International Monetary Stability Between the Wars: Structural Flaws or Misguided Policies?

This paper examines the international monetary system between the Wars. It confirms the generality of several widely held interpretations of recent experience with floating exchange rates. There is a positive association between nominal exchange rate flexibility and nominal exchange rate variability, and between nominal and real exchange rate variability. But policies which reduce nominal exchange rate variability do not guarantee a proportionate reduction in nominal exchange rate risk or in real exchange rate variability and unpredictability without a credible commitment to a stable intervention rule.The paper then considers four potential explanations for the collapse of the fixed rate regime of 1926-3l: failure to play by the `rules of the game'; inadequate international economic leadership by the United States; inadequate cooperation among the leading Gold Standard countries; and structural features of a system in which reserves comprised both gold and foreign exchange. It concludes by assessing the role of the international monetary system in the Great Depression.