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NOTE 50. The Gold-Exchange Standard in the Interwar Years

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Part 4. The Gold Exchange Standard in the Interwar Years

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Great Britain emerged victorious from its travail in World War I, but its economy and particularly its currency lay in shambles.

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All the warring countries had financed their massive four-year war effort by monetizing their deficits,

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most of them doubling, tripling or quadrupling their money supply, with equivalent impacts upon their prices.

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The massive influx of government paper money forced these warring governments to go rapidly

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off the gold standard.

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The currencies depreciated in terms of gold, but the depreciation was masked by a network

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of exchange controls that marked the collectivized economies during World War I.

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Only the United States, which entered the war two and a half years after the other countries

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and hence inflated its currency less, managed to remain de jour on its pre-war gold standard.

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De facto, however, the U.S. barred export of gold during the war, and so was effectively

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off gold during that period.

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In March 1919, when foreign exchange markets became free once more, the bad news became

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evident.

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While the dollar, again de facto, as well as du jour on gold, remained at its pre-war

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par approximately one twentieth of a gold ounce, European fiat paper currencies were

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sadly depreciated.

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The once mighty pound sterling, traditionally at approximately $4.86, now sold at approximately

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$3.50 and at one point in February 1920 was down to $3.20. Here was a 30-35% depreciation

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from its pre-war par. Thus, wartime and post-war Europe was thrown into a cauldron of inflation,

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depreciation, exchange rate volatility and the menace of warring currency blocks. For

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For the first time since the Napoleonic Wars, the world lacked an international money, a

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medium of exchange that could be used throughout the world, and lacked the international harmony,

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the monetary stability and calculability that a world money could generate.

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Europe and the world were plunged into the chaos of an international moneyless or barter

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system.

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All the countries therefore looked back with understandable nostalgia at the relative Eden

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that had existed before the Great War.