Part 4. The Gold Exchange Standard in the Interwar Years
Great Britain emerged victorious from its travail in World War I, but its economy and particularly its currency lay in shambles.
All the warring countries had financed their massive four-year war effort by monetizing their deficits,
most of them doubling, tripling or quadrupling their money supply, with equivalent impacts upon their prices.
The massive influx of government paper money forced these warring governments to go rapidly
off the gold standard.
The currencies depreciated in terms of gold, but the depreciation was masked by a network
of exchange controls that marked the collectivized economies during World War I.
Only the United States, which entered the war two and a half years after the other countries
and hence inflated its currency less, managed to remain de jour on its pre-war gold standard.
De facto, however, the U.S. barred export of gold during the war, and so was effectively
off gold during that period.
In March 1919, when foreign exchange markets became free once more, the bad news became
evident.
While the dollar, again de facto, as well as du jour on gold, remained at its pre-war
par approximately one twentieth of a gold ounce, European fiat paper currencies were
sadly depreciated.
The once mighty pound sterling, traditionally at approximately $4.86, now sold at approximately
$3.50 and at one point in February 1920 was down to $3.20. Here was a 30-35% depreciation
from its pre-war par. Thus, wartime and post-war Europe was thrown into a cauldron of inflation,
depreciation, exchange rate volatility and the menace of warring currency blocks. For
For the first time since the Napoleonic Wars, the world lacked an international money, a
medium of exchange that could be used throughout the world, and lacked the international harmony,
the monetary stability and calculability that a world money could generate.
Europe and the world were plunged into the chaos of an international moneyless or barter
system.
All the countries therefore looked back with understandable nostalgia at the relative Eden
that had existed before the Great War.