History lesson for the day

Gold standard from peak to crisis (1901–1932)

[edit] Suspending gold payments to fund the war

As in previous major wars under its gold standard, the British government suspended the convertibility of Bank of England notes to gold in 1914 to fund military operations during World War I. By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The government later called these notes banknotes, which are different from US Treasury notes. The United States government took similar measures. After the war, Germany, having lost much of its gold in reparations, could no longer coin gold "Reichsmarks" and moved to paper currency, although the Weimar Republic later introduced the "rentenmark" and later the gold-backed reichsmark in an effort to control hyperinflation.

As had happened after previous major wars, the UK was returned to the gold standard in 1925, by a somewhat reluctant Winston Churchill. Although a higher gold price and significant inflation had followed the wartime suspension, Churchill followed tradition by resuming conversion payments at the pre-war gold price. For five years prior to 1925 the gold price was managed downward to the pre-war level, causing deflation throughout those countries of the British Empire and Commonwealth using the Pound Sterling. But the rise in demand for gold for conversion payments that followed the similar European resumptions from 1925 to 1928 meant a further rise in demand for gold relative to goods and therefore the need for a lower price of goods because of the fixed rate of conversion from money to goods. Because of these price declines and predictable depressionary effects, the British government finally abandoned the standard September 20, 1931. Sweden abandoned the gold standard in October 1931; and other European nations soon followed. Even the U.S. government, which possessed most of the world's gold, moved to cushion the effects of the Great Depression by raising the official price of gold (from about $20 to $35 per ounce) and thereby substantially raising the equilibrium price level in 1933-4.