The Great War, the Fall of the Gold Standard and Bretton Woods

In this chapter, we review briefly the monetary experience of theinterwar years, the critical discussions on the adjustment mechanismand the gold standard, including reform proposals as well as some newissues that came to the fore during this period.Major developments in the pure theory of trade occurred during theinterwar years; this flowering of new concepts and analytical techniquesgerminated from ideas internal to the discipline itself. In otherwords, it was a natural process of growth in response to theoreticalneeds. The monetary side of international economics was alsoenormously enriched during this period, but here the stimulus camefrom practical problems thrown up by the dislocation and monetaryinstability that characterised the interwar years.In the previous chapter we dealt with the clarification of the transferproblem that resulted from the discussion on German reparations.Here we take up two other issues that engaged the attention ofeconomists: (i) the purchasing-power parity (PPP) theory of thedetermination of equilibrium exchange rates, and (ii) the possibilitiesand prospects of international monetary reform. The first was relatedto an immediate problem - What should be the new parities forcountries which because of wartime upheavals had left the goldstandard? - but which became a basic assumption of the laterMABP. In view of current concern with flexible exchange rates, weconclude the PPP discussion with a review of the French experiencewith floating rates in the 1920s. The second concern led, of course, tothe work of Keynes and his American opposite number, Harry DexterWhite, in the setting-up of the postwar international monetary orderinstitutionalised in the International Monetary Fund (IMF) and theWorld Bank. During this period also, Keynes developed his closedeconomymacroeconomic theory and that soon led to a reconsiderationof the balance of payments mechanism, i.e. multiplier analysis.