Despite the lack of highly precise data, it is known that a significant portion of the foreign exchange accumulated by France between 1926 and 1928 consisted of pounds sterling. Thus, part of the gold held by the Bank of England ultimately increased the reserves of the Bank of France. Dialogue between the two countries was not always smooth. The British openly asserted that the franc was undervalued, while certain French circles denounced what they described as the imperialism of British finance.
Emile Moreau, Governor of the Bank of France from June 1926 to September 1930, left behind memoirs rich in insight. Referring to a meeting with the President of the Council, he wrote that he had held an important conversation with Poincaré regarding the imperialism of the Bank of England. The strategy, in his view, consisted of directing countries experiencing monetary difficulties toward the Geneva Committee, which the British controlled. The remedies applied typically involved appointing a foreign inspector—English or designated by the Bank of England—to the issuing bank, and depositing part of that bank’s reserves with the Bank of England. This arrangement simultaneously supported sterling and reinforced British influence. As a safeguard against potential instability, assistance from the Federal Reserve Bank of New York was sought.
If the burden of foreign loans appeared excessive, it was transferred to the United States while political advantages were preserved. England had thus established itself, wholly or partially, in Austria, Hungary, Belgium, Norway, and Italy, and was preparing to do so in Greece and Portugal. It sought entry into Yugoslavia and discreetly opposed French interests in Romania. According to Moreau, if this process continued unchecked, a division of currencies into two categories would emerge. First-class currencies—the dollar and the pound—would rest directly on gold. Second-class currencies would rely on sterling and the dollar, with part of their gold reserves deposited in London or New York. Such currencies would lose their independence, and French political influence in countries where it considered its interests essential would be seriously weakened. This passage illustrates the broader issues surrounding key currencies and peripheral currencies, as well as Britain’s role in the establishment and operation of the gold exchange standard. From 1926 onward, the decentralization of the world monetary system assumed a tripartite character.
In 1927, the Governor of the Bank of England, Montagu Norman, sought assistance from his French counterpart. Moreau recorded that Norman requested a reduction in the discount rate, while he responded that the Bank Rate should instead be raised. Nevertheless, in order to assist London, France agreed to purchase gold in New York and asked the Bank of England to acquire on its behalf all gold offered on the London free market. One of the most serious points of friction concerned Anglo-Saxon financial policy toward Germany. France believed that Great Britain could repatriate its German assets to offset gold transfers to the Bank of France. Moreau suggested that if London were compelled to defend itself by calling in its credits from Berlin, the desired outcome would be achieved through frank collaboration, without disturbances in intermediary markets.
Once again, gold—regardless of its formal status—proved insufficient to neutralize the consequences of evolving economic, financial, and political structures during the interwar period. This development ultimately led to the collapse of the Gold Exchange Standard in 1931.
The failure of the Gold Exchange Standard
The conversion of foreign exchange into gold was not unique to France. Most countries that had accepted, willingly or under pressure, the gold exchange standard following the Genoa Conference abandoned their foreign currency holdings as rapidly as possible a few years later. Confidence in key currencies disappeared; stability would have required the existence of only one such currency, as before 1914.
By 1926, thirty-four countries had stabilized their currencies in terms of gold. Eleven relied exclusively on gold to cover their monetary issuance: the United States, Canada, the United Kingdom, Australia, New Zealand, South Africa, the Netherlands, the Netherlands Indies, Sweden, Switzerland, and Lithuania. With the exception of Britain and the United States, none of these countries was a major gold center. All held a significant portion of their international liquidity reserves in pounds or dollars. The formal rule governing note issuance mattered less than the stance adopted by central banks toward convertible currencies, whether or not those currencies formed part of the legal cover for money issuance.
Twenty-five countries chose to include convertible currencies in both their central bank reserves and their monetary cover. These included Germany, Austria, Hungary, Czechoslovakia, Danzig, Denmark, Estonia, Latvia, Finland, and Bulgaria. In South America, Chile, Colombia, Bolivia, and Venezuela followed similar policies. India, Siam, and Egypt held reserves composed exclusively of sterling, while Mexico, Cuba, and the Philippines held reserves in dollars. Between 1926 and 1928, Italy, Poland, Belgium, and Greece officially adopted the gold exchange standard, and France joined this group during the same period.
An examination of international liquidity reserves reveals central bank behavior after 1928. The total foreign exchange reserves of twenty-four European countries declined from a peak of 2.52 billion dollars in 1928 to 505 million dollars in 1932. Over the same period, gold reserves increased from 3.49 billion to 5.87 billion dollars. Foreign currencies, which had represented 42 percent of total reserves in 1927 and 1928, fell to 8 percent by 1932. Ultimately, the data clearly demonstrate France’s decisive role in the failure of the gold exchange standard.