Due to the inability of countries to participate in the gold standard currency peg system: 1. Reducing the exchange rates in times of inflation to restore external competitiveness. On the contrary, the automatic treatment for inflation was the decrease in domestic demand as a result of the decline in gold stocks.
2. And its inability to print banknotes except in the presence of a gold cover…
The stability of the regime from 1870 to 1914 depended on political stability within each state and between states.
The relationship is very direct
In times of war, a large part of the state’s gold reserves is depleted to finance military spending. With the stock nearly running out, the governments of countries put pressure on the central banks to print banknotes in quantities that exceed the gold cover making it difficult to maintain the fixed exchange rate.
This is what happened with the outbreak of war in 1914, especially in the European countries where the war began.
As America remained neutral until 1917, gold flowed from Europe (the conflict countries) to the United States of America (the stable country), and America was able to maintain the gold peg system during most of the twenties despite the restrictions on the export of gold.
After America was a country indebted to the United Kingdom with huge quantities of gold in return for importing goods before the war, America became a creditor country, considering it to lend huge quantities of gold to its allies in Europe, led by the United Kingdom.
After the end of the war in 1918, the superpowers within the system were divided into three sections: 1. The United States possesses a huge stock of gold, which helped a large growth in the money supply and support economic activity during the twenties, a period known as the Roaring 20s that unfortunately ended in the Great Depression.
2. The United Kingdom has a large debt repayable to America in the form of gold, which eventually pushed it to reduce the exchange rate against the dollar in 1931. It was assumed that the United Kingdom would be able to pay these debts if Germany could pay the war reparations to it.
3. Finally, Germany after the war was a country burdened with huge reparations to the victorious countries in the war (war reparations), and these payments led to the depletion of its stock of gold. As the pressure escalated, the Bundesbank was forced to print huge amounts of banknotes, causing one of the classics of hyperinflation during the 1920s.
Important lesson From 1914 until the emergence of a new world order in 1944, the intense conflict between:
1. Stability of foreign transactions on the one hand by fixing currencies to gold and to each other
2. The stability of the internal economy, on the other hand, fluctuates sharply between a great depression in times of gold scarcity (because it leads to restrictions on printing banknotes) and prosperity in times of gold abundance.
Quite simply, the internal economy became at the mercy of the sharp fluctuation in the movement of gold between countries after the war. Whenever gold settled in a country, the state was able to increase the money supply and revive the economy and vice versa.