The Gold-Exchange Standard in the Interwar Years

Murray N. Rothbard (1998)

Rothbard examines postwar monetary reconstruction and its breakdown in Britain’s abandonment of gold in September 1931. His central distinction is between a gold standard disciplined by redemption and a gold-exchange system that retained gold’s prestige while weakening its restraints on credit expansion. British policy choices, monetary institutions, and Anglo-American financial networks jointly explain the instability in his account.

Great Britain emerged victorious from its travail in World War I, but its economy, and particularly its currency, lay in shambles.

Britain’s predicament establishes the tension between national prestige and economic adjustment. Rothbard argues that restoring sterling to its prewar parity of approximately $4.86 overvalued the pound after wartime inflation. Policymakers sought to recover London’s financial standing without accepting the domestic deflation necessary to sustain that rate. He attributes persistent export weakness and unemployment to currency overvaluation combined with wage rigidity, reinforced by unions and unemployment insurance. Restoration at a depreciated parity supplies his counterfactual alternative.

The theoretical basis of this argument is the disciplinary role of gold redemption. Monetary expansion raises domestic prices and encourages external payments that eventually drain an issuer’s gold reserves.

As in the familiar Hume-Cantillon international price-specie flow mechanism, an increase of banknotes or deposits beyond the redemptive gold stock increases the supply of money, for example, francs in France.

For Rothbard, this mechanism limits discretionary issuance. He also distinguishes falling prices generated by productivity gains from depression, rejecting the assumption that price stabilization necessarily ensures economic stability. This distinction grounds his criticism of policies that sustained credit growth while treating stable commodity-price indices as evidence of monetary soundness.

Britain’s return to gold depended on international assistance as well as domestic institutional change. Rothbard treats expectations of American inflation as integral to the parity decision: rising American prices could ease Britain’s competitive disadvantage without equivalent British contraction.

The British government did not seem to realize fully that the United States had emerged from the war as the great creditor nation and also, financially, as the strongest one: financial dominance was moving to New York.

This shift frames Rothbard’s discussion of the House of Morgan and the relationship between Benjamin Strong of the Federal Reserve Bank of New York and Montagu Norman of the Bank of England. American lending facilities and credit expansion supported sterling’s restoration in 1925. In his interpretation, central-bank cooperation protected an unsustainable parity by transferring part of the adjustment burden abroad.

The gold-exchange standard extended this strategy institutionally. Britain substituted bullion redemption for circulating gold coin, restricting ordinary holders’ practical access to gold. Foreign central banks increasingly held sterling claims as reserves, allowing monetary expansion to rest on balances ultimately supported by Britain’s limited gold stock. Where redemption could force an expanding issuer to contract, accumulating sterling reserves permitted further expansion elsewhere.

Rothbard traces this arrangement through precedents in British India, Keynes’s early monetary writings, Ralph Hawtrey’s stabilization proposals, and the Genoa Conference of 1922. Economizing on gold and stabilizing purchasing power supplied rationales for coordinated management. British influence through the League of Nations helped disseminate central banks and sterling-based reserve arrangements, even without Genoa’s full proposed machinery.

The later narrative follows the widening gap between these arrangements and their economic foundations. British exports remained weak, and American accommodation offered only temporary relief. Rothbard disputes accounts that chiefly blame France for destabilization: French stabilization attracted capital, while French authorities continued accumulating sterling despite concerns about its safety. He argues that American expansion in 1927 encouraged speculation without producing the commodity-price increases needed to resolve Britain’s difficulties.

The Austrian and German banking crises intensified pressure on sterling. Rothbard interprets rescue lending and cheap money as postponements of necessary liquidation, while Britain’s departure from gold imposed losses on foreign holders of sterling reserves. Subsequent devaluations, exchange controls, and protectionist blocs broadened the consequences. His defense of enforceable redemption, flexible wages, and liquidation supplies the work’s evaluative framework: the crisis arose from coordinated attempts to evade adjustment while preserving the appearance of monetary restoration.