1. What was the link between the
gold standard and the collapse of
world trade in the 1930s?
John Phelan

2. 1 - Background – The pre-war gold
standard
Key features
• Convertibility between paper and gold at
fixed rate
• Free export and import of gold
Internal and external convertibility

3. First World War
• Convertibility suspended
• Import and export prohibited
• Combatants issue currency and debt to
fund war efforts

4. Effects of the First World War
• Gold flowed into US which held 1/3 of world
monetary gold at end of the war
• Other combatants faced with a problem; with
an increased amount of money circulating
relative to a country‟s gold stock the parity
prices of gold were far below the market
prices. This would lead to massive outflows of
gold once convertibility was re-established
• Price levels disturbed

5. 2 – The scramble for reserves
Three paths out of post war monetary
dilemma
• 1 Internal devaluation - shrink the amount
of currency relative to gold (Britain, 1925)
• 2 External devaluation - accept the
wartime inflation and set the new parity
price at the market price (France, 1926)

6. The scramble for reserves cont.
• 3 Increase reserves. Can‟t increase gold but
by adding gold backed securities
(sterling, dollar) to reserves the shortage of
reserves vis-à-vis liabilities could be
ameliorated
The gold exchange standard (Genoa, 1922)
• “By late 1920s the share of foreign exchange
in international reserves was at least 50%
above pre war levels” (Eichengreen 1992)

7. 3 - Problems with the gold
exchange standard
Exogenous
• Price-specie flow mechanism adjusts misaligned
prices/exchange rates via exports/imports of goods
and capital
Both were constricted in the interwar period
• Capital did not move to offset trade movements but
frequently amplified them – Some countries (U.S.)
exported/lent goods and capital, others (Germany)
imported/borrowed
• Trade was impeded -
Safeguarding of Industries Act, U.K. 1921
Fordney-McCumber Act, U.S. 1922

8. 3 - Problems with the gold
exchange standard – cont.
Endogenous
• Gold backed assets had to be (or thought
to be) „good as gold‟. As UK balance of
payments worsened from 1928 this
became increasingly doubtful
• Countries with sterling securities (notably
France) sought to swap them for gold,
draining UK of reserves

9. UK balance of payments, 1925 -
1931

10. 4 - The Collapse of world trade
• Countries used monetary and fiscal
policies to protect their reserves
• Fiscal – Even higher tariffs
• Monetary – Higher interest rates

11. 4 - The Collapse of world trade
cont.
• Eventually countries choose internal
balance over external balance and devalue
– „Beggar thy neighbour‟ (?)
• Countries which devalue resort less to
protectionism (Eichengreen & Irwin 2009)

12. Was the gold standard to blame?
• No, the gold exchange standard was –
inherent flaws
• Political unwillingness/inability to let gold
standard mechanism work to rebalance
financial system