In order to safeguard exchange-rate stability, France, England, and the United States signed an agreement on September 25, and Holland joined the agreement in November 1936. Shortly before that, the price of gold had been fixed at 35 dollars an ounce on January 30, 1934, devaluing the dollar by 59.06 percent. This did not represent a return to the “gold standard.” The Federal Reserve System did not guarantee — and still guarantees only externally — the convertibility of the dollar into gold and foreign exchange. Currencies came under the control of the Treasury Department. The United States was provided, as England had been in 1931 and France in 1936, with an Exchange Stabilization Fund responsible for carrying out the purchase and sale of foreign exchange and non-monetary gold on the exchange market, in order to maintain the dollar at a fixed exchange rate.
The most important differences are, on the one hand, that the support price of agricultural products is paid only to domestic producers, whereas the support price of gold is paid both to foreign and domestic producers; on the other hand, that stored agricultural products are sold freely, at the support price, to anyone, whereas gold is sold only to certain foreign buyers and never to domestic ones. Consequently, this statute established a minimum world price for gold in terms of dollars.
In this way, a system was established in which gold played no other role than that of an international currency. Aside from the episodes of exchange control, quantitative restrictions, bilateral agreements during the Second World War, and the experience of the European Payments Union in the 1950s, the characteristics of this 1934 dollar are still present, and by 1965 they were already creating certain problems, among them the inevitable dispute in which what appears to some as perseverance is seen by others as mere stubbornness.
Although worldwide cooperation failed at the London Conference, cooperation among the countries of the sterling bloc was a success for which Great Britain deserves recognition. That country pursued a triple objective: to fight the depression, to defend the international role of the City, and to compensate on the economic level for a loss of political influence formalized by the independence granted to the Dominions under the Statute of Westminster in 1931.
The formation of the sterling area
Following the devaluation of the pound and the abandonment of the standard, many countries within the framework of the Commonwealth continued to hold a significant part of their international liquidity reserves in London. In addition, they linked their currencies to the pound through a fixed exchange rate after having followed the pound in its depreciation. These countries were therefore under a Sterling Exchange Standard regime, although it has already been seen that the nineteenth-century gold standard was a kind of Sterling Exchange Standard on a much broader scale than that of the sterling monetary zone after September 1931. People began to speak of this “zone” on the very day that it suffered a major reduction.
The countries that became members of the sterling area in 1931 — or rather, that continued to be so — were, first of all, all the countries of the Commonwealth, with the notable exception of Canada, whose commercial and financial interests had long been oriented toward the United States. Portugal, the Scandinavian countries, Iran, Latvia, Japan, and the Argentine Republic also linked their currencies to the pound.
Commercial ties played an essential role in the decisions made by these different countries, since a very significant part of their international trade was carried out with the United Kingdom. They therefore had an interest in preserving British markets and in aligning their currencies with the pound in order to avoid making their prices appear excessively high. Table X shows, in fact, that exports from the countries of the sterling bloc to Great Britain were relatively more important than imports coming from that country.
The British economy had been much less affected by the depression than the American economy, which favored the cohesion of the sterling area. British industrial production in 1930 represented 92 percent of its 1929 level, whereas the corresponding percentage for the world as a whole reached only 86 percent. At the lowest point of the depression, that same production stood in Great Britain at 88 percent of its 1929 level, compared with 63 percent in the United States and 65 percent in Germany.