Definition of Inter-War Years and World War II

After World War I, in twenties, the exchange rates were allowed to fluctuate. This was the result of large fluctuations in currency values. Consequently, the trade could not develop. Once a currency became weak, it was further weakened because of speculative expectations. The reverse happened with strong currencies, because of these unwarranted fluctuations in exchange rates, the trade volumes did not grow in proportion to the growth in GNP. Many attempts were made to return to gold standard. U.S. could adopt it in 1919, U.K. in 1925 and France in 1925. U.K. fixed pre-war parity. In 1934, U.S. modified the gold standard by revising the price of gold (from $20.67/ounce to $35/ounce) at which the conversions could be effected.

Till World War II practically the above practice remained in force. The gold standard to which countries returned in mid twenties was different than which existed prior to 1914. The major difference was that instead of two international reserve assets, there were several currencies, which were convertible to gold and could be termed as reserves. Apart from pound, French Francs, U.S. dollar had also gained importance. Whenever French accumulated pound sterling, they used to convert these into gold. The second difference was that Britain had returned to gold standard with a decline in relative costs and prices.

In 1931 the crisis began with the failure of a branch banking institution in Austria called Ke Kredit Anstalt. Had British, U.S. and French banks did not cooperated, this could have a small impact on world exchange rate environment, but French banks did not cooperate. Germans withdrew their money from Austria leading to deepening of crisis led to dismemberment of Gold Standard.