Online Currency Trade

Scrambling for Gold

When World War I broke out--- all of the belligerent nations--- and soon most others as well--- took action to protect their gold reserves by suspending currency convertibility and embargoing gold exports.

The gold standard was now defunct.

Private individuals could no longer redeem paper currency in gold, nor could they sell it abroad. But they could still sell one paper currency for another--- exchange control not being invented until the 1930s, at whatever price the exchange market would bear.

The fixed exchange rate mechanism of the gold standard, therefore, was succeeded by its absolute opposite: a pure floating exchange rate regime.

In the ensuing years, as currency values varied considerably under the impact of wartime uncertainties, the international monetary order could not even come near to realizing its potential for joint gain.

Accordingly, once the war was over and peace arrangements taken care of, governments quickly turned their attention to the problem of world monetary reform.

Lulled by the myth of the Golden Age, they saw their task as a comparatively simple one: to restore the classical gold standard (or a close approximation thereof).

The major conundrum seemed to be an evident shortage of gold, owing to the extreme price inflations that had occurred in almost all countries during ad immediately after the war.

These had sharply reduced the purchasing power of the world's monetary gold stock, which was still valued at its old prewar parities.

One plausible solution might have been an equally sharp multilateral devaluation of currencies in terms of gold, in order to restore the commodity value of gold reserves.

But that was ruled out by most countries on the grounds that a return to 'normal' (and to the Golden Age) must include a return to prewar rates of exchange.

An international economic conference in 1922 (the Genoa conference) recommended worldwide adoption of a gold-exchange standard in order to centralize and coordinate the demand for gold.

Central banks were urged to substitute foreign exchange balances for gold in their reserves as a means of economizing the use of gold.

Also, gold holdings were to be systematically concentrated in the major financial centers (e.g., London).

Outside the centers, countries were to maintain their exchange rates by buying and selling 'gold exchange' (i.e, currencies convertible into gold, such as sterling) instead of gold itself.

The monetary order was thus to combine a pure fixed exchange rate mechanism of balance of payments adjustment modeled on the classical gold standard, with a new mixed commodity-currency standard to cope with the shortage of gold.