Interwar Monetary Chaos

After the First World War, governments tried to rebuild the gold standard, but conditions had changed. War debts and German reparations created huge cross-border obligations, Germany suffered hyperinflation in 1923, and Britain returned to gold in 1925 at its prewar rate, which overvalued the pound and hurt its exporters. The restored system relied heavily on American lending; when that dried up after 1928 and the Depression began, countries defending gold had to raise interest rates and cut spending just when their economies needed support.

Banking crises spread from Austria to Germany in 1931, and Britain left gold that September. Countries then devalued in turn and raised trade barriers, a pattern later called 'beggar-thy-neighbour'. Economic historians such as Barry Eichengreen have shown that countries which abandoned gold earlier generally recovered sooner, a lesson that shaped the designers of the postwar system.