GOLD STANDARD

The end of World War I triggered a heartfelt desire across much of the world to make a new world. But when it came to economics, it was a different story. The spectacular growth of the international economy before 1914 persuaded almost everyone that the main objective was to recreate the international gold standard system, a stable currency exchange mechanism that facilitated the movement of money and goods around by globe by stabilizing currency values at a fixed rate.

The war had caused most countries to abandon "gold," the shorthand term for the mechanism; however, by 1919 the need to recreate the gold standard seemed imperative thanks to the currency instability and inflation that were sweeping Europe. The lead was taken by the United States and Great Britain, which, sometimes with the assistance of the League of Nations, organized stabilization loans and technical support to help countries back onto gold, but the lion's share of the work was undertaken by national governments and their central banks. To be a member of the gold standard, countries had to follow the three central rules of what has become known as "orthodox economic policy." The first two rules applied to governments, which had to sustain a positive balance of payments (spending could not exceed income levels) and a positive balance of trade (exports should exceed imports). The third rule affected central banks, which were expected to shadow the interest rates of all the other members of the system and use all their resources to stay on gold when the national currency was under speculative pressure.

By 1928 forty-four countries had returned to the gold standard. Cracks in the system quickly began to appear, however, as countries struggled to follow the rules of economic orthodoxy, particularly after 1930. The effective end of the gold standard order came when its chief supporter, the United States, left the system on April 19, 1933. A temporary shortage of gold within the U.S. banking system had prompted Franklin Roosevelt to call an extended bank holiday, but the real reason for the U.S. break with gold was to free Roosevelt to make economic policy as he saw fit. Subsequently, interest rates were allowed to fall (bank loans now cost less) and the dollar fell on the international exchange by almost 40 percent, helping prices to rise and making U.S. exports cheaper and imports from gold countries more expensive. Equally importantly, Roosevelt was now able to increase government spending.

This U.S. shift in policy greatly increased the pressures on countries such as France and Poland, which were still committed to the system. In contrast to the 1920s, there were now competing views on monetary policy, making international cooperation all the more difficult to achieve given the increasingly nationalist climate of the 1930s.

GOLD STANDARD

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