The Gold Standard as Frame of Reference and the Pre-war Parities

The gold standard frame of reference was the basis for understanding of international finance in the nineteenth century and the twentieth century up to the Second World War. For most, it involved a commitment to the exchange rate parities used before the First World War. In the money-bargaining frame of reference, exchange rates need to reflect the relative purchasing powers of the national moneys to facilitate flows of international trade. Movements in prices during and after the war meant that the parities no longer fulfilled this requirement. When Britain and other countries resumed the pre-war parities in the mid-1920s, international money-bargaining chains were adversely affected. Countries with overvalued currencies became dependent on credit to maintain economic stability. Trade was further disrupted by credit repayment obligations, mostly to the United States, incurred during the First World War. The gold standard proved ineffective in dealing with trade deficits, since the United States, and other countries, neutralised inflows of gold in pursuit of domestic price stability. A gold exchange standard, introduced to offset shortages of gold, diminished the impact of the gold standard obligations on countries operating reserve currencies. The gold standard effectively gave way to a dollar standard.