https://no01.substack.com/p/gold-caused-the-great-depression
No1
Sep 18, 2026

tawhuac stumbled on a review of Lords of Finance 2 days ago, which he generously shared with us in the comment section (make sure you head over there! We have a great community over there!).

Now Liaquat Ahamed is a Pulitzer winner. He wrote a book called “The Bankers Who Broke the World”. It’s about four central bankers steering the world into the Great Depression.

So the takeaway the reviewer got from that: the real villain was the gold standard. Obviously…

Too little gold → too little money → breadlines.

Obviously

Sounds neat right? Fits on a napkin. Can explain it to your kids (or any other polite company that happens to always agree with whatever you say) and they’ll just nod along.

One small problem though...

The book is literally called Lords of Finance: The Bankers Who Broke the World.

Not “Gold that Broke the World”. Not “The restrictions of Gold that Broke the World”.

I went back and re-read it at that point to make sure he wasn’t reading up on two different books, but no… One book.

Like with all things, nothing is black and white. Lots of shades of gray.

Let’s start with what I think the author got right: countries that ditched the gold standard early, recovered earlier.

Britain walked away in September 1931 and started climbing out.
The US hung on until 1933.
And France and its little gold bloc clung on until 1936 and got to enjoy the Depression in the extended director’s cut.

That pattern is real. And it’s basically the entire idea behind the whole “golden fetters” school.

But leaving a system and then recovering shows the system made the damage hard to repair. The main question is: WHO did the damage in the first place?

Ok ok, let’s take the reviewer’s mechanism as the golden truth. “Gold was genuinely scarce” (otherwise it wouldn’t be able to back anything, but that’s a story for another day). And at the time, “hardly any new metal was coming out of the ground”.

Remember the unwritten rules of the gold standard: no printing unless you got more gold. Because you have to have your currency backed one for one. And when gold left, you tightened. That was the entire self-correcting bit.

So if there wasn’t any more gold, there wasn’t any more credit.

Fair enough… However, Douglas Irwin factchecked this: by December 1932, world gold reserves were 24% larger than five years earlier.

Larger.

A global shortage of gold, featuring 24% more gold. In the middle of the worst deflation of the industrial age, central banks were sitting on more monetary metal than they’d ever held…

Yeah, definitely a source of deflation? I guess?

In 1926, France had about 7% of the world’s gold reserves, and raised that to 27% in 1932, with an economy roughly a quarter the size of America’s. By the end, Paris held nearly as much gold as Washington, on a cover ratio approaching 80%.

Paris and Washington together held more than 60% of all the monetary gold on the planet. And France vacuumed up almost every additional ounce the world produced over those years, leaving everyone else with a net increase of a very round number: zero.

Now, remember the gold standard rules I mentioned before?

Well, both Paris and Washington took the inflows and sterilised them. Locked the metal in the vault and made very sure it never turned into one extra franc or dollar of credit. Just stopped it.

So the machine broke because the two biggest players wouldn’t follow gold’s own rules.

So, of course gold is to blame.

Ben Bernanke (can’t really call him a goldbug, right?) wrote that the first American and French contractions were largely self-inflicted wounds.

US prices slid about 4% over 1929. Not to be outdone, France managed a drop of almost 11% in a single year, while gold was pouring »in«.

Deflation. With a filling vault... Yep, that’s a shortage alright.

The American money supply shrank by roughly a third between 1929 and 1933. The reviewer wants you to picture this as gold draining out of the country and dragging all the dollars along with it.

But what actually was collapsing, was the banking system.

People stopped trusting banks, they pulled their cash, and every bank that died took its deposits into the grave with it. (remember in those days there was no FDIC to recoup part of your losses.)

The currency-to-deposit ratio does the work here:

In March 1931 cash in hand was 18.5% of deposits, two years later 40.7%.

Those dollars went into coffee tins and sock drawers, because the bank down the road had just shut its doors and kept the neighbours’ savings.

How can a metal be responsible for that?

That’s a confidence game, not a metal one.

Which brings me to the part where the reviewer mentions that the US stock market “sucked up so much available credit”.

Next paragraph: gold did it.

Obviously…

The credit bubble is sitting right there… Waving and jumping around, waiting to get noticed by the reviewer. Nope. Not its fault. It’s gold. Definitely.

And neither did it start in 1928.

During the First World War, American farmers were told to feed the world, so they did.

More land. More tractors. And all of it on credit.

The number of banks went from ~12,400 in 1900 to over 30,000 by 1920. Quite a few of them tiny rural outfits lending against farmland priced at wartime wheat.

Farm lending doubled between the start of the war and 1920.

Then the war ended. Swords to plowshares. Europe went back to farming.

As those things go, supply, demand, that kind of thing… farm incomes fell 60% between 1919 and 1921. Land values never came back. And by the end of the decade more than 5,000 banks failed (80+% of them rural).

During the boom, but before the crash. In what was called “the Roaring Twenties”. (Roaring for whom, exactly…)

That’s globalisation and industrialisation doing precisely what they advertised to do.

Machinisation plus a world market reopening gives you more wheat, cheaper wheat, and a mountain of debt that was priced for expensive wheat.

Productivity is deflationary (it is supposed to be) because that’s what makes things cheaper.

However, what makes cheaper a catastrophe is that that debt was stacked on top of the old price of land and farms and wheat...

But it wasn’t only the farms that were indebted. Also in the cities, the consumer debt doubled in four years (from $1.4 billion in 1925 to $3 billion in 1929).

Around 60% of cars and three quarters of radios went out the door on “buy-now, pay-later” plans.

We’ve evolved since then, obviously. Nothing like that happening now, right?

In the summer of 1927 the Lords convened on Long Island.

Montagu Norman needed a hand, because the sterling was wobbling.

Benjamin Strong obliged and pushed the New York discount rate from 4% down to 3%, over objections from inside his own system.

According to Charles Rist, one of the French bankers at the table, Strong described the cut as a little coup de whisky for the stock exchange.

I’m not making this up.

There’s nothing like the most powerful central banker on earth that is propping up somebody else’s currency, right? We’ve definitely learned to be better, to DO better by now, right?

Well, needless to say: Wall Street had that drink.

And then several more.

Two years later it ended up face-down under the table.
https://tile.loc.gov/storage-services/service/pnp/cph/3c10000/3c17000/3c17200/3c17261v.jpg

There IS a gold angle in all of this, just not the one on offer.

The 1920s ran on the gold exchange standard, the post-war goldish edition, where central banks could count pounds and dollars as reserves right next to the actual metal.

Credit got stacked on claims to gold that were themselves stacked on other claims, and the same pile got counted multiple times over.

Nothing like that would happen ever again, right?

When confidence finally cracked, all that paper ran for the exit at once, discovering that the metal behind it had been booked more than once.

Where did we hear that before?

Even Barry Eichengreen, the man who literally wrote Golden Fetters, went back later and co-authored a BIS paper calling the Depression a credit boom gone wrong.

His ingredients: lenders competing aggressively to hand out credit (check), new technologies that took far longer to pay off than anyone priced in (check), and central bankers who had swapped the rules-based pre-war standard for their own discretion (read that as: “were making things up as they went”) (oh, and check).

Then, when the bust FINALLY arrived, Washington looked at a world drowning in goods nobody could afford and answered with Smoot-Hawley in 1930.

Tariffs up on thousands of items (check), everyone retaliated (we’re getting there), and world trade shrank by about two-thirds in value by 1933 (not too long now).

A glut of goods, treated with a tax on goods. Yep, we’ve evolved...

Not one iota of that needed gold. Just human psyche was enough.
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After 1873, prices drifted down for the better part of two decades under a gold standard while America industrialised, and the average inflation was about zero percent for all these years (see link above).

Deflation. Plus growth. NO soup kitchens.

Japan then ran the mirror image: pure fiat, not an ounce of gold as far as the eye could see, a credit bubble on top that popped in 1990, and we got a decade of flat-to-falling prices.

And in 2008 the Fed had to conjure trillions to stop a debt deflation in a system that hadn’t touched the metal in nearly four decades.

Deflation under gold without a depression.
Debt deflation without a gram of gold in sight.

Whatever the common ingredient is here, it IS NOT the yellow stuff.

The fetters were real though. They stopped the Lords from reflating a bust the Lords had spent a decade inflating.

Cutting them let the printing start, and the printing got people back to work, much the way a stiff drink gets you upright again.

It does explain the recovery.

It, however, does not explain one bit about what put you on the floor.

Gold was simply the barkeep calling last orders.

And now, ninety-odd years later, we’re STILL blaming the barkeep.

Even though we fired him in 1971.

No1’s been cut off ever since.