Four - Dissolution of the Gold Bloc

Summary

Even more than the small Scandinavian states, Belgium, the Netherlands, and Switzerland failed to pursue a flexible-exchange-rate policy during the economic crisis of the 1930s. Although the devaluation of the British pound and a series of other currencies in September 1931 lowered the competitiveness of their exporting sectors, they were determined to defend the old monetary order. Not even devaluation of the US dollar in the spring of 1933 changed their minds. On the contrary, on 3 July 1933, Belgium, the Netherlands, and Switzerland joined France, Italy, and Poland in forming the “gold bloc” and signed a declaration stating that they would continue to maintain the gold standard at the current parities (Table 4.1). The statement was a reaction to Roosevelt's “bombshell message” to the London Economic Conference in which the U.S. president displayed no interest in international currency stabilization. Predictably, the plan of the gold bloc countries was unrealistic and highly damaging to their economies because maintenance of the gold standard required drastic deflationary measures. In March 1935, Belgium threw in the towel, introduced exchange-rate controls, and then devalued. Eighteen months later, France announced that it would take the same step; the Netherlands and Switzerland followed one day later. The devaluation liberated the Belgian, Dutch, and Swiss policymakers from the straitjacket of the gold standard and had immediate positive effects.

This episode raises three major issues. First, why did Belgium, the Netherlands, and Switzerland fail to devalue earlier?