Courtesy Reuters

Prerequisites to Monetary Stabilization

THE international gold standard worked reasonably well before the World War -- so well, indeed, that with hardly a dissenting voice it was reëstablished at the earliest possible moment after peace had been made. The return was accomplished in the belief that monetary stability would provide a basis for necessary readjustments in the wider field of financial and trading relationships which had been distorted during the conflict and the years immediately following. These anticipations were grievously disappointed. The restored gold standard did not prove an effective means of promoting economic stability, and, within a decade, it was everywhere abandoned. In some countries the action was unavoidable; in others it was taken as a voluntary measure of monetary policy.

This striking difference in the results obtained from the gold standard in the prewar and postwar periods was not primarily due to intervening changes of a monetary character such as variations in the amount of monetary gold stocks, in exchange parities, in banking organization and in credit policies. The gold standard worked well in the prewar period because all the more important commercial countries were not far from financial and trading equilibrium. This position was maintained through the persuasive influence exerted under the gold standard, tending to check departures from equilibrium before they became so extreme as to involve difficult changes in costs and in the employment of labor and capital. Of course, payments were never in exact balance. Now one country and then another would experience an unfavorable balance of payments, reflecting fluctuations in export and import trade, tourists expenditures, shipping charges and the like, as well as on account of capital movements. But such unbalanced situations did not become so extreme as to require intolerably difficult changes in the structure of costs and prices. In the postwar period the departure from equilibrium was so extreme that adjustments under the pressure exerted by gold movements seemed impracticable. Immediate collapse was threatened. At all events, policies of coöperative support were adopted

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