France, Russia, Germany, and Austria-Hungary chose to abandon the gold standard, either to obtain the flexibility to fight the war more effectively or because they were economically too weak to mobilize militarily while remaining on gold. Britain and the United States, determined to uphold the exchange rate between the pound sterling and the dollar in the interest of easy borrowing, picked the former option. On the other hand, they could “go off” gold for the duration of the war, but thereby push the costs of regaining parity forward into an uncertain future. On the one hand, they could remain within the system at the cost of economic contraction and a prolonged paralysis of the credit system.
Given the demands of early wartime mobilization, states that were on the gold standard faced a choice. This necessitated an expansion of credit and a lowering of interest rates.Īs Europe mobilized for war in August 1914, these tasks came into conflict with one another. The other responsibility was to act as a lender of last resort for their banking system by supplying emergency liquidity. This required raising interest rates and keeping the total volume of money and credit under control, often with contractionary effects. The first was to defend their currency’s parity with gold and thereby the entire edifice of the international gold standard. In the event of a crisis central banks would find themselves torn between two responsibilities. The public and private elements of the system supported each other in stable times, but they could come into conflict in times of crisis. Moreover, in the decade before the war, the importance of large financial institutions (especially the large clearing banks of the City of London) grew as their gold reserves and lending behavior exercised a larger influence on global financial market conditions. Yet, the central banks whose coordination and mutual assistance kept the gold standard operational were nominally private entities. It was public insofar as it underpinned the national currencies of sovereign countries-59 nations were part of the system in July 1914-and set the boundaries within which private businesses, banks, and individuals could access trade, finance, and markets. Global finance in the first decade of the 20 th century was based on the gold standard, a hybrid public-private system. The Global Financial System before the War ↑
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