Restoring the Gold-exchange Standard

Historically, the gold-exchange standard came into formal existence early in 1925.

This is when Britain reestablished the gold convertibility of the pound and eliminated restrictions on gold exports.

Within a year nearly forty other nations had joined in the experiment, either de jure or de facto, and most other independent governments joined not much later.

Unfortunately enough, such experiment failed to last as expected.

In 1931, following a wave of bank failures on the European continent, the British were forced by a run on their reserves to suspend convertibility once again, and in the chaos that ensued the international monetary order broke up into congeries of competing and hostile currency blocs.

The largest of these was the sterling bloc, comprising Britain, its overseas dependencies and dominions.

Except Canada, which had closer financial ties with the United States, and a variety of independent states with traditionally close trading and banking connections with Britain.

This bloc was a shrunken remnant of the world that the British had dominated and in effect managed prior to 1914.

Members were identified by two main characteristics: they pegged their currencies to sterling, even after convertibility was suspended; and they continued to hold most of their reserves in the form of sterling balances in London.

A second bloc after 1931 was informally grouped around the United States (the dollar area), and a third around France (the 'gold bloc').

In addition, there was a large group of miscellaneous countries (including, especially, Germany and the states of Eastern Europe) that abandoned convertibility altogether in favor of starkly autarkic trade and financial policies.

The decade of the 1930s, the decade of the Great Depression, was a period of open economic warfare--- a prelude to the military hostilities that were to follow after 1939. Never had the conflicting element in international monetary relations been laid quite so bare.

It was truly a free-for-all regime. With public confidence shattered, exchange rates tended to fluctuate widely.

Moreover, governments consciously engaged in competitive depreciations of their currencies in attempting to cope with their critical payments and unemployment problems.

As in the years during and immediately after World War I, the monetary order failed to come even near to realizing its potential for joint gain.

In 1936, a semblance of cooperation was restored by the Tripartite Agreement among Britain, France, and the United States for mutual currency stabilization.

But this was only the barest minimum that might have been done to restore consistency to international monetary relations. Genuine monetary reconstruction had to wait until after World War I.

But why did the interwar experiment fail? Why did the attempt to return to the Golden Age end so disastrously?

Mainly because the Golden Age was a myth--- a myth based on misconceptions of how much the world economy had really changed.

Governments failed to read the signs of decay in the prewar era; more importantly, they failed to realize how anachronistic a restored gold standard would be in the new circumstances of the postwar era.