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Which is it? Both–or neither

Scott Sumner writes,

"I don’t object to people noting that Bretton Woods had some characteristics of the gold standard; I’ve made that argument myself. But I wish the gold bugs would get the story straight.  Half of them seem to think the US monetary system of the 1920s wasn’t really a gold standard, and half seem to think Bretton Woods was.  Which is it?"

The answer is "both" — or "neither." Here's why.

The pre-World War I gold standard included the following characteristics: (a) On the eve of the war, world GDP was divided roughly 50-50 between countries that had central banks and those that did not. Most of the world outside of Europe did not have central banks, with the significant exception of Japan. (The U.S. Federal Reserve had been established by law, but did not become operational until shortly after war broke out in Europe.) (b) Most independent countries were on a gold or silver standard. (c) Significant exchange controls were rare. (d) Gold and silver coins were in widespread use.

The interwar gold standard differed from the prewar gold standard in each characteristic. (a) Central banking was the dominant monetary system. Free banking almost disappeared; currency boards, though they became more widespread in the period, existed mainly in colonies or League of Nations mandates. (b) The gold standard remained the ideal until the 1930s, but it was an ideal that more and more countries had difficulty adhering to. Among independent countries, the gold exchange standard, rare before the war, became widespread. Under the gold exchange standard, central banks held a large share of reserves in foreign securities that before the war they would instead have held in gold.  (c) Exchange controls were widespread except for a stretch of several years in the 1920s. (d) Gold coins disappeared from use and silver coins became rarer.

Under the Bretton Woods system, the characteristics again changed. (a) Central banking was even more dominant than in the interwar period. (b) Member countries of the Bretton Woods system and their colonies were on a gold exchange standard in which the U.S. dollar was the only major currency exchangeable for gold during most of the life of the system. (c) Exchange controls were widespread for the whole life of the system. Even in the United States, the linchpin of the system, the dollar was only exchangeable for gold by central banks, not by private persons. (d) Gold coins were no longer minted except as collector’s items and silver coins disappeared from use almost everywhere, a sign that governments and the public did not expect the same durability of exchange rates under the Bretton Woods version of the gold standard as under the pre-World War I version.

Keeping the characteristics of each period in mind, it is not surprising that when referring to the interwar or Bretton Woods periods in a short phrase, some people consider them gold standards and others do not. Judged against the pre-World War I gold standard, the later periods retained some similarities but also introduced significant differences. Some people stress the factor of continuity that the monetary system continued to center on gold in one way or another; others, me included, stress the differences.

P.S. Where are the other contributors? If this threatens to become a single-author blog I will cease writing. Most of the interest of the blog lies in its having multiple contributors with varied interests.


  1. I, too, would love to see more posts from other authors. But I want to encourage you to keep posting regardless, as I enjoy your posts and find them insightful.

  2. The major difference between the gold standard before and after the First World War was that the Gold Standard was even further away from gold-as-money after the war than it was before it.

    People like Benjamin M. Anderson ("Economics and the Public Welfare") were not true gold-as-money people – they (basically) approved of the pre First World War situation.

    However, they were shocked by the Benjamin Strong New York Federal Reserve policy of the late 1920s.

    It was NOT that they (Ben Anderson) were anti credit bubble people – it was the SCALE of the credit bubble they objected to.

    Although (of course) being establishment types they would not use the language I just did.

    The Free Banking angle has not really been fully explored.

    For example, if Canada was under a system of Free Banking in the 1920s – why does it seem to have a boom in the late 1920s and a bust at the end?

    Did Free Banking not really make much difference – or did the links Canada had with the Bank of England and Federal Reserve draw Canada into a mess it would not otherwise have got into?

    As for Bretton Woods….

    Well fluctuating exchange rates do cause damage – no argument there.

    But RIGGED exchange rates cause even moe damage.

    If the "Pound" and the "Dollar" are just names for certain weights of gold (or silver – or whatever) then the exchage rate is automatically "fixed".

    However, if they are not (and if the monetary expansion of the Pound and the Dollar is different) then a fixed exchange rate will be a RIGGED exchange rate – and will be a terrible thing (for example the false exchange rate agreed in 1925 – an exchange rate that basically tried to pretend that the British First World War monetary expansion had not happened).

    Still – B.W.

    It at least preserved a gold FIG LEAF.

    Overseas Central Banks could demand that the United States produce actual gold to back its "Dollars".

    In theory this should have acted as restraint on the Federal Reserve (and so on).

    And perhaps in the 1950s it actually did act that war – but in the 1960s (Great Society welfare programs and the Vietnam war) the United States lost its way.

    Richard Nixon is wildly attacked for getting rid of the fig leaf in 1971 – but really it was falling apart anyway (American gold reserves were draining overseas).

    Of course the praise that Nixon gets (from the Chicago School) for adopting a 100% fiat currency and "floating exchange rates" is utterly misplaced – but RIGGED exchang rates would not help (any more than Nixon's domestic price controls helped).

    So the short version…..

    Pre First World War – a lot of credit bubbles in the gold STANDARD even then.

    Post First World War – worse, vastly worse.

    Then breaks down in the 1930s.

    B-W – a mess for some countries from the start (the British government persisted in pretending the Pound was worth more than it actually was – hence the "Dollar shortage" a product of a RIGGED exchange rate).

    However, for the United States it may have worked a bit (sort of) in the 1950s.

    In the late 1960s it breaks down – really before Nixon admitted it.

    Since then?

    A total mess.

    Or a Chicgo School wonderland.

    Depending on your point of view.

    1. Paul raises some interesting questions. One in particular interests me: What permitted Canada's banking system to engage in a pro-cyclical fiduciary credit expansion? I have a few thoughts, but I also want to ask Paul and Kurt what they know about how this question has been answered to this point.

      My impression is that the question has not been adequately addressed and I would be interested in exploring it further if it deserves to be. I have seen several studies on the stability and efficiency properties of branch banking in Canada, but little on the nature and effects of the banking system's deviations from free banking.

      One possibility that I want to focus on is that the supposedly free banking system after the war, and especially at the end of the 1920's, was not as free as it had been before the war. Chartered banks were able to profitably expand without the checks that they would have faced before the war.

      This can be observed in a few ways. First, chartered banks were not under obligation to pay out gold to depositors; instead, they could pay out Dominion notes. Second, at the end of the 1920's the Government imposed a de facto prohibition on outflows of gold. Third, chartered banks had unlimited access to a discount window at below-market rates, under the Finance Act at the Treasury Board.

      Another set of issues concerns the possibility that chartered banks were further enabled to expand by regulatory forbearance and mandatory currency insurance. But my analysis and memory of the facts are too weak for me to say much with confidence just now.

  3. It really is tragic that this blog isn't more active. A lot of the big name blogs haven't lived up to the promised standards, although I figure everyone has their lives to attend to. I hope trends reverse on this one; the amount of talent listed on the right hand column is incredible.

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