The Gold Exchange Standard, Not Gold
The major twist, the major deformation of a genuine gold standard perpetrated by the British in the 1920s, was not the gold bullion standard, unfortunate though that was.
The major inflationary camouflage was to return, not to a gold standard at all, but to a quote, gold exchange standard.
In a gold exchange standard, only one country, in this case Great Britain, is on a gold standard
in the sense that its currency is actually redeemable in gold, albeit only gold bullion
for foreigners.
All other European countries, even though nominally on a gold standard, were actually
on a pound sterling standard.
In short, a typical European country, say Ruritania, would hold as reserves for its
Currency, not gold but British pounds sterling, in practice bills or deposits payable in sterling
at London.
Anyone who demanded redemption for ruritanian rurers then would receive British pounds rather
than gold.
The gold exchange standard then cunningly broke the classical gold standard stringent
limits on monetary and credit expansion, not only for the other European countries but
But also for the base or key currency country, Great Britain itself.
Under the genuine gold standard, inflating the number of pounds in circulation would
cause pounds to flow into the hands of other countries, which would demand gold in redemption.
Thereby, gold would move out of British bank and currency reserves, and pressure would
be put on Britain to end its inflation and to contract credit.
But under the gold exchange standard, the process was very different.
If Britain inflated the number of pounds in circulation, the result, again, was a deficit
in the balance of trade and sterling balances piling up in the accounts of other nations.
But now that these nations have been induced to use pounds as their reserves rather than
gold, these nations, instead of redeeming the pounds in gold, would inflate and pyramid
a multiple of their currency on top of their increased stock of pounds.
Thus, instead of checking inflation, a gold exchange standard encourages all countries
to inflate on top of their increased supply of pounds.
Britain too is now able to quote, export her inflation to other nations without paying
a price.
Thus, in the name of sound money and a check against inflation, a pseudo gold standard
was instituted, designed to induce a double inverted pyramid of inflation, all on top
of British pounds, the whole process supported by a gold stock that does not dwindle.
Since all other countries were sucked into the inflationary gold exchange trap, it seemed
that the only nation Britain had to worry about was the United States, the only country
to continue on a genuine gold standard.
That was the reason it became so vitally important for Britain to get the United States, through
the Morgan connection, to go along with this system and to inflate so that Britain would
not lose gold to the United States.
For the other nations of Europe, it became an object of British pressure and maneuvering
to induce these countries themselves to return to a gold standard, with several vital provisions.
a. That their currencies too be overvalued, so that British exports would not suffer,
and British imports would not be overstimulated, in other words, so that they join Britain
in overvaluing their currencies. b. That each of these countries adopt their
own central bank, with the help of Britain, which would inflate their currencies in collaboration
with the Bank of England. c. That they return, not to a genuine gold
gold standard, but to a gold exchange standard, keeping their balances in London and refraining
from exercising their legal rights to redeem those sterling balances in gold.
In this way, for a few years, Britain could have its kick and eat it too.
It could enjoy the prestige of going back to gold, going back at a highly overvalued
pound and yet continue to pursue an inflationary, cheap money policy instead of the opposite.
It could inflate pounds and see other countries keep their sterling balances and inflate on
top of them.
It could induce other countries to go back to gold at overvalued currencies and to inflate
their money supplies.
And it could also try to prop up its flagging exports by using cheap credit to lend money
to European nations so that they could purchase British goods.
Not that every country was supposed to return to gold at the overvalued pre-war par.
The rule of thumb imposed in the 1920s was that A. Currencies, such as that of Britain
herself, that had depreciated up to 60% from pre-war, for example, the Netherlands and
the Scandinavian countries, would return at the pre-war par.
B. Currencies that had depreciated from 60 to 90% were to return to gold within that
The French franc, which had depreciated to 240 to the pound due to massive inflation,
returned to gold at the doubled rate of 124 to the pound.
And c, only those currencies that had been wiped out by devastating hyperinflation, like
like Austria, Bulgaria and especially Germany were allowed to return to gold at a realistic
rate and even they were stabilized at a little bit above their lowest point.
As a result, virtually every European currency suffered from the requirement to raise the
value of its currency artificially above its depreciated level.
The gold exchange standard was not created de novo by Great Britain in the interwar
period.
It is true that a number of European central banks before 1914 had held foreign exchange
reserves in addition to gold, but these were strictly limited and they were held as earning
assets.
These after all were privately owned central banks in need of earnings, not as instruments
of monetary manipulation.
But in a few cases, particularly where the pyramiding countries were from the third world,
they did function as a gold exchange standard.
That is, the third world currency pyramided its currency on top of a key country's reserves
– pounds or dollars – instead of on gold.
This system began in India after the late 1870s as a historical accident.
The plan of the British Imperial Center was to shift India which, like many third world
countries, had been on a silver standard, onto a seemingly sounder gold, following the
imperial nations.
India's reserves and pound sterling balances in London were supposed to be only a temporary transition to gold, but as in so many cases of seeming transition, the Indian gold exchange standard lingered on and received great praise for its modern inflationary potential from John Maynard Keynes, then in his first economic post at the India office.
It was Keynes, after leaving the India office and going to Cambridge, who trumpeted the
new form of monetary system as a quote, limping or imperfect gold standard, but as a quote,
more scientific and economic system, end quote, which he dubbed the gold exchange standard.
As Keynes wrote in February 1910, quote, It is cheaper to maintain a credit at one of
of the Great Financial Centers of the World, which can be converted with great readiness
to gold when it is required."
In a paper delivered the following year to the Royal Economic Society, Keynes proclaimed
that out of this new system would evolve, quote, the ideal currency of the future.
Elaborating his views into his first book, Indian Currency and Finance, London, 1913,
Keynes emphasized that the gold exchange standard was a notable advance because it
economized on gold internally and internationally, thus allowing greater
elasticity of money, a long-time code word for ability to inflate credit, in response to business needs.
Looking beyond India, Keynes prophetically foresaw the traditional gold standard as giving way
to a more, quote, scientific system based on one or two key reserve centers, quote,
a preference for a tangible reserve currency, end quote, Keynes declared blithely, quote,
is a relic of a time when governments were less trustworthy in these matters than they are now,
end quote. He also believed that Britain was the natural center of the new reformed monetary order.
While his book was still in proofs, Keynes was appointed a member of the Royal Commission on Indian Finance and Currency to study and make recommendations for the basic institutions of the Indian monetary system.
Keynes dominated the commission proceedings, and while he got his way on maintaining the gold exchange standard, he was not able to convince the commission to adopt a central bank.
However, he managed to bully it into including his annex favoring the state bank in its report, completed in early 1914.
In addition, in his work on the commission, Keynes managed to enchant his doting mentor, Alfred Marshall, the unquestioned ruler of academic economists in Britain.
Written While Montague Norman was the field marshal
of the gold exchange standard of the 1920s, its major theoretician was long-time Treasury
official Ralph Autry.
When Autry rose to the position of Director of Financial Enquiries at the Treasury in
1919, he delivered a speech before the British Association on, quote, the gold standard,
the speech presage, the gold exchange standard of the 1920s.
Autry sought not only a system of stable exchange rates as before the war, but also a monetary
system that would stabilize the world purchasing power of gold or world price levels.
Autry recommended international cooperation to stabilize price levels and urged the use
of an indexed number of world prices, a proposal reminiscent of Yale professor Irving Fisher's
suggestion for a, quote, tabular gold exchange standard made in 1911.
In practice, such calls for price-level stabilization, which were pursued by Benjamin Strong in
the 1920s, were really calls for price inflation to combat the dominant secular trend in a progressing
free-market economy of falling prices.
In the post-World War I world, this attempt at dual stabilization meant that the governments
would have to salvage the high post-war price levels from the threat of deflation, and in
In particular to alleviate the, quote, shortage of gold compared to the swollen totals of
paper currencies existing in Europe.
As Professor Eric Davis writes, quote, There had been concern in official circles that
a return to the gold standard would be inhibited by a shortage of gold.
Prices were much higher than before the war, and thus if there was a general return to
the old parodies there might be insufficient gold.
Autry picked up on the idea that the gold exchange standard could be widely introduced
to economize on the use of gold for monetary purposes.
Since countries would hold foreign exchange, much presumably in sterling balances, as a
substitute for gold, there was a special advantage for Britain.
The demand for the pound would be increased at the same time the demand for gold lessened.
The central instrument for imposing the new gold exchange standard on Europe was the International
Financial Conference called by the League of Nations at Genoa in the spring of 1922.
At a previous International Financial Conference at Brussels in September 1920, the League
had established a powerful financial and economic committee which from the very beginning was
dominated by Montague Norman through his allies on the committee.
Head of the committee was British Treasury official, Sir Basil Blackett, and also dominant
on the committee were two of Norman's closest associates, Sir Otto Niemeyer and Sir Henry
Strakusch.
All of these men were ardent price-level stabilizationists.
Moreover, Norman's chief advisor in international monetary affairs, Sir Charles S. Addis, was
also a dedicated stabilizationist.
Frauded by Norman, British Prime Minister Lloyd George successfully urged the British Cabinet
in mid-December 1921 to call for a broad economic conference on the post-war reconstruction
of Europe to include discussions of German reparations, Soviet-Russian reconstruction,
the public debt and the monetary system.
At a meeting of the Allied Supreme Council at Cannes in early January 1922, Lloyd George
The research got the delegates to propose an all-European economic and financial conference for the reconstruction of Central and Eastern Europe.
Promptly, the British set up an interdepartmental committee on economics and finance to prepare for the conference.
Head of the committee was the Permanent Secretary of the Board of Trade, Sir Sidney Chapman.
The aim of the Chapman Committee was to return to a gold standard, restore international
credits, and establish cooperation between the various central banks.
On March 7, 1922, the Chapman Committee issued its report for a draft agreement, which included
currency stabilization, central bank cooperation, and adoption of a gold exchange rather than
a straight gold standard, with each country deciding on the rate at which it would return
to Gold.
The European Economic Conference occurred at Genoa from April 10th to May 19th, 1922.
The conference divided itself into several commissions, including economic and transportation
commissions.
The relevant commission for our concerns was the Financial Commission, headed by British
Chancellor of the Exchequer, Sir Robert Horn.
The Financial Commission divided itself into three subcommissions on credits, exchanges
and Currency.
Credit resolutions dealt with intergovernmental loans and exchanges was an attempt to eliminate
exchange controls.
Currency was the sub-commission dealing with the international monetary system.
The crucial committee, however, was a large committee of experts covering all three sub-commissions
and which actually drew up the resolutions finally passed by the conference.
The committee of experts was appointed solely by Sir Robert Horne and it met in London during
in the early stages of the Genoa Conference.
This large committee, consisting of government officials and financial authorities, was headed
by the ubiquitous Sir Basil Blackett.
Ralph Autry drew up the Treasury plans for international money after having quote, extended
discussions with Montague Norman and presented them to the Committee of Experts.
After a temporary setback, the Autry plan was reintroduced and substantially passed
in the form of 12 currency resolutions by the Financial Commission and then ratified
by the plenary of the Genoa Conference.
Having gotten his plan approved by the nations of Europe, Autry became the leading Fugelman
and interpreter of the Genoa Resolutions.
The currency resolutions of the Genoa Conference, which formed the European monetary system
of the 1920s, called for a stable currency value in each country and for the establishment
of Central Banks Everywhere, quote, In countries where there is no central bank of issue, one
should be established, end quote.
These central banks, not only in Europe, but elsewhere, particularly the United States,
should practice, quote, continuous cooperation in order to bring about and maintain, quote,
currency reform.
The conference suggested an early formal meeting of central banks and an international convention
to launch this coordination.
The currencies of Europe should be on a common standard, which at present would have to be
gold.
After expressing a desire for balanced budgets in each nation, the conference declared that
some countries would need foreign loans to attain stabilization.
Fixing the value of the currency unit in gold was left, by the conference, to each country,
and the resolutions were vague on the criteria to be used.
Section 9 looked specifically to a new form of gold standard which would, quote, centralize
and coordinate the demand for gold, and so avoid those wide fluctuations in the purchasing
power of gold which might otherwise result from the simultaneous and competitive efforts
of a number of countries to secure metallic reserves, end quote.
In other words, to fix and raise price levels above the free market, and in particular to
try to avoid redemption in gold and subsequent contraction of over-expanded paper currencies.
Resolution 9 then became specific.
The point was to economize, quote, the use of gold by maintaining reserves in the form
of foreign balances, such, for example, as the gold exchange standard or an international
Resolution 11 spelled out the gold exchange system in detail and also declares that credit
will be regulated not only to keep the various currencies at par, but also with a view of
preventing undue fluctuations in the purchasing power of gold, that is, the stabilizationist
program of fixing and raising prices higher than free market levels.
In particular, in Resolution 11, the maintenance of the currency at its gold value must be
assured by the provision of an adequate reserve of approved assets, not necessarily gold.
In more detail, a participating country, in addition to any gold reserve held at home,
may maintain in any other participating country reserves of approved assets in the form of
of Bank Balances, Bills, Short-Term Securities, or other Suitable Liquid Resources.
The ordinary practice of a participating country will be to buy and sell exchange on other
participating countries within a prescribed fraction of parity of exchange for its own
currency on demand.
The gold aspect of this scheme is covered in the clause when progress permits certain
of the participating countries, i.e. Great Britain and the U.S. if it participates, will
establish a free market in gold and thus become gold centers.
The upshot the currency resolution concludes is that the convention will thus be based
on a gold exchange standard.
Ralph Autry's essay on behalf of the Genoa system is instructive in many ways.
Most of it is devoted to defending the idea of coordinated central bank action, that is,
essentially monetary expansion, to stabilize the price level.
Autry asks the crucial question, quote, it may be asked, why is any international agreement
on the subject of the gold standard necessary at all?
When we have once got a currency based on commodity like gold, why should we not rely
on free market conditions as we did before the war?
Why indeed?
Why can't the new pseudo-gold standard be like the old?
Autry makes it clear that his reason is a phobia about deflation.
The paper money stock had multiplied since 1914, and therefore their, quote, has been
and a great fall in the commodity value of gold.
Even in late 1922, after the price fall of the 1921 recession, the value of the gold
dollar was only two-thirds of what it was before the war, hence the danger of a scramble
to secure gold and a contraction of money and prices.
But what is so terrible about deflation?
Here, Hawtrey avoids even mentioning the wage rigidity and the unemployment insurance program
that had changed the economic face of Britain.
He simply points to the quote, notorious chronic state of depression which prevailed during
the spread of the gold standard in the period 1873 to 1896, end quote.
This is really his only horrible example.
But in the first place, Autry is wrong in attributing falling prices during the late
19th century to a shift from silver to gold.
The falling prices were due to the Industrial Revolution and the phenomenal advance of productivity
and hence a drop in price levels during this period.
But a more important error is that Autry has made the all-too-common modern error of identifying
falling prices with, quote, depression.
In reality, production and living standards were progressing in Britain and the United
States during this period.
Costs were falling and therefore there was no squeeze on profits.
The era of falling prices was not a quote, depression at all and was only experienced
as such decades later by historians who failed to understand the social benefits of falling
prices.
Second, in his exegesis, Autry lets the cat out of the bag.
He virtually concedes that his ideal is to abandon gold altogether and remain with only
managed fiat money.
Thus, in discussing the key currency countries, Autry states wistfully,
quote,
At the gold centers some gold reserves must be maintained, end quote.
But if the gold standard becomes worldwide, quote,
If all the gold standard countries adhere to it, gold will nowhere be needed as a means
In short, Autry looked forward to dispensing with gold as a monetary metal altogether and
to have the world solely on a fiat paper standard.
Autry concludes his essay by conceding that there was only one defect in the Genoa resolutions,
that there was no mention of how long it would take to return to gold.
Even the strongest countries, he emphasized, would have to wait until their currencies
rose on the exchange market to equal their designated rates.
To induce a rise in pound sterling to meet the high fixed rate, Britain would either
have to deflate, or else foreign countries, especially the United States, would have to
inflate to correct the international discrepancy.
Further deflation, declaimed Harvey, is out of the question.
Therefore, the only hope was to stabilize our currency at its existing purchasing power
and wait for the increased gold supply in the United States to lead to a substantial
inflation in the United States.
Like the other British leaders, Autry was pinning his faith on Uncle Sam's inflating
Many historians have written off the Genoa Conference as a, quote, failure and dismissed its influence on the international money of the 20th century.
It is true that the formal institutions of central bank cooperation called for at Genoa were not established, largely because of the reluctance of the United States.
But the critical point is that Genoa triumphed anyway since Benjamin Strong was willing to perform the same tasks in informal but highly effective central bank cooperation to establish and prop up Britain's pseudo gold standard.
Strong's reluctance stemmed from two sources, an understandable fear that isolationist and
anti-bank sentiment would raise a firestorm against any formal collaboration with European
central banks, especially in an America that had reacted against the formal foreign interventionism
of the League of Nations.
And second, Strong actually preferred the full gold standard and was queasy about the
inflationary unsoundness of a gold exchange standard.
But his reluctance did not prevent him from collaborating closely in support of his friend
Montagu Norman and of their common Morgan connection.
Their collaboration constituted, in the words of Michael Hogan, a quote, informal entente.
Actually, what Strong preferred was close, quote, key currency collaboration between,
say, the central banks of the United States, England and France, rather than to be outvoted
at Formal International Conventions. In fact, after international commodity prices began
to decline in 1926, Norman became more frantic in pursuing formal meetings of central bankers
and more insistent on continuing and intensifying the inflationary thrust of the gold exchange
standard. Finally, with the establishment of the Bank for International Settlements
at Geneva in 1930, Norman at least succeeded in having regular monthly meetings of central
bankers.
Far from Genoa being merely a flash in the pan, the 1922 conference placed its decisive
stamp upon the post-war monetary world.
In the words of Professor Davis, quote, the widespread adoption of the gold exchange standard
can be seen as the legacy of Genoa, end quote.
Following the Genoa model, Great Britain, as we have seen, set up the gold exchange
system by returning to its new version of gold in 1925.
The other European countries, as well as other nations, followed, each at its own pace.
By early 1926, some form of gold standard was established, at least de facto, in 39
countries.
By 1928, 43 nations were du jour on the gold standard.
Of these, even the few allegedly on the gold bullion standard, such as France, kept most
of their reserves in sterling balances in London, and the same is true of officially
gold coin nations such as the Netherlands.
Apart from the United States, the only officially gold coin countries were minor nations on
It should be noted that Norway and Denmark, who insisted in following the Genoa path of struggling back to gold at a highly overvalued currency, suffered, like Britain, from an export depression throughout the 1920s, whereas Finland, acting on better advice, went back at a realistically devalued rate and avoided chronic depression in the 1920s.
During This Period Throughout Europe, Great Britain, wielding
its control of the Finance Committee of the League of Nations, engineered the stabilization
of currencies on a gold exchange, that is, a sterling exchange standard, in Germany,
Austria, Hungary, Estonia, Bulgaria, Greece, Belgium, Poland and Latvia.
New central banks were established in the nations of Eastern Europe, basing themselves
on reserves in sterling, with British supervisors and directors installed in those banks.
Emile Moreau, the shrewd governor of the Bank of France, recorded his analysis of this British
monetary power play in his diary,
England, having been the first European country to re-establish a stable and secure money,
has used that advantage to establish a basis for putting Europe under a veritable financial domination.
The Financial Committee of the League of Nations at Geneva has been the instrument of that policy.
The method consists of forcing every country in monetary difficulty to subject itself to the Committee at Geneva, which the British control.
The remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England and the deposit of a part of the reserve of the central bank at the Bank of England, which serves both to support the pound and to fortify British influence.
To guarantee against possible failure, they are careful to secure the cooperation of the Federal Reserve Bank of New York.
Moreover, they pass on to America the task of making some of the foreign loans, if they seem too heavy, always retaining the political advantages of these operations.