The Gold Exchange Standard (1925-31)

What was the Gold Exchange Standard, adopted in Great Britain 1925, in France 1926, Italy 1927 and most other Gold Standard countries in 1928, why was it adopted and what led to it being abandoned? Read on to get answers to all those questions. 

After the First World War, countries aimed to reintroduce the Gold Standard. However, the two requirements of the gold standard, trust and international cooperation, were no more. Price inflation and hoarding of gold during the made it impossible for all countries to back their currency with gold and so The Gold Exchange Standard allowed countries other than the US and UK to hold dollars and pounds as reserves, while the dollars and pounds in their turn was backed by gold.

By refusing to adapt to the post-war reality and instead embarking on deflationary measures to accommodate economies back to the gold standard system, such as increasing interest rates while reducing prices and wages, policy makers in the 1920s accentuated the problem which eventually turned into the Great Depression. As Barry Greenstein says in his research paper ‘The Gold Standard and the Great Depression’ (NBER Working Paper #6060, 1997)

“Developed to cope with a world that no longer existed and sustained by social and political pressures that discouraged its abandonment, this intellectual construct spawned policy responses which were directly responsible for economic catastrophe.”

In 1931, when the Great Depression was in full force, wealthy private investors and central banks all over the world converted their pounds into gold and the Bank of England gold reserve quickly depleted, forcing Great Britain to abandon the Gold Exchange Standard, shortly followed by the US. The world was again preparing to go to war.

After the Second World War (or at least when the outcome seemed inevitable) world leaders met at Bretton Woods to lay out plans for a new economic system known as the Bretton Woods International Monetary System, where the US Dollar became the reserve currency of the world, in its turn backed by gold.