Today, the conventional discourse is to believe that the Great Depression was created by a failure of laissez-faire economics; a failure of the free-market; and a failure of an unregulated economy. This is the narrative that has been constructed and which is now construed in all classes of political science and history taught to students. Modern Intellectuals and economists have furthered this narrative by asseverating that the gold standard was the real cause of the market failure, thus government intervention was consequently legitimate to rescue the economy. This is a myth that must be debunked before it indoctrinates the forthcoming generations.

The gold standard did not generate the crash of the stock market of 1929; but the Federal Reserve did. By definition, the gold standard is a monetary system in which the value of money is determined by a physical commodity; mainly gold, because gold has been the most precious and trusted metal to convey trades. In 1861, Treasury Secretary, Salmon Chase, signed the U.S. Paper Certificate which enabled individuals to exchange paper money for a set amount of gold. In 1900, the Gold Standard Act was enacted to make of gold, the legal tender that will determine the value of the Dollar. So, the value of gold was set at $20.67 an ounce; therefore, one Dollar equated one-twentieth ounce of gold. The pure and classical gold standard was effective from 1861 to 1914. Individuals used gold as commodity money because it guaranteed that the government would redeem any amount of paper money for its value in gold. Furthermore, the gold standard was mainly trusted as a backed-commodity money because it kept inflation relatively low and sustainable. In 1913, the Federal Reserve was created and enacted by Congress for the purpose to be used as a lender of last resort due to bank panics. It entailed that the Federal Reserve’s main objective was to maintain the value of gold during the period of bank panics.

In 1914, the United States was engaged in World War I, and could not subsidize its military expenditures by solely relying on the gold standard. President Woodrow Wilson took the United States economy off the gold standard and used the Federal Reserve to print more money so that the United States government could supply its military arsenal during the war. The early 1920s saw the rise of the Federal Reserve as the central authority which has become the regulator of the value of gold.

As they thought doing the right thing, the leaders of the Federal Reserve committed the irreparable mistake which unfortunately led to the Great Depression. They passed a law that allowed the Federal Reserve to control the loans and credits that it would offer to commercial banks. This is how the Real Bills Doctrine was implemented.

According to a study conducted by Professor Richard H. Timberlake who has extensively researched on the Real Bills Doctrine and monetary policy; the theory of the Real Bills Doctrine states that the unrestricted issuing of money in exchange for real bills will not cause excessive inflation from undue increase in money supply, and that will not cause bank failure from illiquidity. So, the Federal Reserve supplied an excess of money to commercial banks during times of economic expansion. Based on another study conducted by Professor Lawrence H. White published on Cato Institute, the Real Bills Doctrine wrongly took the nominal quantity demanded of a particular type of credit as a reliable guide to the nominal quantity of money the public wants to hold. Moreover, Professor White argued that the Real Bills Doctrine wrongly made the redeemability of bank liabilities an unimportant aspect in the process that determined the quantity of money. The leaders of the Federal Reserve, in effectuating the Real Bills Doctrine during the 1920s, did not plan in their theory; an alternative response to counter bank panics during times of economic recession. The accumulation of the excess of money supplied to commercial banks by the Federal Reserve has generated a substantial deflation. Prices of goods and services significantly shrank below zero percent of the inflation rate; and this deflation subsequently created the crash of the stock market in 1929.

When Franklin Delano Roosevelt became President; one of his major acts as the most powerful man in America, was to increase the value of gold by enacting the Gold Reserve Act. The value of gold increased from $20.67 an ounce to $35 an ounce. Enacted in 1934, The Gold Reserve Act asserted that gold could no longer be retained by private ownership. The law required that gold certificates held by the Federal Reserve through private ownership be surrendered and vested in the Department of Treasury. Only licensed jewelers were allowed to have gold for sales purposes. The Gold Reserve Act was the primary policy that, in fact, took the United States off the gold standard before it was utterly dissolved by President Nixon in 1971. The Gold Reserve Act entrenched the nationalization of money and epitomized a clear unjustified encroachment of the central government in the economy. The federal government did not need to take full control of the money-supply to restore the economy. The Federal Reserve could have changed its monetary policy while leaving commercial banks with the power to freely establish their own exchange rates without government interference. Subsequently to this lengthy analysis, I can confidently conjecture that the gold standard did not create the Great Depression, but the Federal Reserve did.