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What were the major changes in the international economy after 1914? Why did the gold standard work well before 1914 but not in the interwar period?

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Introduction

What were the major changes in the international economy after 1914? Why did the gold standard work well before 1914 but not in the interwar period? "Trade is the language which prevents people from cutting each other's throat" -- Bruce Chatwin "War is hell" -- William Tecumseh Sherman Conventional wisdom in economic history suggests that conflict between countries can be extremely disruptive of economic activity, especially international trade The world war changed the course of the international economy. The damage of life and physical resources all over the world were unprecedented in history. The economic and political boundaries all over the world were altered. The years before 1914 are often described as the Golden Age which the war had destroyed. They war had an immediate impact on the world economy. The gold standard, which had been the backbone of the world economy for many years, had to be suspended as huge amounts of money had to be printed to finance the war. From 1871 to 1914, the gold standard was at its pinnacle1. During this period near-ideal political conditions existed in the world. Governments worked very well together to make the system work, but this all changed forever with the outbreak of the Great War in 1914. ...read more.

Middle

Most of the major economies of the world adopted the gold standard before the First World War. As a result they established fixed exchange rates with each other. Appendix shows a list of countries that followed the gold standard in the pre war as well as the inter war period. The working of the classical gold standard can be best described by the price-specie mechanism. According to the "rules of the [gold-standard] game," central banks were supposed to reinforce, rather than "sterilize" (moderate or eliminate) or ignore, the effect of gold flows on the monetary supply. A trade deficit would cause gold to flow out of the country and hence decreases the money supply of an economy and vice versa. This would further lead to a fall in domestic prices as a result of which exports become cheaper and imports become expensive and hence the deficit would be corrected. But in the actual world gold flows were rare and the payment flow included investment and not just payment for trade i.e. the gold flows depended upon the total balance of payments and not just trade balance. Hence a country with a negative balance of payments would increase its interest rates so as to reduce imports and promote foreign direct investment. ...read more.

Conclusion

and France with large reserves of gold. * The correction of the balance of payments was hindered by powerful trade unions which helped to keep both unemployment and wages high in the British export industry. * In the pre war period, London was the one dominant financial centre; in the interwar period it was joined by New York. Both private and official holdings of foreign currency could shift among the two centres, as interest-rate differentials and confidence levels altered. * The credibility in authorities' commitment to the gold standard was not absolute. Convertibility risk and exchange risk could be well above zero, and currency speculation could be destabilizing rather than stabilizing. * There was no crucial leadership role provided by the Bank of England, and central-bank cooperation was inadequate to establish credibility in the commitment to currency convertibility. The "international gold standard," defined as the period of time during which all four core countries were on the gold standard, existed from 1879 to 1914 in the classical period and from 1926 or 1928 to 1931 in the interwar period. The interwar gold standard was a dismal failure in longevity, as well as in its association with the greatest depression the world has known. ...read more.

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