This chapter is an overview of central banking developments between 1919 and 1939, highlighting the establishment and operation of 28 new central banks, most in what are now called emerging markets and developing countries. Inspired by expert advice and underpinned by foreign lending, the new banks were designed to function independently from political interference, and to defend the gold standard as part an international, rules-based network of cooperating institutions. The Great Depression revealed the flaws in this setup. As capital flows dried up and international cooperation faltered, the gold standard disintegrated, and central banks were unable to head off macroeconomic and financial collapse. Designed to fight inflation, they were ill-prepared to address financial fragility. In the wake of their failure, a two-pronged reaction set in. Central bank autonomy was curtailed, while monetary policy was subordinated to new policy objectives, including the support of import substitution in Latin America and central planning in Eastern Europe. At the same time, central banks’ powers expanded, as they were transformed into agents of state-led development policy. Thus, the new central banks of the 1920s and 1930s were integrally involved not just in post-First World War reconstruction and the Great Depression, but also in the key economic developments of the mid-20th century.

Established at the behest of the League of Nations to help the country secure an new international loan, the Bank of Greece was regarded with a mixture of suspicion and hostility from its very foundation. The onset of the Great Depression tested its commitment to defending the exchange rate against domestic pressure to reflate the economy. Its policy response has been criticized as being ineffectual and even detrimental: the bank is said to have been unduly orthodox and restrictive, not only during but also after the country’s eventual exit from the gold exchange standard. This chapter combines qualitative and quantitative sources to revisit the Bank of Greece’s decisions during the Great Depression. It argues that monetary policy was neither as ineffective nor as restrictive as its critics suggest, thanks to a continued trickle of foreign lending but also to the Bank’s own decision to sterilize foreign exchange outflows. It reappraises Greece’s attempt to maintain the gold standard after sterling’s devaluation, a decision routinely denounced as a policy mistake. Finally, it challenges the notion that Greece constitutes an exception to the rule that countries that shed their ‘golden fetters’ faster recovered earlier.

To date, research on Latin American central banks in the interwar years has focused on their loss of autonomy due to the slump and subsequent implementation of innovative, countercyclical monetary policies. These policies, although fostering economic recovery, led to higher rates of inflation and exchange-rate volatility. The chapter shows that these policies resulted from more than loss of autonomy and subordination of central banks to governments. In fact, the need for countercyclical monetary policies had been foreseen by foreign advisors to newly established central bank before and during the crisis, but Latin American central bankers had been reluctant to implement them for fear of damaging the credibility of the gold-standard regime. This finally changed with the collapse of the gold exchange standard. In the 1930s, central banks had become effective actors, channeling credit to the real economy and supporting the emergence of state institutions that would promote the development of local industry.