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We commonly hear that the world gold standard of the 1920s,
reconstructed after World War I, was somehow radically different than
the gold standard systems prior to 1913. A meeting in Genoa in 1922
gets a lot of attention.
This serves a certain political or rhetorical purpose: first, it allows
some people to claim that the gold standard systems of the 1920s, the
so-called "gold exchange standard" systems, "weren't really a gold
standard," so the gold standard was not to blame for the Great
Depression. Then, ironically, these same people typically turn around
and claim that the supposedly-faulty not-really-a-gold-standard systems
of the 1920s actually were to blame for the Great Depression. This is
quite an intellectual somersault, you have to admit.
But, a "gold exchange standard" is really not much more than a currency
board. Currency boards work today, with no great problems and high
reliability. So, what was the problem, exactly? Also, the value of the
currencies were clearly linked to gold, by being linked to a "reserve
currency" itself linked to gold. Gold was clearly the "standard of
value" for these curencies.
I've argued that the so-called "gold exchange standard" was indeed a
legitimate form of gold standard system. It worked fine, without any
particular issues, and with high reliability, just as currency boards
operate today. There is an issue when the reserve currency itself
leaves gold, as was the case for Britain in 1914 and 1931, and the U.S.
in 1971. But, except for that, the track record is pretty good.
Read Gold and the Gold Standard (1944),
by Edwin Kemmerer.
Lots of good info here from the guy who actually set up a lot of "gold
exchange standards" among Latin American countries in the 1920s. He
tells you how they work, including a detailed example from the
Philippines -- in 1905-1910.
The "gold exchange standard" was actually quite common in the pre-1913
era as well. In fact, all but three major countries -- the U.S.,
Britain and
France -- regularly engaged in foreign exchange transactions, and held
foreign exchange reserve assets, as part of their regular operating
mechanisms. Often, they also had direct convertibility into gold as
well, plus domestic debt assets including discounting activities, and
also various forms of direct lending to governments or government bond
holdings. So, there was not a clear distinction between a system that
"was," or "was not," a gold exchange standard. An interesting example
is given by Sweden. Sweden held gold bullion, and had direct
convertiblity into gold. However, Sweden also held substantial foreign
exchange assets, in five (!) reserve currencies. Most importantly,
over 99% of the Bank of Sweden's transactions, in terms of volume, were
done in foreign exchange. Thus, in practical terms, it was 99%+ of a
100% "gold exchange standard," even though it is not categorized as
such today. Since most other central banks also held substantial
amounts of foreign exchange -- although perhaps not as much as Sweden
-- I
expect that they too did most of their transactions in foreign exchange
rather than in gold or in domestic assets. Thus, the 1920s period, the
supposed "gold exchange standard," was really something of an extension
of what was already the norm in the pre-1913 period. The Bretton Woods
period was a still further extension.
It may seem that there were "more central banks on a gold-exchange
standard" in the 1920s, but this was due in part because there
were more central banks. The Kemmerer Commission went around Latin
America setting up new central banks in the 1920s. Also, there were a
number of new countries that emerged in eastern Europe after World War
I -- Estonia, Latvia, Lithuania, Poland, Czechoslovakia, Hungary, and
more -- which also adopted "gold exchange standards," just as
peripheral countries did in the pre-1913 period as well.
The 1920s period
was not qualitatively different than the pre-1913 period. It was more
of a matter of degree. Both were gold
standard systems.
Let's see what I mean. This table is from Key Currencies and Gold, 1900-1913
(1969), by Peter Lindert.
As you can see, most every country except for Britain, the U.S. and
France, had substantial foreign reserves, and probably -- like Sweden
-- relied on foreign exchange transactions predominantly to manage the
value of their currencies, just like a currency board today.
As we can see, the foreign exchange reserve ratios are higher here. But
it is a matter of degree, not some wholly new arrangement. This is from
Elusive Stability: Essays in the
History of International Finance, by Barry Eichengreen.
Much the same was true during the Bretton Woods era. However, by this
time, direct convertibility into gold was becoming rarer.
A surprising amount of foreign reserves during the Bretton Woods era
were in the form of British pounds. This is from Reserve Asset Preferences of Central Banks
and Stability of the Gold Exchange Standard, by Peter Kenen.
Or, as Lindert put it in 1969:
"The similarity in composition of
reserves between the last prewar years adn the mid-1920s tends to
undermine the frequent distinction between a "nineteenth century
(prewar) gold standard" and a "gold-exchange standard" of the interwar
and postwar eras. The periodization of the history of international
finance involved in such a semantic choice can obscure the continuity
of the emergence of a key-currency system."
More important than the composition of reserves, in my opinion, was the
volume of transactions conducted via foreign exchange. This data is
hard to come by, but the Swedish example suggests that it was rather
high indeed.
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