William Adams Brown, Jr.

English

Research Papers in Economics

This PDF is a selection from an out-of-print volume from the National
Bureau of Economic Research
Volume Title: The International Gold Standard Reinterpreted, 1914-1934
Volume Author/Editor: William Adams Brown, Jr.
Volume Publisher: UMI
Volume ISBN: 0-87014-036-1
Volume URL: http://www.nber.org/books/brow40-1
Publication Date: 1940
Chapter Title: Book three: Part I The Nature of the Experiment
Chapter Author: William Adams Brown, Jr.
Chapter URL: http://www.nber.org/chapters/c5943
Chapter pages in book: (p. 384 - 391)01<
THREE
'93'
The
°f theCHAPTER 13
The Unity of the Period, 1925—193i
FromApril 1925 tO September '93' Great Britain adhered to
the international gold standard. These years are therefore a
clearly defined and unique epoch in gold standard history.
Yet the process of Restoration continued after this period be-
gan, and the process of Disintegration began before it ended.
The year 1925 marks neither the substantial completion of
the return to gold throughout the world nor the ending of
the prosperity phase of the international business cycle which
facilitated that return. It does not coincide with the maturity
of the forces that gave France her peculiar and, at times, even
dominant importance in international finance, or with the
French return to gold, or with the legislation that gave final
form to the British gold bullion standard. In these respects
'928 has a better claim to be considered the last year of Res-
toration, and since it was almost immediately followed by
the first defections from the newly restored gold standard sys-
tem, it is more truly an historical turning point than 1925.
In 1925, moreover, there was no sharp or decisive reversal of
underlying economic trends. The influence of the war and
the peace settlements in accentuating some and retarding
other secular trends in world production and trade had by no
means fully worked itself out. The world economy was in a
sort of rough equilibrium only because it was still incomplete.
Countries dependent upon agricultural products and indus-
trial raw materials still enjoyed a temporary respite in their
search for markets because of the absence of certain competi-
tors from world trade. Russia as an exporter of wheat, petro-
leu:rn, and other natural products was still absent from the386 EXPERIMENTATION
world's commerce in large degree. Central European output
of sugar, wheat, and other agricultural products was still low.
Because of financial and exchange difficulties and lack of capi-
tal, Germany was temporarily eliminated as a major competi-
tor in the export of manufactured goods. The competitive
power of Japan had not nearly reached its full maturity. In
general, in 1925 agricultural countries had not adjusted their
economies to the return to production of the areas most se-
riously affected by war and revolution, and manufacturing
countries had not adapted themselves to the full force of in-
evitable new competition.
If, therefore, the first phase of post-war economic history
continued well into the 1925—31 period, and if both the end
of the Restoration process and the beginning of the process
of Disintegration came almost exactly in the middle of it,
some further justification for treating it as a unified whole is
needed. This is found in its two all-pervasive characteristics:
experimentation and illusion.
The Element of illusion in the Return to Gold
The announcement of Great Britain's return to the gold
standard in April 1925 was the signal for the return to gold
of Australia, New Zealand, South Africa, Danzig, Hungary,
and the Netherlands. The number of countries related to
gold in one way or another and enjoying stable exchange rates
was raised to over thirty.' Most people then rejoiced that the
world had returned to the solid basis of gold. They ceased to
measure appreciation or depreciation of their currencies in
terms of the American dollar. America ceased to drag her
golden anchor. The currencies of many countries were joined
to one another in a stable relationship. Gold was the cement
that bound them together. But people did not commonly
think of it in that way. Each country thought of itself as at-
tached to gold rather than as attached to other countries
through gold. This was a deep, instinctive feeling not incon-
1Leagueof Memorandum on Currency and Central Banks, 1913—
1924, I,47.NATURE OF THE EXPERIMENT 387
sistent with very refined analyses of gold standard problems
'when the international gold standard actually exists over a
'wide area. It was confidently expected that the most disturb-
ing financial influences of the post-war period would be elimi-
nated by a redistribution of gold, by a definite end of flights
and repatriations of capital, and by a permanent solution of
the reparation and war debts problem. A stable economic
equilibrium was expected to follow from the assertion of the
underlying forces assumed in gold standard theory which
would bring about an adjustment of international price levels
and of the financial and commodity elements in the balances
of payments of both debtor and creditor countries. It was
expected that unusual modifications in central bank and treas-
ury practice in the leading money markets would continue
only as temporary expedients to provide time for the healing
adjustments commonly associated with the gold standard.
Expectations of this character may be read in the Cunliffe
and Vissering-Kemmerer reports, the Report of the Commit-
tee on the Currency and Bank of England Note Issues, the
John Parke Young Report (Commission of Gold and Silver
Inqu:iry, United States Senate) ,andin countless other sources
in which the operation of the corrective forces of the interna-
tional gold standard is described. They were not fulfilled. Up
to the eve of the world crisis corrective forces produced no
genuine economic balance for reasons ably and concisely
stated in the League of Nations World Economic Survey,
1931/2(pp.170—1):
"The balancing of international accounts, it must be repeated,
is a continuous process into which enter, not only imports and
exports visible and invisible, and capital movements both for
long- and for short-term investment, but also interest rates and
price changes. In the flexible pre-war organization, all these ele-
ments were kept in equilibrium by the manner in which the gold
standard was operated. If anything more than temporary disequi-
librium developed in the financial relations of any one country
with the rest of the world, an outflow of gold brought about a
restiiction of credit, and therefore rising interest rates, which388 EXPERIMENTATION
attracted capital or checked its exportation, and falling prices
which encouraged exports and checked imports till equilibrium
was restored again. Such a corrective sequence of events was,
however, dependent both upon a certain flexibility in the na-
tional price-structures and upon a smooth and efficient working
of the standard. In the post-war world, neither of these conditions
has been present, while, on the other hand, the balance of in-
ternational obligations. .demandedradical changes either in
the balances of commodity trade, in relative and stand-
ards of living, or in both. There was reluctance to face the neces-
sary changes either in the balance of trade or in the price-levels,
but, on the other hand, there was rigid insistence on the financial
obligations which made such changes necessary. For some years,
the dilemma was evaded by a credit expansion which made pos-
sible international lending on a scale sufficient to balance the
accounts for a time, but the piling up of these new obligations
constantly aggravated the lack of real balance and, when the
credit expansion came to an end in 1929,the'gap in the balance
of payments' yawned wider than ever."
The authors of these studies, however, have not found in
any analysis based solely upon the failure of traditional cor-
rective forces to operate successfully after 1925 a completely
adequate explanation of why the gold standard proved at that
time to be only a fair weather friend. We are convinced that
this question can best be answered by placing the events of
these years in their true perspective in the history of the stand-
ard. Our exposition of the 1925—31 period does not neglect
the immensely important factors stressed in the passage just
quoted: the increasing rigidity of prices, the grave malad-
justments in balances of payments, the unprecedented growth
of international debts, and the pressure for their repayment.
In harmony, however, with the whole plan of these studies as
set forth in the Introduction, it stresses also the replacement
of an international gold standard system dominated by a sin-
gle center by one dominated by a group of center countries.
It emphasizes the relations of the center countries to one an-
other, and the relations of the central group as a whole to
other countries. It relates the operation of the internationalNATURE OF THE EXPERIMENT 389
gold standard system under these conditions to the course of
the international business cycle. Finally, it endeavors never
to lose sight of one new factor of paramount importance: the
psychological hazard introduced into the operation of the
gold in all its phases by the penetration Into the con-
sciousness of masses of people of the idea that money as such
can lose its value.
The international gold standard system from 1925 to 1931
had to solve more difficult fundamental economic problems
than the pre-war system. It had to do so with far less effective
institutional equipment and was subject to immense new
psychological dangers. The very strength that confidence in
gold. based upon very ancient and deeply rooted instincts,
brings to an effective international banking and credit system
wherL that system rests upon a solid economic basis and is in
the hands of competent management, becomes under other
circumstances a threat and a weakness. The fact that the world
returned to the gold standard without being fully aware of
the strength of the cyclical forces at work, of the depth of the
economic maladjustments, and of the meaning of the loss of
centralized control and the new imperfections of interna-
tional clearing, gave to the confidence that return inspired an
element of tragic illusion. Under such conditions the inter-
national gold standard was a facade that masked the true na-
ture of economic problems. It promised escape from radical
economic readjustments by making hard and intractable
problems appear transitory and transitional. It was a false
sign-post that made dangerous ways seem safe.
Experimentation, the Parts and the Whole
In returning to or maintaining the gold standard from 1925
to 1931everycountry faced peculiar problems which made
the period one of experimentation in the management of
its own currency. These special problems and the solutions
reached have been abundantly and ably treated in the mono-
graphic literature, of the period. It was easy both for the ad-
ministrators of practical affairs and for writers about them to390 EXPERIMENTATION
regard these experiments in the light of more or less successful
efforts to adjust the conditions in their own country or in a
group of countries, of which theirs was a unit, to the gold
standard in general. This gold standard they often conceived
of as operating according to certain general principles de-
veloped during the period of British domination by British
theory. Such a point of view ran the danger of underempha-
sizing the fact that an experiment was in progress greater than
the sum of the experiments taking place within individual
countries. The discussion of individual currency problems
does not disclose the loss of stability and of economy in the
use of gold which was a technical consequence of the transfer
of international banking functions from London to New
York. It cannot bring out the full implications of such a
transfer for the success of the gold exchange standard or the
full meaning for periphery countries of division at the center.
Yet the experiment as a whole was defined by the relations of
its parts, and therefore the parts must be separately con-
sidered in sufficient detail to make their nature clear. They
are, however, never considered in isolation. The experiment
of creating an international money market in New York, the
experiment of defending sterling, and the experiment of op-
erating a gold exchange standard without a focal point were
all interrelated. When their effects are combined and con-
sidered in their general economic setting they lose their sepa-
rate identity in one all-embracing experiment, that of at-
tempting to operate an international gold standard with a
decentralized financial system in an unbalanced world econ-
omy.2
2 Ch. i8, 19, and 20 constitute the core of our analysis of the Experimentation
period; Ch. 14, 15,andi6 place it in its contemporary setting; Ch. 21 places
it in its historical setting. Ch. 17developscertain aspects of clearing under a
decentralized system in support of the general argument. Readers who are
not interested in a survey of currency stabilizations outside the major powers
may omit Ch. 14. Those who have no taste for an accounting analysis may
omit Ch. 17.

The International Gold Standard Reinterpreted, 1914-1934

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Research Papers in Economics