure, the redirection of
economic resources to support a transition from producing exports to producing military
armaments, and myriad disruptions of freight and mail. The pound sterling enjoyed general
stability throughout World War I, in large part due to various steps taken by the U.K.
government to influence the pound's value in ways that yet provided individuals with the
freedom to continue trading currencies. Such measures included open market interventions on
foreign exchange, borrowing in foreign currencies rather than in pounds sterling to finance war
activities, outbound capital controls, and limited import restrictions.[13]: 25–27
In 1930, the Allied powers established the Bank for International Settlements (BIS). The
principal purposes of the BIS were to manage the scheduled payment of Germany's reparations
imposed by the Treaty of Versailles in 1919, and to function as a bank for central banks around
the world. Nations may hold a portion of their reserves as deposits with the institution. It also
serves as a forum for central bank cooperation and research on international monetary and
financial matters. The BIS also operates as a general trustee and facilitator of financial
settlements between nations.[2]: 182 [15]: 531–532 [16]: 56–57 [17]: 269
Smoot–Hawley tariff of 1930
U.S. President Herbert Hoover signed the Smoot–Hawley Tariff Act into law on June 17,
1930. The tariff's aim was to protect agriculture in the United States, but congressional
representatives ultimately raised tariffs on a host of manufactured goods resulting in average
duties as high as 53% on over a thousand various goods. Twenty-five trading partners responded
in kind by introducing new tariffs on a wide range of U.S. goods. Hoover was pressured and
compelled to adhere to the Republican Party's 1928 platform, which sought protective tariffs to
alleviate market pressures on the nation's struggling agribusinesses and reduce the domestic
unemployment rate. The culmination of the Stock Market Crash of 1929 and the onset of the
Great Depression heightened fears, further pressuring Hoover to act on protective policies
against the advice of Henry Ford and over 1,000 economists who protested by calling for a veto
of the act.[10]: 175–176 [17]: 186–187 [18]: 43–44 Exports from the United States plummeted 60% from 1930 to
1933.[10]: 118 Worldwide international trade virtually ground to a halt.[19]: 125–126 The international
ramifications of the Smoot-Hawley tariff, comprising protectionist and discriminatory trade
policies and bouts of economic nationalism, are credited by economists with prolongment and
worldwide propagation of the Great Depression.[3]: 2 [19]: 108 [20]: 33
Formal abandonment of the Gold Standard
The classical gold standard was established in 1821 by the United Kingdom as the Bank of
England enabled redemption of its banknotes for gold bullion. France, Germany, the United
States, Russia, and Japan each embraced the standard one by one from 1878 to 1897, marking its
international acceptance. The first departure from the standard occurred in August 1914 when
these nations erected trade embargoes on gold exports and suspended redemption of gold for
banknotes. Following the end of World War I on November 11, 1918, Austria, Hungary,
Germany, Russia, and Poland began experiencing hyperinflation. Having informally departed
from the standard, most currencies were freed from exchange rate fixing and allowed to float.
Most countries throughout this period sought to gain national advantages and bolster exports by
depreciating their currency values to predatory levels. A number of countries, including the
United States, made unenthusiastic and uncoordinated attempts to restore the former gold
standard. The early years of the Great Depression brought about bank runs in the United States,
Austria, and Germany, which placed pressures on gold reserves in the United Kingdom to such a
degree that the gold standard became unsustainable. Germany became the first nation to formally
abandon the post-World War I gold standard when the Dresdner Bank implemented foreign
exchange controls and announced bankruptcy on July 15, 1931. In September 1931, the United
Kingdom allowed the pound sterling to float freely. By the end of 1931, a host of countries
including Austria, Canada, Japan, and Sweden abandoned gold. Following widespread bank
failures and a hemorrhaging of gold reserves, the United States broke free of the gold standard in
April 1933. France would not follow suit until 1936 as investors fled from the franc due to
political concerns over Prime Minister Léon Blum's government.[13]: 58 [19]: 414 [20]: 32–33
Trade liberalization in the United States
The disastrous effects of the Smoot–Hawley tariff proved difficult for Herbert Hoover's
1932 re-election campaign. Franklin D. Roosevelt became the 32nd U.S. president and the
Democratic Party worked to reverse trade protectionism in favor of trade liberalization. As an
alternative to cutting tariffs across all imports, Democrats advocated for trade reciprocity. The
U.S. Congress passed the Reciprocal Trade Agreements Act in 1934, aimed at restoring global
trade and reducing unemployment. The legislation expressly authorized President Roosevelt to
negotiate bilateral trade agreements and reduce tariffs considerably. If a country agreed to cut
tariffs on certain commodities, the U.S. would institute corresponding cuts to promote trade
between the two nations. Between 1934 and 1947, the U.S. negotiated 29 such agreements and
the average tariff rate decreased by approximately one third during this same period. The
legislation contained an important most-favored-nation clause, through which tariffs were
equalized to all countries, such that trade agreements would not result in preferential or
discriminatory tariff rates with certain countries on any particular import, due to the difficulties
and inefficiencies associated with differential tariff rates. The clause effectively generalized tariff
reductions from bilateral trade agreements, ultimately reducing worldwide tariff rates.[10]: 176–177 [17]:
186–187 [19]: 108
