investors. Countries moved on to the gold standard (GS) as soon as they could in the expectation that this would improve the situation. But this required governments to manage the public accounts responsibly, i.e. not run large deficits. But cutbacks in public expenditures had a recessionary effect on the economy.
The countries cooperated at various levels to resolve these issues. The major areas where cooperation was attempted were as follows: (i) establishment of central banks in the newly independent countries, (ii) reparations and (iii) economic recovery, fundamentally centred around ER stability. As we shall see in the subsequent sections, some of these attempts succeeded. Cooperation was most successful in tackling the problems of establishing central banks in the newly independent countries and in tackling the problem of reparations. It was much less successful in tackling the broader macroeconomic issues.
Cooperation in Setting Up of Central Banks
Many of the newly independent countries formed after the collapse of the Austro-Hungarian Empire needed to set up central banks. These central banks needed a stock of gold as reserves and these could only be provided through loans which could only be raised with the help of the older central banks, mainly the English and French central banks. Furthermore, they needed technical advice on the role of central banks and their mode of operation. There were differences of opinion as to who would provide the technical advice and the loans and a struggle for power also ensued among the central banks of the three major countries. To circumvent this competition, the assistance was provided under the aegis of the League of Nations. The League came up with an almost standard formula through its Economic and Financial Organization of the League of Nations set up in 1920 (Decorzant and Flores, 2012).3 A new bank of issue was established with the help of a foreign loan which was secured on the basis of certain revenues. A programme of financial reforms was implemented, and a neutral controller general was appointed by the League Council. Usually, the loan was raised in England and France, mainly the former. Advice was provided by a controller general appointed by the League, often from England. In the case of Austria, a government guarantee for the loan was necessary.4 But this was thought to be unnecessary in the other cases.
Reparations
Reparations were important in creating uncertainty and doubt in the 1920s. Astronomical sums were thrown around at Versailles. The decision was postponed. Ultimately, the 1921 London Schedule of Payments required Germany to pay 132 billion gold marks (US$33 billion) in reparations to cover civilian damage caused during the war (Marks, 1978).5 Immediately 20 billion gold marks were to be paid, but only 8 billion was paid. The London schedule divided reparations into three groups, A, B and C. A was the leftover amount of 12 billion and B was 38 billion golden marks. The rest was designated as C, and none expected this to be paid.6 Ultimately, just over 20 billion gold marks or $5 billion was paid. Most of these payments were financed by foreign loans, many of which were eventually repudiated by Hitler (Marks, 1978).7
Reparation payments were progressively reduced.8 The Dawes Plan managed to finally get French agreement to a reparations deal after the fiasco of the occupation of the Rhineland in 1923.9 The United States loaned $200,000,000 to Germany to “prime the pump,” and Germany paid 1,000,000,000–2,500,000,000 marks in reparations for 5 years.10 But it soon became obvious that Germany would not be able to pay the required amounts. The Young Commission was set up in 1929. The Young Plan further reduced payments by about 20%. Also, of the annual payment of US$473 million, one-third had to be paid; the rest could be postponed, but would incur interest. Most of the payments were financed by a consortium of American investment banks coordinated by J.P. Morgan & Co. In the end, Germany received more money in loans than it ever paid in reparations; thus, the cost of repairing war damage was borne ultimately by the taxpayers, investors and consumers of the Allied nations and the United States.
There was considerable discussion and cooperation at various levels. But these did not satisfactorily resolve the issues. There were continuous alarms, and the performance of the world economy during this period was poor. Some analysts have attributed the problems to the lack of a hegemon. According to this idea, a hegemon would provide the public good of monetary stability and other countries would benefit from this stability (Kindleberger, 1973).11 Such analysts argue that in the pre-World War I period, the UK had been the hegemon and the Bank of England (BE) had acted to ensure the smooth working of the GS. Eichengreen (1996, 1998) challenged this hegemonic interpretation of the GS, arguing that the international monetary system was essentially cooperative. The BE depended on lending from other central banks, the Bank of France in particular, to stabilize the system in times of crisis.12 The extent of cooperation among central banks has been questioned. Cooperative efforts, Gallarotti (1995, Ch. 3)13 argues, were intermittent, occurred on an ad hoc basis when crises threatened, were bilateral rather than systemic and were effected in order to protect domestic markets.14
Great Britain was too weakened by the war to act as a hegemon any longer, and the US, which was now the most powerful economy, chose not to act to stabilise the world economy. Others argue that the BE could no longer stabilise the world economy because structural changes prevented it from playing that role (De Cecco, 1984). Still others have held that the reparations issue vitiated the atmosphere for cooperation or that they imposed an unbearable burden on Germany, which weakened it and the entire world economy.
Attempts at International Cooperation to Stabilise the Economy
Genoa Conference
The Genoa Conference (GC) was held in 1922 to find a cooperative solution to the ills of the world economy, particularly the European economies. However, the major powers had very different expectations. Also, political and economic objectives were intertwined. The British and the French had called for the conference. The French were mainly interested in ensuring their security from Germany. They sought to cripple Germany’s power and reparations were one way to do so; thus, their main concern was that reparations be paid to them and that there would be no reduction in the amount of reparations.
The British sought a revival of the world economy by agreement on monetary measures and the reintegration of Germany, the Soviet Union and other East European economies into the world economy as this would boost British exports and so the economy. The Soviets also hoped for their reintegration into the world economy. The US, expecting that they would be pressurised to write-down the war debts owing to them, did not officially attend.15 Furthermore, the US economy seemed to have overcome its earlier recession and was now growing rapidly so that European revival seemed less necessary for its own prosperity. Furthermore, they had not recognised the Soviet Union and did not want to officially attend a conference with them.
The UK was most interested in the revival of Germany and Russia. Negotiations foundered when France and Belgium, pre-revolutionary Russia’s main creditors, insisted on the repayment of pre-war loans and restitution of confiscated foreign-owned property in Soviet Russia. The US was also unwilling to deal with Russia unless it recognised its responsibility for the tsarist debts and met other conditions which essentially meant a repudiation of communism. On the contrary, Russia wanted to be reintegrated economically without accepting liability for tsarist debts and without any political and economic strings.
Genoa seemed to provide a map for the reconstruction of the international monetary system. The draft resolutions, piloted by the British Chairman Hawtrey, sought to both increase the supply of gold available to the central banks and reduce the demand. Withdrawal of gold coinage meant that the entire amount of available gold was at the disposal of the central banks. The demand for gold was sought to be reduced, through adoption of the GES.16 Countries held their reserves in the form of other currencies, usually the
