The 1922 Genoa Conference, Lloyd George on the front row, left.
Courtesy of the British National Archives


The carnage of the Great War led to great post-war efforts to put the “Humpty Dumpty” of the world financial order together again.   Restoring the gold standard was, of course, a high priority.  So badly had the war beggared the belligerents, however, that expedients were sought.  The prime expedient, the “gold-exchange standard,” was a devilish seed that would blossom into the Great Depression.

As Lehrman Institute founder and Chairman Lewis E. Lehrman wrote in the Fall 2011 issue of The Intercollegiate Review:

It is certainly strange that an unhinged token, the paper dollar, is now the monetary standard of the most scientifically advanced global economy the world has ever known. How did we get here?  In 1922, at the little-known post–World War I Monetary Conference of Genoa, the gold-exchange standard was officially embraced by academic and political elites. It was there that the dollar and the pound were confirmed as official reserve currencies, so that these national currencies might substitute for what was said to be a “scarcity” of gold. But there was no true scarcity—only overvalued national currencies caused by the inflation of World War I. The overvaluation, relative to the gold monetary standard, was maintained after World War I despite a doubling and tripling of the general price level in national currencies during the war. The greatest economist of the twentieth century, Jacques Rueff, warned in the 1920s of the dangers of this flawed official reserve currency system, designed “in camera” by the experts. Rueff predicted a collapse of this newly rigged official reserve currency system. And it did collapse, in 1929–1931, with catastrophic effects.

Lehrman issued a comparably rigorous critique over 30 years ago, in the Minority Report of President Reagan’s United States Gold Commission on which he served as a Commissioner and of which he was, along with Commissioner Ron Paul, one of two co-signatories:

Faced with a global inflation of unprecedented volume and destruction both during World War I and immediately after it, the world attempted to restore monetary stability. But while most officials wanted gold to re-appear as the monetary anchor, they also wanted to be able to keep inflating. Put another way, they wanted to have their cake and eat it too.

Preeminent victims of this delusion were the British; with a burgeoning welfare state in the early 1920s, and especially with rigid wage rates, it was difficult politically to end inflation. Further, Britain wanted to return to gold, but for reasons of national "prestige" she wanted to go back at the pre-war, pre-inflation rate of $4.86 per pound. In effect, she wanted to pretend that the inflation had never happened. There was only one way Britain could get away with enthroning an artificially overvalued pound: by making other countries play along. Other nations had to be persuaded (or forced) into either likewise returning to gold at an unrealistic rate or inflating their monies so as not to cripple Britain's exports (also priced artificially high).

Britain accomplished this at the Genoa Conference of 1922.  Emerging from that first post-war economic meeting was not a gold standard, but a more slippery "gold-exchange" standard. Here's how it worked: Only the United States stayed on the old gold-coin standard, where anyone could present notes totalling $20.67 to the Treasury and receive an ounce of gold in return. But Britain began redeeming pounds not just in gold, but in Federal Reserve notes or dollars. Further, the other nations began predominantly using British pounds as their backing. And importantly, when they did pay gold they only paid in large bullion bars, not coins, so the average citizen was not able to redeem his currency. The Genoa Accord made the pound as well as the dollar as good as gold, even though sterling was not in fact a sound currency. Britain now printed its "gold" with American support—the U.S. agreed to inflate enough to keep Britain's reserves of dollars or gold from flowing to America.

This inflationary charade was played to buttress Britain's fading dreams as an imperialist world power. But also involved was the rise of the new doctrines of John Maynard Keynes, who by the early 1920s had become a foe of the "barbarous relic” gold and extolled instead the alleged virtues of a politically managed paper currency. That these ideas became so influential so fast in London banking circles was due in no small part to the catastrophic loss suffered during World War I of truly the finest minds of a generation. These would have normally become leaders during the 1920s. This left a gap which affected Britain as it did few other countries. For at the risk of broad-brush painting, the British are a people that have always put more stock in practical knowledge than the more philosophical French or Germans. But pragmatism depends less on book knowledge than on skills handed down orally. The annihilation of a generation thus created a gap in the continuity of knowledge those more bookish nations escaped. So as one contemporary observer of London financial circles perceptively explained, by the mid-1920s, there would be few remaining grandfathers who remembered the virtues of sound money. And there would be their grandsons "miseducated by Keynes.”  Between them was a gap, which created such "a barrier in ideas that it was not easy for tradition and practical knowledge to pass."

Thus was an unflinching indictment of the “more slippery” gold-exchange standard comparable to that of Jacques Rueff spread upon the public record.  Rueff himself had repeatedly made plain the case against the “grotesque caricature” of the gold standard that is the gold-exchange standard.  His iconic Monetary Sins of the West, (The Macmillan Company, New York, New York, 1972, pp. 48-53) lays out an irrefutable indictment of Genoa, concluding with the dramatic observation “This was the system that collapsed in 1931 and was engulfed in the catastrophe of the Great Depression.”


Many of my critics complain that my analysis, by setting up the shortcomings of the gold-exchange standard as against the virtues of the gold standard, is backward and outmoded.

The Cahiers de la République, for example, reproaches me with attempting to revive a corpse.

Raymond Aron is of the opinion that "the gold standard is a thing of the past, like sailing ships and oil lamps."

The Economist considers that "there is no ordered way of put-ting the clock back. Gold: gold exchange standard: key currencies backed by IMF: true international credit—this is a natural progression [for the monetary system of the West]."

All the above contentions are based on the notion that the gold- exchange standard was substituted for the gold standard because it represented a relative advance. But the facts categorically invalidate such a claim. Resolution 9 of the Genoa Conference, which in 1922 recommended that it be introduced, states expressly that the gold-exchange standard "makes for savings in the use of gold by maintaining reserves in the form of foreign balances."

The Genoa experts held the view that the gold-exchange standard was only an expedient, a gimmick, which did not operate so as to improve the functioning of the world monetary system in a lasting manner. Instead, it was expected to stave off the gold shortage that would have resulted, in the then existing conditions, from the restoration of gold convertibility in those countries which had abandoned such convertibility during the First World War.

For all those who examined the situation that had arisen out of the war, a shortage of gold reserves was obviously something to be feared. For de jure or de facto reasons, banks of issue maintain a certain ratio between the currency value of their gold holdings and the quantity of money that they have issued in the form of bank- notes or of credit balances in their books. It is this ratio that constituted what was then called the percentage cover.

As to the quantities of money, they too are roughly commensurate with the level of prices.

Between 1913 and 1920, the average level of wholesale prices in terms of gold rose from n o to 2446 and total demand liabilities of central banks rose from $1,226 million to $4,299 million.

With the then existing level of reserves, such increases should have made it impossible to maintain gold convertibility, thereby affording a practical demonstration of the inadequacy of the gold reserves. In fact, however, the dollar had remained convertible

into gold throughout the war and could still be freely converted in 1920. Yet this situation, which was apparently abnormal, was due to a peculiar combination of circumstances.

In the first place, inflation had caused the disappearance of gold coins—a well-known phenomenon. The suspension of gold convertibility in all the belligerent countries, with the exception of the United States, brought about a situation where the United States alone was paying the agreed price for gold. At the same time, due to the events of the war, the United States had become the main source of supplies for the Allies. These and several other factors caused gold to flow into the vaults of the Federal Reserve System, whose metal reserves increased from $4,922 million in 1913 to $7,652 million in 1920.

This concentration of gold in the United States made it possible, notwithstanding the changed situation as a result of the war, to maintain throughout the world the gold convertibility of one currency, i.e., the dollar. But everything pointed to the conclusion that the price to be paid for maintaining such convertibility was the inconvertibility of all other major currencies. And that any endeavor hindering the concentration of gold in the vaults of the Federal Reserve System—and in particular the restoration of sterling and French franc convertibility—would reveal the inadequacy of world gold stocks in relation to existing price levels, and there- fore the impossibility of reverting to the prewar monetary system.

Now, in 1920, all the major countries that had instituted forced currency during the war were determined to restore gold convertibility at the prewar par value at the earliest possible date. Britain, in fact, restored it in 1925. And France itself, notwithstanding the substantial depreciation of its currency, had under- taken the self-imposed obligation-incorporated in legislation specifically to that effect—to restore it within a very short period, contrary to the dictates of common sense.

Thus, in 1920 there was no doubt that the value of the gold stocks available would not make it possible to implement the de- sired and stated policy of the major countries. The policy could only be feasible if there was a substantial increase in the currency value of the available gold stock or a modification of practices relating to monetary convertibility, bringing on a notable saving in the amount of gold reserves required for the carrying out of such policy.

The first of the above two solutions could manifestly have been brought about by a reduction in the legal gold content of the dollar, in other words, by an increase in the price of gold in terms of dollars. Such an increase would have augmented by a corresponding amount the currency value of the gold holdings. It also could have brought them up to the level required for a general return of currencies to convertibility, subject to the adoption of an appropriate rate of exchange in countries where price levels were not equivalent to those obtaining in the United States.

In 1920, however, no change was envisaged in the definition of the gold content of the major currencies, that is, in the legal determination of the quantity of gold that they represented. What is more, such a change was formally ruled out not only in the United States, where the price levels obtaining in 1920 were twice the prewar levels, but also in Britain, where they had increased threefold—and in France, where they had risen fivefold.

Thus the solution of an increase in the nominal value of existing gold stocks through an increase in the price of gold was ruled out. And there was no alternative—if the intention was to pursue a policy of return to gold convertibility—but to change the convertibility practices followed, thereby bringing about a notable saving in the quantities of gold that convertibility required. The gold-exchange standard afforded such a saving, making it possible to extract two cumulative monetary accounting operations from a single gold stock by entering in the reserve both the gold content of such stock and the amount of foreign exchange that was the representation of such gold.

A short history of the gold-exchange standard would show that

this system was imposed in India in 1898, the use of gold being reserved for external relations and the use of silver for domestic circulation.

The ingenuity of the system was immediately appreciated, and it spread rapidly to the silver-currency countries—the Philippines in 1903, Mexico in 1905—and, through the mechanism of conversion funds, to countries that had to stay with a paper currency system—Argentina in 1899, Brazil in 1905. Through the operation of the current account of the Treasury, this system also governed the financial relations between some French colonies and their metropolis.

A knowledgeable commentator stated about the gold-exchange standard in 1932: "It affords a quasi colonial and assuredly exotic remedy administered to long-ailing currencies. It is in fact neither a system nor a doctrine, but a makeshift, a rule-of-thumb expedient which is no doubt ingenious, often efficacious, whose flourishing future no one could have suspected at the time."

It was therefore preposterous to interpret the 1922 Genoa Conference resolution recommending the widespread application of the gold-exchange standard as the consequence of a deliberate attempt to improve the monetary system. Even in the minds of its proponents, this widespread application was a mere artificial device, intended to reconcile two conflicting attempts: one aiming at an early restoration of monetary convertibility in the new circumstances arising out of wartime inflationary situations, the other refusing to envisage any possible change in the legal parities between the various currencies.

It was this expedient that received systematic widespread application through the Financial Committee of the League of Nations, which turned it into the basic principle of the monetary system established in all countries whose currencies it rescued: Austria, Hungary, Greece, Bulgaria, Estonia, and the Danzig territory. At the same time, the system was extended to Germany upon the recommendation of the Dawes and Young committees, while France agreed to apply it indirectly from 1928 onward with respect to a substantial part of its monetary reserves.

As a result of this generalized extension, the gold-exchange standard had in fact become the monetary system of the West as early as 1925, although France was to adopt it only at a later stage. It was based on two key currencies: the dollar and the pound sterling, together with satellite currencies tied to them in varying degrees.

This was the system that collapsed in 1931 and was engulfed in the catastrophe of the Great Depression.

The indictment of the gold standard as an anachronism, “the opinion that ‘the gold standard is a thing of the past, like sailing ships and oil lamps,’" remains current in many elite circles.  Rueff’s refutation is both decisive and prescient:  “[Such] contentions are based on the notion that the gold-exchange standard was substituted for the gold standard because it represented a relative advance. But the facts categorically invalidate such a claim."

Next: The Great Depression, Part I

Previous: World War I