This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: The International Gold Standard Reinterpreted, 1914-1934 Volume Author/Editor: William Adams Brown, Jr. Volume Publisher: NBER Volume ISBN: 0-87014-036-1 Volume URL: http://www.nber.org/books/brow40-1 Publication Date: 1940 Chapter Title: Book IV, Part II: The World of Sterling and the World of Gold, September 1931 to April 1933 Chapter Author: William Adams Brown, Jr. Chapter URL: http://www.nber.org/chapters/c5949 Chapter pages in book: (p. 1073 - 1255) CHAPTER Following the Leader, September .1931toApril .1933 In order to emphasize the general contrast between the war and post-war international gold standard systems we stated in Chapter 21 that the existence of a separately defin- able sterling area after the war was evidence of the decline in the importance of sterling as a world currency. Nevertheless, the influence of sterling over the world's exchanges was stiiI tremendous, and a logical first step in a study of the Disinte- gration period is to present a statistical picture of this in-j fluence as reflected in the world's exchange rates, and thus to justify and give precise meaning to the statement that the world was divided after September i 931 into a world of ster- ling and a world of gold. Such a procedure has definite advantages over other meth- ods of picturing the disintegration of the international gold standard. An attempt, for example, to classify the countries of the world on the basis of the legal provisions defining their monetary standards after September 1931, or on the basis the techniques by which their exchanges were controlled, would not yield very fruitful results. The whole tenor of our study of the post-war period has shown that classifications olf monetary systems based upon external forms do not assist very materially in the analysis of what was happening to the international gold standard as a world institution.1 Classifica- tions according to the techniques of management are hardly more helpful. According to the foot-rule of the writer the rec- ord of the official regulations restricting the freedom of deal- 1 Cf. in particular our examination of the lack of substantial meaning of out- ward adherence to the gold standard by periphery countries in Ch. 24 and in the section on Argentina in Ch. 1073 1074 DISINTEGRATION ings in the exchanges in various countries, compiled by the Bank for International Settlements, had reached in October 1937 a thickness of two and a half feet. The student who at- tempts to thread his way through this maze will find his atten- tion equally divided between gold standard and non-gold standard countries. This is shown by a table compiled by Leo Pasvolsky.2 The interpretation of such a table is subject to Monetary Standard Position of 50Countries,January x, NOMINALLY ON THE GOLD STANDARD WITH OFF THE GOLD STANDARD AND OLD PARITIES WITH DEPRECIATED CURRENCIES MAINTAINED ON FULL Without Official With THROUGH OFFI- GOLD Control Official CIAL CONTROL STANDARD Control Australia Argentina Austria Albania British India Bolivia Bulgaria Belgium British Malaya Brazil a Czechoslovakia Danzig Canada Chile Estonia Dutch East Indies Egypt Colombia Germany France Finland Denmark Hungary Italy Great Britain Ecuador Latvia Lithuania Irish Free State Greece Rumania The Netherlands Mexico Japan Yugoslavia Poland New Zealand b Persia 0 Switzerland Norway Portugal The United States Palestine Spain a Peru Turkey a Siam Uruguay b Sweden Union of S. Africa aThegold standard was never officially resumed after the World War. b The gold standard was never officially reestablished after the war, but there was a de facto return to pre-war gold parities. °Persiahad a silver standard until March 1932, when a gold parity was legally adopted, although the exchange rate followed the pound sterling. many difficulties. By no means all forms of exchange control are embodied in official regulations. Consequently not even the area within which the gold standard continued to be a reality as well as an ornament is clearly defined. Moreover, the currencies of many countries not on the gold standard were in fact pegged to gold standard currencies in much the same 2 Current Monetary Issues (Brookings Institution, p. 8. 'Ti STERLING AND GOLD DIVIDE THE WORLD 1075 way as were countries nominally on the gold standard. There- fore such a classification does not reveal the full extent of the world of gold. Finally, it gives no hint of the relation of the various currencies to sterling. This can be seen only by a study of the exchanges. From April 1929 to April 1933 35 countries left the gold standard in the order indicated.3 To plot the exchanges of 1929 1931 1932 April August January Uruguay Mexico Colombia Nicaragua November September Costa Rica Argentina United Kingdom Canada April December India Greece Brazil Sweden Chile Denmark 1930 Norway May March Egypt Peru Australia Irish Free State British Malaya June April Palestine Ecuador New Zealand Siam October September Austria July Venezuela Portugal Yugoslavia Finland Bolivia 1933 Salvador January Union of South Africa December Japan April Honduras United States these countries according to the single criterion of their de- preciation in gold would not, however, clearly disclose the real divisions established in the world's currency system. In introducing our analysis of the behavior of exchange rates during the war we drew attention to the very different aspect of the war-time rates when observed from the point of view of Zurich and from that of London or New York. Similarly after 1931 the choice of a base is all important. Many essen- tial facts concerning the grouping of the world's exchanges after September 1931 would be obscured by a simple plotting Bank of Nova Scotia, Monthly Review, September 1933. 1076 DISINTEGRATION of the depreciated currencies in terms, let us say, of the French franc. Another method of picturing the behavior of the world's exchanges has therefore been adopted which car- ries forward the analysis presented in Chapter i1. TheBoundaries of the World of Sterling and of the World of Gold In an unpublished manuscript on the sterling standard, Charles Wilson has studied the exchange rates of 36 countries from the abandonment of the gold standard by Great Britain in September 1931tothe abandonment of the gold standard by the United States in March Inorder to facilitate comparisons between these currencies, both as to their fluc- tuations and their general position in the world system of rates, he has expressed all the rates in terms of percentage deviations from the gold parities prevailing before the disin- tegration of the international gold standard system began. Since rates on New York are expressed in cents per unit of foreign currency, and rates on London in units of foreign currency per pound, he first worked out the reciprocals of the London quotations and then multiplied these reciprocals by 240 in order to get a series of quotations in the form of pence per unit of foreign currency. When London rates in this form are expressed as percentage deviations from the old parities they become strictly comparable with the New York rates similarly expressed. In Appendix Table 5 the exchange rates of the 36 countries on London and New York as compiled by Mr. Wilson are given. By plotting these rates and combining those with simi- lar characteristics, a graphical picture of the grouping of the nations in accordance with the behavior of their exchanges is obtained and the boundaries of the world of sterling and of the world of gold are defined. Before presenting the results of this procedure two preliminary observations should be made. First, the classification of countries is strictly on the STERLING AND GOLD DIVIDE THE WORLD 1077 basis of the behavior of the exchange rates, with one excep- tion. At the sacrifice of strict logical consistency the countries whose exchanges were kept stable in terms of gold have been divided into two groups to bring out the area within which traditional gold standard procedures continued to be observed without substantial modification. Second, as Mr. Wilson is careful to point out, a grouping of this sort, based solely on the behavior of the exchanges, does not disclose the full ex- tent of the sterling area, if by that term is meant all the coun- tries bound more closely to Great Britain than to other cen- ter countries by economic and financial ties. Sterling Countries In Chart 61 the sterling-dollar rate, expressed in percentage deviations from the old parity of 4.8665, is shown monthly from September 1931 to February 1933. The exchanges of io PCAC C N 7* CC OLVIAl ION ,.Os PA. Ac CHART 6i Sterling-Dollar Exchange August 1931—February \ 1933, Monthly Averages of \ DailyQuotationsasPer- centage Deviations from Par —4C —3C III III III SON 0. V A MI JA 50Mb J leil 1933 ofthe 36 countries studied by Mr. Wilson were sufficiently stable in London to repeat in their fluctuations on New York the pattern of the sterling-dollar rate. There is therefore no difficulty in classifying them as sterling countries, but they fall naturally into two groups (Charts 62 and 63). 4Thewriter relies upon the discussion elsewhere, particularly in Ch. to give to expressions of this kind the connotations intended by him. 1078 DISINTEGRATION STERLING STANDARD AND STERLING AREA COUNTRIES Of the io sterling countries 6 remained completely stable in sterling as far as their fluctuations were concerned, though this stability