The proposed GES mitigated the deflationary pressure arising from the demand for gold as countries returned to the GS.
Also, devaluation of currencies that had depreciated significantly was recommended, in order to speed restoration of the GS. It was also recommended that independent central banks be set up in the newly independent countries and that the central banks should cooperate continuously in order to manage the system and be free from political pressure. Cooperation would regulate credit to maintain the currencies at par and to prevent undue fluctuations in the purchasing power of gold.
While all parties agreed on the need to return to gold, the resolutions fudged on just what the GS was and would be, and when and how countries off gold would get there. Furthermore, the French and the Belgians did not accept the need to devalue.17
Consequently, the progress at Genoa did not lead to a durable reconstruction of the system. The French role at the conference and policy thereafter illustrate how little real consensus existed among the conference participants and how opposition to the Genoa principles, present from the start, developed in the later 1920s. They, along with a number of other countries, were not in favour of devaluation and wanted a return to the pre-war parities. Furthermore, the French were against the adoption of the GES as it would give undue importance to the pound.18
The GC, however, had a long-run effect. The Bank of International Settlements (BIS) set up to manage the Young Plan became a forum for meetings of central bankers, which it continues to be to this day. These meetings helped develop common ideas on monetary policy and the role of central banks. Two of the ideas that have become very prominent are that central banks should be independent and that the only objective of central banks should be to control the rate of inflation.19
Section Cooperation after Genoa
There were two aspects to cooperation after the GC. One was attempts to deal with the vexatious issue of reparations. The former has been discussed earlier. The other was central bank cooperation, principally among the central banks of the US, the UK, France and Germany. The intensity of central bank cooperation over different periods has been measured.20
An index was developed on the basis of the state of international relation, prestige and independence of central banks and technicality of issues requiring cooperation. Usually, cooperation was the greatest in technical issues. Extent of cooperation in both the aggregate and the individual components was the lowest in the 1930s included in technical issues. The 1920s however, had a higher index of cooperation, even higher than in the pre-World War I period. But cooperation was found to be the highest in the period 1959–1973.
The GC recommended that a meeting among central bank heads be convened soon. But such a meeting did not take place. The 1920s witnessed a sharp struggle for supremacy between the US and Britain.21 To strengthen its position, Britain needed the adoption of the GES to bolster demand for sterling and thus retain the importance of London.22 It sought an expanding world economy fuelled by expansionary US policies as inflation in the US improved Britain’s competitiveness without having to undergo a debilitating deflation and also US government loans. Specifically, the British sought a favoured status in Russian development, a financial bloc centred in London, reduced war debts, regulated world capital flows and stabilised world prices.
The US on the contrary wanted private lending so that New York would replace London.23 It also wanted a pure GS so that the pound sterling would be at a disadvantage.24 It wanted repayment of its loans while raising tariffs that made it difficult for other countries to export to the US. The US was willing to lend to help other countries import from the US and thereby increasing their indebtedness to the US and providing the US with leverage. This US system stacked benefits, such as trade surpluses, stable prices and debt receipts, heavily in favour of the United States and assigned adjustment burdens such as trade deficits, deflation and debt payments primarily to Europe and the rest of the world.
Ultimately, Britain was forced by US policies and the actions by the important colonies to return to the GS at an overvalued ER which hindered the growth of its economy and circumscribed its role in the world economy.25 Return to the GS was necessary to pre-empt the colonies from adopting the GS before Britain which had fatally weakened the control of the London money market and the links between Britain and her colonies were replaced by links between the US and the colonies. This struggle continued in the fashioning of the post-Second World War international economic system culminating in the negotiations for the US loan to British after the conclusion of the World War II.
Norman and Strong had been meeting regularly to exchange information and views regarding the state of the international economy and measures to solve the problems. In 1924, Schacht, the head of the German central bank, also joined the meetings and from 1927 the Bank of France was also represented.26
Governor Strong of the NY Federal Bank supported the return of the UK to the GS.27 He tried to maintain a low interest rate in the US so that capital would not flow from the UK to the US. He did so sometimes even after opposition from other Federal Reserve Banks and sometimes even the central board located in Washington (Ahamed, 2009). But ultimately when inflationary pressures became too strong and also when pressure to curb the speculation on the New York stock exchange mounted, he was forced to raise interest rates.
After the stabilisation of the franc at an undervalued rate, the French ran surpluses and accumulated considerable amounts of gold. It soon became clear that the interests of the French central bank were aligned with those of the US central bank as both were running surpluses and accumulating gold.28 The German economy was also doing well after the acceptance of the Dawes Plan. In the two following years, US$1.5 billion flowed into Germany more than the US$500 million required for reparations payments (Ahamed, 2009) and this inflow fuelled rapid growth. However, Schacht remained concerned at the running up of German debt, and his interests seemed to align more with those of Norman.
In brief, by the mid-1920s all the major currencies were on gold. France and the US ran BOP surpluses, whereas Britain ran considerable deficits. While Germany ran surpluses, these were based on borrowings from the US and there were doubts about their sustainability. As far as growth was concerned, the US, France and Germany were all growing rapidly and only Britain was limping along.
Cooperation after the Onset of the Great Depression: The London Conference
When England went off the GS in September 1931, the ERs among major currencies became very unstable. Furthermore, at that time all the economies were suffering from severe reduction in economic activity and increase in unemployment. It was believed that governments needed to act cooperatively to stabilise ERs which would raise investor confidence and thus lead to a revival of the world economy. Also, cooperation was required to turn back the increased protectionism which was aggravating the problems faced by the trade sector.
The 33% depreciation in the sterling/dollar rate during the 16 months ended in December 1932 and the preferential imperial trading arrangements negotiated at Ottawa in July–August 1932 had allowed the BE to follow a more expansionary monetary policy and the domestic economy was beginning to recover. The only drawback was the continued burden of war-debt annual payments to the United States, equivalent to 12% of Britain’s 1932 exports.
When economic activity declined in France, the exigencies of remaining on the GS led the authorities to cut expenditures and maintain monetary discipline, which further weakened the domestic economy. Raised tariffs and quotas sought to bolster domestic industries from imports cheapened by currency depreciations and deflation abroad. A devaluation of the French franc became imperative and the French sought to persuade Britain and the US to accept the devaluation
