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The Sterling-Dollar-Franc Triangle: Monetary Diplomacy 1929–1937

Published online by Cambridge University Press:  13 June 2011

Kenneth A. Oye
Kenneth A. Oye
Affiliation:
Princeton University
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Abstract

The late interwar years encompass a full spectrum of international monetary conflict and cooperation. Why did Great Britain, France, and the United States cooperate in some periods and not in others? First, the transience of monetary cooperation and conflict is explained in part by inherent characteristics of gold exchange and floating monetary systems. Second, environmental changes—swings between prosperity and depression, between peace and the threat of war, and between monetary orthodoxy and inflationist heresy—altered the strategic setting confronting the central monetary powers. Third, the actions of governments both followed from and shaped the circumstances that they confronted. Through strategies of composition across issues and decomposition across time and actors, nations deliberately fostered the emergence of cooperation by altering the context of monetary diplomacy.

Type
Part III: Applications to Economic Affairs
Information
World Politics , Volume 38 , Issue 1 , October 1985 , pp. 173 - 199
Copyright
Copyright © Trustees of Princeton University 1985

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References

1 See Figure 1: Exchange Rates, 1920–1939, for the value of sterling and the franc relative to the dollar. Between 1920 and 1925, the dollar was tied to gold, while sterling and the franc floated. Uncertainty over the ultimate disposition of the controversies over war debts and reparations, a shortage of international liquidity, national differences in postwar inflation, and the burdens of postwar reconstruction delayed what all parties viewed as the inevitable restoration of a gold standard.

2 Proponents of the theory of hegemonic stability maintain that a fundamental exogenous factor, the international distribution of power, explains economic cooperation and conflict. They contrast the turbulence of the interwar years with the tranquility of British and American hegemonic orders, and argue that concentration of power is a necessary, though not sufficient, condition for openness. Revisionists have challenged the conventional interpretations of the late 19th and late 20th centuries. As this essay suggests, interwar economic cooperation was more extensive than is commonly realized. In any event, modest changes in power distribution during the brief interwar period cannot account for the oscillations between conflict and cooperation at that time. On hegemonic stability, see Krasner, Stephen D., “State Power and the Structure of International Trade,” World Politics 28 (April 1976), 317CrossRefGoogle Scholar–47; Kindleberger, Charles P., The World in Depression: 1929–1939 (Berkeley. University of California Press, 1973Google Scholar); and Gilpin, Robert, U.S. Power and the Multinational Corporation (New York: Basic Books, 1975), 258CrossRefGoogle Scholar–59. For contrasting views, see McKeown, Timothy, “Hegemonic Stability Theory and 19th-century Tariff Levels in Europe,” International Organization 37 (Winter 1983), 73–91CrossRefGoogle Scholar; Oye, Kenneth A., “Belief Systems, Bargaining, and Breakdown: International Political Economy 1929–1936,” Ph.D. diss. (Harvard University, 1983Google Scholar); Calleo, David, “The Historiography of the Interwar Period: Reconsiderations,” in Rowland, Benjamin, ed., Balance of Power or Hegemony: The Interwar Monetary System (New York: New York University Press, 1976Google Scholar). For a conditional refutation of the theory of hegemonic stability, see Keohane, Robert, After Hegemony (Princeton: Princeton University Press, 1984Google Scholar).

3 Calculated from “The Adequacy of Monetary Reserves,” IMF Staff Papers 3 (1953–1954), Table 1, p. 201. Under a pure gold standard, reserves of all states consist entirely of gold; exchange disequilibria trigger gold shipments that reduce the national money supply and restore equilibrium to foreign exchange markets. Peter Lindert notes that leading currencies were an important component of official reserve assets under the often idealized “pure” gold standard. See his Key Currencies and Gold: 1900–1913, Princeton Studies in International Finance, No. 24 (Princeton: Princeton University, International Finance Section, 1969).

4 As Figure I indicates, exchange rates across currencies in late 1936 were not substantially different from exchange rates in early 1931.

5 This situation is also characteristic of other international monetary systems. Under the Bretton Woods system, the United States was expected to maintain full convertibility between the dollar and gold, and the monetary authorities of other states were encouraged to accept the dollar as a portion of their international reserves. American payments deficits provided international liquidity. Under the current defacto dollar standard, the international money supply is determined largely by the balance of payments of the United States. Dollars put into international circulation by American payments deficits are held and used by national monetary authorities and private banks, corporations, and individuals engaged in trade and finance. International liquidity may also be derived from other sources. Under a pure gold standard, where national currencies are backed by 100% gold cover, the international money supply would be determined strictly by the availability of newly mined gold. Under a pure Special Drawing Rights (S.D.R.) or European Currency Unit (E.C.U.) standard, international or regional money supply would be determined strictly by the collective decisions of members of the International Monetary Fund (I.M.F.) or European Monetary System (E.M.S.). These alternative approaches to the creation of liquidity remain ideal types. Neither will be treated in this essay.

6 See Triffin, , Gold and the Dollar Crisis (New Haven: Yale University Press, 1961Google Scholar), 3–14. For an argument that the recognition of mutual interdependence on the part of key participants in the international monetary system, coupled with a desire to preserve the system, may impart a much greater degree of endurance to the system than Triffin suggests, see Lawrence H. Officer and Thomas D. Willett, “Reserve-Asset Preferences and the Confidence Problem in the Crisis Zone,” Quarterly Journal of Economics 83 (November 1969), 688–95.

7 On the Norman-Keynes exchange, see Sayers, R. S., The Bank of England 1811–1944, Vols. I, II, and Appendixes (Cambridge: Cambridge University Press, 1976), 172Google Scholar–87. For the definitive economic analysis of the effects of British international monetary policy during this period, see Alec Cairncross and Eichengreen, Barry, Sterling in Decline (Cambridge: Cambridge University Press, 1984Google Scholar).

8 The best accounts of this episode are found in Sayers (fn. 7), II, 397–99, and in Clarke, Stephen V. O., Central Bank Cooperation 1924–1931 (New York: Federal Reserve Bank New York, 1967), 182–219Google Scholar.

9 The British economic malaise was caused, in part, by the overvaluation of sterling. On structural causes of sluggish British economic performance, see Mowat, Charles Loch, Britain Between the Wars: 1918–1940 (Chicago: University of Chicago Press, 1955Google Scholar), chaps. 5–7.

10 To place these rates in real perspective, remember that domestic prices were falling rapidly during this period. The GNP implicit price deflator for 1929 is 30% higher than the deflator for 1933. See Economic Report of the President 1982 (Washington, DC: GPO, 1982Google Scholar), Table B-3. Real interest rates did not approach these levels again until 1981.

11 Policy coordination clearly served the preferences of both the French and American governments. I do not argue, however, that preferences and real interests coincided. The two-point increase in the New York discount rate in 1931 unquestionably intensified the Depression. This account of Franco-American monetary diplomacy in 1931 is drawn largely from Brown, William Adams, The International Gold Standard Reinterpreted (New York: National Bureau of Economic Research, 1940), 1179Google Scholar–82, and Kindleberger (fn. 2), 168.

12 On domestic problems associated with raising prices through production restraints, see Hawley, Ellis W., The New Deal and the Problem of Monopoly: A Study in Economic Ambivalence (Princeton: Princeton University Press, 1966CrossRefGoogle Scholar). For a defense of price raising through gold purchasing, see Warren, George F. and Pearson, Frank A., Gold and Prices (New York: John Wiley & Sons, 1935Google Scholar).

13 See Feis, Herbert, 1933: Characters in Crisis (Boston: Little, Brown, 1966), 178–258Google Scholar, for a sensitive account of these episodes. See also Stephen V. O. Clarke, The Reconstruction of the International Monetary System: The Attempts of 1922 and 1933, Princeton Studies in International Finance, No. 33 (Princeton: Princeton University, International Finance Section, 1973), 19–39.

14 For conventional analyses of economic inefficiency of interwar bilateralism and discrimination, see League of Nations, International Currency Experience: Lessons of the Period (Geneva: League of Nations, 1944), 162Google Scholar–89, and Ellis, Howard S., Exchange Control in Central Europe (Cambridge: Harvard University Press, 1941Google Scholar). For analysis of the mutual economic benefits of German and East European exchange controls, see Child, Frank, The Theory and Practice of Exchange Control in Germany: A Study of Monopolistic Exploitation in International Markets (The Hague: Martinus Nijhoff, 1958CrossRefGoogle Scholar).

15 U.K. Treasury Papers, Memorandum, Richard Hopkins to Neville Chamberlain, December 8, 1931. Cited in Drummond, Ian M., The Floating Pound and the Sterling Area (Cambridge: Cambridge University Press, 1981), 10CrossRefGoogle Scholar.

16 The British also rejected a somewhat narrowly self-serving French suggestion that the Bank of England convert Bank of France sterling reserves into gold at the old parity, to the detriment of other central banks.

17 Britain displayed some ambivalence on the desirability of appearing to urge other countries to join the sterling bloc. To disavow responsibility for the security and convertibility of foreign sterling reserves, British officials sought to appear “studiously aloof on the issue. See Drummond, (fn. 15), 9. In fact, Britain used commercial and financial leverage to encourage others to join the sterling bloc.

18 For provisions of the Abnormal Importations Act and the Ottawa Agreements, see Gordon, Margaret S., Barriers to World Trade: A Study of Recent Commercial Policy (New York: Macmillan, 1941Google Scholar); Jones, Joseph M., Tariff Retaliation: Repercussions of the Hawley-Smoot Bill (Philadelphia: University of Pennsylvania Press, 1934CrossRefGoogle Scholar); and League of Nations, World Economic Survey 1930–31 (Geneva: League of Nations, 1931Google Scholar), and World Economic Survey 1931–32 (Geneva: League of Nations, 1932Google Scholar).

19 See Richardson, J. Henry, British Foreign Economic Policy (New York: Macmillan, 1936), 69–75Google Scholar, and Brown (fn. 11), II, 1135.

20 This account is drawn from Drummond (fn. 15), 8 and 10; Brown (fn. 11), II, 1135 and 1167; and Richardson (fn. 19), 69–75.

21 Argentina was to make available sterling remittances equal to exchange derived from Argentine sales in Britain after retaining a “reasonable sum” to service other foreign obligations.

22 The terms of the agreements are drawn from Richardson (fn. 19), 106–08; Brown (fn. 11), II, 1167–68; and Gravil, Roger, The Anglo-Argentine Connection: 1900–1939 (Boulder, CO: Westview, 1985), 179–212Google Scholar.

23 The United States sought to privatize benefits associated with restoration of full convertibility between the dollar and gold. Countries on the gold standard were free to convert dollars into gold, while members of the sterling bloc were denied conversion rights. However, because the British were free to trade in the gold-backed Poincare franc, the United States could not effectively privatize its international monetary policy.

24 Einzig, Paul, The Theory of Foreign Exchange (London: Macmillan, 1937Google Scholar), insert following p. 286.

25 Wolfe, Martin, The French Franc Between the Wars, 1919–1939 (New York: Columbia University Press, 1951), 144Google Scholar.

26 On Feis, see National Archives, Record Group 59, 800.5151/88½, “Economic Stabilization,” 4th Draft, pp. 7–8. On Chamberlain, see Sayres (fn. 7), II, 478–79. For general discussions of the consequences of exchange-rate misalignment, see Morton, Walter A., British Finance 1930–1940 (Madison: University of Wisconsin Press, 1943Google Scholar); League of Nations (fn. 14).

27 Morgenthau Diaries, September 18, 1936, Book 32, p. 10, cited in Scott Eric Ratner, “The Politics of Quiet Diplomacy: Henry Morgenthau Jr. and the Efforts of the American Jewish Establishment to Aid the Jewish Victims of Nazism” B.A. thesis (Princeton University, 1984), 121.

28 On French efforts to reinforce perceptions of the connection between security and economic issues, see Sayers (fn. 7), 476–77, and Wolfe (fn. 25), 145–46.

29 To the Deputy Governor of the Bank of France, the agreement was “ni accord, ni entente, uniquement co-operation journaliere.” To an official British operator, it was “flimsy and ineffective.” Quoted in Sayers (fn. 7), II, 480 and 482. For a superb account of how agreement was reached, see Clarke, Stephen V. O., Exchange-Rate Stabilization in the Mid-igjos: Negotiating the Tripartite Agreement, Princeton Studies in International Finance, No. 41 (Princeton: Princeton University, International Finance Section, 1977Google Scholar). For trenchant commentary on the weaknesses of the Tripartite Stabilization Agreement, see Drum-mond, Ian M., London, Washington, and the Management of the Franc, 1936–39, Princeton Studies in International Finance, No. 45 (Princeton: International Finance Section, 1979Google Scholar).

30 Einzig (fn. 24), 480; Wolfe (fn. 25), 138–71.

31 Because New Deal capital controls were never tested by strong capital outflows, the American experience was of limited relevance to France.

32 This account is drawn from Drummond (fn. 29), and Wolfe (fn. 25).

33 See especially Kindleberger (fn. 11), 26–28.