Abstract
A number of previous works have demonstrated that the classical gold-standard regime represented a highly credible system, despite the fact that participating countries often did not play by the so-called rules of the game (see, for example, Chapter 2 in this volume and Officer, 1996). The reconciliation of these two apparently conflicting aspects (see Bordo and MacDonald, 1997 and Chapter 3 in this volume) appears to lie in the fact that currencies participating in the classical system were highly credible (in the sense of obeying the predictions of a target zone system [Svensson, 1994]), which allowed them limited scope to deviate from strict adherence to gold-standard rules. In contrast, certain key characteristics of the inter-war gold exchange standard would lead one to expect this system to have little credibility and therefore not offer participating countries the freedom to adopt measures which were at variance with the rules of the game. Several important factors may be cited in this regard.First, the inter-war gold standard had evolved into a gold exchange standard in which member countries held their reserves in gold bullion and (with the exception of the reserve centre countries, the United Kingdom and the United States, and later France) in foreign exchange. This increase in the ratio of central bank liabilities to the gold base increased the fragility of the international monetary system. It also reduced the disciplinary power of gold movements by increasing the possibility of sterilisation operations.