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Although there is plenty going on today to talk about, not to
mention my perennially neglected Traditional City stuff, I seem to
be getting drawn back again and again to the 1914-1941 period in
economic history. A great many misconceptions today stem from that
time. It is like a childhood trauma that needs to be dealt with to
resolve issues in the present adult. Although a lot has been said
about that time, most of it is alas garbage. I find it is often best
to start by just looking at what is available, and coming to some
basic and obvious conclusions, rather than trying to shoehorn the
historical evidence into some preconceived agenda, which is what
most other works consist of.
I've mentioned this before:
April
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15, 2012: Foreign Exchange Rates 1914-1941
target="_blank" September
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30, 2012: Currency Devaluations of the 1930s
The source is the same: the Federal Reserve's Banking and Monetary
Statistics, which you can get from clicking on the above link. I'm
surprised at how many people have downloaded this, and continue to
do so, which indicates continuing interest in what is certainly a
very wonky topic.
So, I dug into it. This is slow, laborious work but perhaps I'll be
able to chew through it over time.
Let's start by reviewing what was going on with the two major
international currencies of that time, the British pound and the
U.S. dollar.
I'm making some assumptions here, such as that the value of the
dollar was $20.67/oz. (officially) in the wartime period and through
the 1920s, although that was certainly not the actual case, as we
looked at previously. There were a lot of capital controls during
wartime and soon afterwards.
target="_blank" December
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23, 2012: The Federal Reserve in the 1920s 4: The Historical
Record
December
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16, 2012: The Federal Reserve in the 1920s 3: Balance Sheet and
Base target="_blank" Money
November 25, 2012: The Federal Reserve in the 1920s 2: Interest
Rates
November
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18, 2012: The Federal Reserve in the 1920s
target="_blank"
March
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25, 2012: The U.S. Dollar During WWI and the Recession of 1920
Of course we can see the dollar devaluation of 1933, and the
resumption of the dollar gold standard at $35/oz. from 1934.
Here is Britain. The devaluation of the British pound after
floatation in 1914 is not really apparent here due to forex capital
controls during wartime. It becomes more apparent after those
controls are lifted after the war's end. The pound was returned to
its prewar gold parity in 1920-1925. We see the British devaluation
in September 1931 -- remember, this was the world's premier
international currency at the time, so it was a big deal. The dollar
devaluation of 1933 really returned the pound/dollar exchange rates
to their previous levels. Unlike the dollar, the British pound
floated after 1931, although it didn't lose much value until just
before the war. Nevertheless, the fact that the U.S. dollar returned
to a gold standard system and the British pound remained a floating
currency pretty much cemented the transition of international
currency leadership from Britain to the U.S. during this time,
further solidified during WWII and soon afterwards.
Here's the value of the British pound in terms of gold. Again, we
are assuming that the dollar's value was $20.67/oz. during WWI,
which wasn't really the case. But, that's the only data I have.
What I am referring to "capital controls" below is a notation in
the data that the rates are "nominal for at least five days during
the month." There may have been various forms of capital controls
previous, and further measures afterwards. But, when a foreign
exchange rate becomes "nominal," you can bet things are locked down
pretty tight.
Argentina:
Here is the exchange rate between the Argentine Peso and the US
dollar, from 1916-1941, as represented in U.S. cents per peso.
Obviously, we begin in the middle of World War I, when most all
currencies in the world were floating. The peso here provides an
interesting view because it is apparently a freely floating rate,
while it seems that a lot of forex rates were heaving managed using
capital controls during that wartime period. During the early 1920s,
there is an effort to correct for some of the wartime devaluation by
raising the value of the currency, along the lines of what was
happening in both Britain and the U.S. at that time.
Here's what it looks like compared to gold. (Here we are again
assuming that the dollar's value was linked to gold at $20.67/oz.
during the WWI period, which wasn't really the case.)
Argentina transitions from a "gold peso" (obviously it wasn't pegged
to gold during this time) to a "paper peso" on December 10, 1933.
The "gold peso" was stabilized vs. gold in 1932. However, as the
U.S. dollar was devalued in 1933, the forex rate between the gold
peso and the dollar rose, which introduced negative trade
influences. This led to a devaluation of the peso ("paper peso")
soon afterwards, not only adjusting for the U.S. dollar devaluation
but exceeding it. This was the "competitive devaluation" or
"beggar-thy-neighbor devaluation" approach popular during that time
period. After that 1933 devaluation, the peso is quite stable vs
gold for the remainder of the period, although there is some
variation. Capital controls were imposed after April 1933, through
1941. In effect, thse forex rate becomes an "official" rate rather
than the "free" rate, because the point of capital controls is that
foreign exchange isn't "free" anymore, but rather controlled.
Note that I am extrapolating the gold value of the peso (and other
currencies) by using average US dollar/gold ratios for 1933 and also
average foreign exchange rates. This naturally leads to a bit of
wiggle. If the line is mostly flat but has a bit of wiggle in 1933,
that probably means the currency was linked to gold (without the
wiggle) during that time.
Because this was the time of transition from the British pound to
U.S. dollar for international currency leadership, it is worthwhile
to look at peso/pound rates as well. As we can see, the peso was
kept in a fairly tight (for Argentina) range with the pound. After
1933, the peso is basically linked to the pound, via capital
controls as previously mentioned. So, in Argentina's case, the
British pound remained the reference currency (as was predominant
pre-1913), although the pound floated while the dollar remained
gold-linked.
Australia:
The Australian pound basically remained linked to the British pound
after the British devaluation in 1931.
Capital controls were imposed beginning in May 1934, through to 1941
and beyond.
Austria:
Like Germany, Austria had hyperinflation after WWI. The Austrian
krone was actually repegged to gold in September 1922, at the
devalued rate. In March 1925, the krone was replaced with the
shilling, which was basically the same with four fewer zeros. As
befits a country that had just experienced a hyperinflation, Austria
did not follow the British pound lower in 1931.
However, when the U.S. devalued in 1933, the Austrian shilling was
apparently devalued alongside somewhat, although the degree of
devaluation was not as great as for the U.S. dollar. The trade
pressures of the time pushed even hard-money-loving Austria to
devalue. This is common when the major international currencies
devalue. The same thing happened to the Swiss Franc during the
1970s.
Germany's annexation of Austria in March 1938 ends our story here.
Belgium:
Belgium also experienced devaluation during WWI and a few years
afterward (probably following the French franc). In October 1926,
the franc was retired and replaced with the gold-linked Belgian
belga. The belga was worth five francs; the gold link was basically
at the prevailing value of the franc when it was repegged to gold.
(All of this mirrors France.) Belgium did not follow the British
pound devaluation in 1931.
However, the devaluation of the U.S. dollar in 1933 put competitive
trade pressures upon Belgium, which responded with a devaluation in
April 1935. Belgium remained on a gold standard system afterwards,
unlike others who continued to float. World War II intervened in
1940.
Brazil:
We begin Brazil's story in the middle of WWI. The value is
stabilized (by Brazilian standards) in the early 1920s and linked to
gold in December 1926. However, Brazil pre-empts Britain and begins
to devalue in November 1929 (quick!), although modestly at first in
a slow slide. During the U.S. devaluation in 1933, Brazil follows
the U.S. dollar lower, maintaining almost-fixed exchange rates.
Another devaluation follows in 1938.
Capital controls were imposed beginning in April
1933.
Isn't that interesting? Maybe you can see why I did this. I hope
to follow up with more later, although it is a lot of work.
Nevertheless, I get an idea of what was going on during those
years that is basically unobtainable from written narratives.
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