On the eve of the First World War, the United States was eager to free itself from British tutelage in international financial operations. Despite its economic power, the United States lacked the ability to challenge British preeminence, which rested largely on the particular structure of the City of London. New York was still only a national financial center, and American bankers had not yet entered the financing of international trade. American capital had begun to be invested abroad, but the dollar was not accepted as a reserve currency and therefore had not yet achieved recognition as an “international currency.” The First World War accelerated developments that were already underway. The work of the National Monetary Commission reveals the impatience of American bankers to compete with London. The history of the interwar period, especially from 1919 to 1930, was marked by conflict between London and New York. Between 1926 and 1931, France added an important piece to this landscape. During this period, the franc did not play the role of an international currency in the same way as the pound or the dollar, but Paris remained a major financial center, and the franc became a highly sought-after currency between its stabilization in 1926 and the devaluation of the pound in 1931.
From 1919 onward, Great Britain lost its financial monopoly, and with it the centralization of international finance disappeared. Speculators were now free to choose among several key currencies, and shifts in confidence led to shifts in capital flows. One of the first authors to analyze the consequences of this decentralization of global finance after 1919 was W. A. Brown Jr.
These changes and their possible consequences affected the functioning of the new gold standard, namely the Gold Exchange Standard, proposed by Great Britain at the Genoa Conference in 1922. At the time of the system’s failure, the Macmillan Report provided a belated but relevant analysis. Recalling the situation of the nineteenth century, the report stated that even then the automatic mechanism of the gold standard depended largely on the Bank of England and functioned satisfactorily only because of London’s supremacy as the world’s leading financial center. Other countries had to adapt to decisions taken in London. The postwar situation was radically different: New York had become an extraordinarily powerful financial center, exerting an attraction over the world’s gold resources comparable to that of London, and the volume of foreign-held liquidity in both centers was far greater than before the war. For these reasons, stronger means of monetary management and direction were deemed necessary.
The rivalry between France and its allies resolved little. To understand the attitude of the Banque de France toward the Bank of England between 1928 and 1931, one must consider the issue of war debts. France rejected the Anglo-American stance on reparations, and the governor of the Banque de France reminded his British counterpart that Britain could increase its gold reserves simply by repatriating its assets from Germany and Central Europe.
This analysis begins with the origins and principles of the Gold Exchange Standard, followed by an examination of its functioning and eventual failure. This leads to a detailed review of the competition between London and New York on one side, and between Paris and London on the other. The absence of international cooperation and the failure of the World Economic Conference in London in 1933 only intensified the difficulties arising from the depression of 1929–1933. Only Great Britain, by abandoning gold, managed to preserve the international role of the pound within its currency area.
Conditions for the Return to Gold
The Genoa Conference is generally cited as the origin of the interwar international monetary system. However, an expert conference held in Brussels in 1920 prepared the ground for Genoa two years later. The recommendations of delegates from 39 nations meeting in Brussels highlighted both the urgency and the dangers of a “return to normality,” that is, to the gold standard. They warned that an effective return to gold would, in many cases, require significant deflation, and that such deflation would have to be implemented gradually and with great caution.
Another recommendation deserves special mention: the proposal to create an international credit organization and a clearing house. An international body would be available to states seeking credit to pay for essential imports, with assets deposited as collateral and managed under agreed conditions.
An article in The Economist discussed Germany and the United States in terms that proved prescient given subsequent U.S. foreign lending policies between 1920 and 1930. Neither country was strongly represented at the conference. While the German delegation left a generally favorable impression, the head of the American delegation bluntly stated that Americans did not consider Europe a solvent and secure debtor, emphasizing the contrast between European states divided by customs barriers and political rivalries and the U.S. states bound by free trade and cooperation.
Here too, the warning signs were evident. The need to return to gold and long-term forward-looking perspectives formed the core message of the 1920 Conference. In the following six months, the currencies of Poland and Austria collapsed, and the German mark was heading toward catastrophe. It was partly to confront these problems that the Genoa Conference of 1922 was convened.