The Gold-Exchange Standard, Its Collapse and the Interwar Lack of an International Money

With the First World War the classical gold standard ended. In the immediate post-war period, most advanced countries found themselves with price levels significantly higher than the pre-war period and experiencing marked exchange rate volatility. In this context governments became convinced of the necessity to rebuild an international monetary order by re-establishing a system similar to the gold standard: the gold-exchange standard. This system only lasted from 1925 until 1931. Various explanations have been given for its short life and subsequent collapse. Most scholars attribute the collapse of the system to the formation of strong trade unions and mass political parties which prevented the costs of adjusting imbalances being passed on to workers, as had been the case with the classical gold standard. This made the gold-exchange standard politically unsustainable in the long run. The introduction of a monetary system based on a form of money that favoured smoother adjustments of macroeconomic imbalances was also hampered by the balance of power that prevailed in the international arena after the First World War.