ABSTRACT

After the Great War, Europe encountered considerable difficulties when trying to restore its monetary system. The underlying cause for these problems was the inflation brought about by the war, which had eroded the purchasing power of most currencies. In addition, the degree of erosion varied between different countries. In consequence, the exchange rates were not as they had been before the war. To return to a system exactly as it had been during the prewar years implied a politically costly deflationary effort; however, since inflation had not affected all countries equally, some, such as Britain, considered it possible to return to the prewar parity (the gold value of the pound sterling), while others deemed it unfeasible. For the statesmen of the times, the virtues of the gold standard as a system

for international payments were evident. After all, the gold standard had made possible the belle époque’s great prosperity. The problem was that adopting different parities from those of the prewar years implied devaluations, and it also meant the recognition of the downward rigidity of prices and wages. Today, after the inflation experienced during the second half of the twentieth century, the desire to recover prewar (World War I) parities may seem a fussy and absurd obsession. At the time, it was not. The system had functioned so well with fixed and determined exchange rates that to tinker with even just a cog of the complicated mechanism appeared to be risky, as, in effect, it turned out to be. For many, the change in parities was not only dangerous, but also immoral.

Europeans were used to living with undeniable certainty based upon the sacred value of gold and currency. To offer postwar Europeans less gold for their money was considered by many some sort of fraud on the part of the powers that be, a way of frustrating the citizens’ desire to recover full value for their savings. The gold standard had functioned so well, it was thought, because of its solidity, from which it derived its credibility. If prewar parities were modified, who could assure savers and investors that those parities would not be changed again and again, that what had been fixed and dependable would not become variable? The public had accepted banknotes

because it knew they could be converted at will for a determined amount of gold: if that equivalence was modified one day, it could just as well be modified in the future; logically, people would mistrust banknotes and would prefer to hoard gold. These fears turned out to be exaggerated because by then the public were used to unconvertible banknotes. Nevertheless, the advantages in money of constant value seemed evident. Another aspect of the problem, where questions of morality and risk coin-

cided as well, was unfair competition. If some countries reestablished currency convertibility below prewar parity, they would be internationally more competitive than those which established the old parity. This would involve a double sacrifice for the latter, which would have to further lower their prices and wages in order to compete with those countries which had devalued their currency. The pertinence of this fear was confirmed by the problems experienced by Britain after 1925. In trying to find a solution to these questions, a series of monetary con-

ferences was organized during the postwar years. The Genoa Conference in 1922 has always been mentioned as the one in which the “gold exchange standard” was consecrated. A country practices the gold exchange standard when it accepts as part of its monetary base (also called “high-powered money,” i.e., monetary assets in a bank’s vault which are used as reserves or justification for issuing paper money or creating bank deposits) not only gold, but also foreign currencies convertible into gold. During the belle époque it was common for some countries to treat the pound sterling as gold when computing the monetary base for the issuing of banknotes by their central banks. After all, it did not make any difference whether the central bank had pounds sterling or gold in its vaults. Accepting pounds as a monetary base avoided the nuisance of having to send them to Britain to have them converted to gold and then have the gold shipped to the country in question. Another variety of the gold standard, also widely used during the period

between the wars, was the so-called “gold bullion standard.” Under this system, the convertibility of the banknotes issued by the central bank was maintained, but only for very large amounts (bullion), that is to say, the convertibility was maintained for a few operators only. The convergence of depositors withdrawing their deposits in times of panic or widespread mistrust was thereby avoided. Technically the banknotes could be converted to gold, but the precious metal was not minted, nor did it circulate. It was the British delegation who pressed in Genoa for the use of these

versions of the gold standard. Their aim was to solve a dilemma: on the one hand, inflation and the expected increase in international trade were bound to bring about an increase in the demand for money; on the other, there was no guarantee that the world’s gold stock would increase in correlation. Gold scarcity could result in a depression, which had started to be felt at the end of the war. This was what worried Keynes (a member of the British delegation in Genoa), who would later write in his General Theory (1960: 230-31) that if “money could be grown like a crop or manufactured like a motor-car,