The Great Devaluation

10The Banker

Times of crisis and war are the times when a country most needs to expand its credit facility. On June 14, 1914, when a Bosnian revolutionary named Gavrilo Princip assassinated Archduke of Austria Franz Ferdinand and his wife, such a crisis was sparked. The event would trigger the first world war and confront the six-month-old Federal Reserve with its first true test. The world was about to see the need for credit explode.

The war was initially known as the European war. The fight pitted the Central Powers of Germany, Austria-Hungary, and Turkey against the Allies, mainly France, Great Britain, Russia, Italy, and Japan. The United States stayed out of the war during its first two and a half years, openly debating whether it was our war to fight. President Woodrow Wilson declared that the United States would remain neutral.

Remaining neutral in the conflict turned out to be a windfall to the United States' bottom line. The American economy would boom while we sold materials, munitions, commodities, and other goods to both sides. As supplies headed out, gold flowed in. The war effort caused England and France to go heavily into debt. Once their local central banks had been tapped to exhaustion, these governments turned to the Americans. The largest lender in the crisis was the House of Morgan. Despite the formal “neutrality” of the United States, Morgan's deep relationships in England inclined the private Morgan bank to lend to the side of the Allies. John Moody, ...