VSEVOLOD MEYERHOLD

Historically, the gold standard developed in an unplanned and uncoordinated manner during the eighteenth and nineteenth centuries. The first country to place its currency on a gold basis was Britain, who established the de facto convertibility of sterling in 1717, followed by de jure convertibility in 1821. As the nineteenth century progressed, an increasing number of countries joined Britain on the system, abandoning the more commonplace silver or bimetallic (gold and silver) standards as the value of silver diminished following a rapid increase in its world supply. By the 1880s, all the world’s major trading nations had placed their currencies on the gold standard, making it the first truly international exchange rate regime.¹⁰

The relative stability and smooth functioning of what is now known as the

‘classical’ gold standard era however, was largely due to a series of unique and largely fortuitous conditions. The progressive expansion and generally open character of the world economy provided capital with a continuous supply of new markets as outlets for surplus value; the growth in the world supply of gold largely kept pace with the rising demand for monetary gold and ensured that its value, and hence its utility as the basis of the money supply remained relatively stable; and the political and economic disorganisation of the working class on an international scale enabled countries to swiftly return to the regime if

9 McKinnion (1996), p.31; Eichengreen and Flandreau (1997), pp.101ff: Examples of the gold standard as a policy rule also include Bordo and Kydland (1995); Miller and Sutherland (1992); Hallwood et al (1996).

ever they were forced to depart from it.¹¹ The system was also underpinned by a substantial degree of central bank co-operation between the major gold standard countries (namely Britain, America, France, and Germany), and by the role played by the Bank of England, which by virtue of Britain’s nineteenth century economic dominance and the associated status of sterling as the world’s primary currency, formed the central orchestrating agency of the regime.¹²

By the early part of the twentieth century however, these conditions were becoming progressively undermined. The growth of international economic activity was fast outstripping the growth in the world supply of gold, destabilising its value; the spread of economic protectionism and an intensification of Imperial rivalries were eroding openness in world trade; the growth in working class organisation was putting growing pressure on the ability of state authorities to pursue policies of strict economic orthodoxy; and the decline in Britain’s economic dominance was eroding the global position of sterling and the centrality of the Bank of England. In 1914, under the mounting pressures of the First World War, the system finally collapsed.¹³

Throughout the war the free exchange of currencies was severely constrained as countries introduced widespread controls and sought to regulate their exchange rates in line with the demands of the conflict. By 1919 free exchange had been largely resumed, though the severity of the financial and economic dislocation caused by the war now forced countries, with the exception of America (who remained on gold), to adopt a floating exchange rate regime. This was subject to great volatility as intense political and economic

11 Primary producing countries for example were frequently unable to pursue deflation in order to avoid economic crises, though almost always engaged in a rapid return to the system. Britain’s adherence to the gold standard was also suspended in 1797 due to the Napoleonic wars, and was also temporarily suspended in 1847, 1857, and 1866. See Eichengreen (1996); McKinnion (1996), p.31.

12 Kemmerer (1944), pp.198-202; Scammell, (1965), p.105; Aldcroft and Oliver (1998), pp.46-7.

13 Tomlinson (1981), pp.27-42; (1990), pp.15-24; Ingham (1984), p.174.

turmoil engulfed the immediate postwar period. A fierce world boom during 1919 was followed in 1920 by an equally severe slump, while social unrest appeared to be endemic.

Faced with these difficulties, state authorities around the world became increasingly convinced of the need for a return to a gold standard in order to provide stability and facilitate an economic recovery. In 1925 Britain re-established sterling on a gold basis at its prewar parity of $4.86, providing the signal for many other countries to re-link their currencies to gold (though rarely at their prewar ratios) and heralding the start of a generalised move back to global exchange rate stability. By 1928 this process had largely been completed, and an international gold standard was once more a reality.¹⁴

The reconstructed system however was fundamentally weak and unstable. Despite the onset of another global boom during the mid-1920s, the regime was steadily undermined by a growing crisis of overproduction within the global circuit of capital. By 1929 the world economy was rapidly plunging into the deepest depression ever seen, putting the system under even more pressure. In 1931, economic and financial turmoil in Central Europe led to a speculative attack on the pound, forcing Britain to abandon the gold standard, and leading many other countries to do likewise. By 1932 most countries had now moved to a managed exchange rate regime, leaving only the United States and a small ‘gold bloc’ of European countries remaining on gold. Despite various efforts throughout the 1930s to re-establish the international gold standard, a combination of global political and economic instability, and social tensions resulting from the depression now ruled out any such prospect and precluded all but the most basic international co-operation. A US devaluation in 1933 added to the difficulties and uncertainties facing the world economy and put the remaining gold standard countries under growing deflationary

pressure in order to maintain their par values. In 1936 this pressure forced France to devalue and to leave the gold standard, triggering the dissolution of the gold bloc, and by 1938 the US was the only country remaining on gold. As an international regime, the system was finally consigned to history.¹⁵