A Grotesque Caricature of the Gold Standard Caused the Great Depression

"[W]hat went down in the disaster and shame of the Great Depression was not the gold standard but its grotesque caricature in the form of the gold-exchange standard," observed Jacques Rueff in The Monetary Sin of the West, The Macmillan Company, New York, New York, 1972, p. 57.

Genoa Conference, 1922, courtesy of Wikipedia

The distinction between the classical gold standard and its "evil twin," the gold-exchange standard, continues to befuddle many monetary students and scholars.  There is a critical distinction to be made.  The gold standard was destroyed by World War I and thus could not possibly have been the cause of the Great Depression. 

Confusion in the public and even academic mind arose due to the institution of a "gold-exchange standard" in Genoa, in 1922, well described by the learned Mark Skousen as "a fatally flawed mixture of gold, flat money, and central banking." The pound sterling remained defined by and internationally convertible into gold. Other central banks could hold as a legal reserve gold-defined currencies rather than gold itself.

As described by the Wikipedia:

Among the propositions formulated at the conference was the proposal that central banks make a partial return to the Gold Standard. The Gold Standard had been dropped to print money to pay for the war. Central banks wanted a return to a gold-based economy for easing international trade and facilitating economic stability, but wanted a form of Gold Standard that "conserved" gold stocks - meaning that the gold remained in their vaults and day-to-day transactions were conducted with the representative paper notes.

This, rather than the classical gold standard, was the true precipitating cause of the Great Depression. 

Skousen wrote, in 1995, a perceptive critique of Prof. Eichengreen's Golden Fetters, published in The Freeman, from which this is extracted and bears reading in full:

Did the Gold Standard Cause the Great Depression?

The Postwar Monetary System Was Really a Gold-Exchange Standard

MAY 01, 1995 by MARK SKOUSEN

“Far from being synonymous with stability, the gold standard itself was the principal threat to financial stability and economic prosperity between the wars.”
—Barry Eichengreen, Golden Fetters (1992), p. 4

Berkeley Professor Barry Eichengreen has fueled the flames of anti-gold in his recent historical work, Golden Fetters: The Gold Standard and the Great Depression, 1919-1939 (Oxford University Press, 1992). Essentially, the author argues that (1) the international gold standard caused the Great Depression and (2) only after abandoning gold did the world economy recover. The book has been praised by colleagues, further dampening enthusiasm for the precious metal as an ideal monetary system.

It should be noted at the outset that Eichengreen, a Keynesian, is extremely biased against gold. In 1985, while teaching at Harvard, he edited a collection of essays entitled The Gold Standard in Theory and History (New York: Methuen, 1985), which pretends to offer a “complete picture” of how an international gold standard would operate, with pros and cons. Yet he failed to include a single article by a gold supporter! ...

Despite his extensive research and history, Eichengreen cannot crucify mankind upon a cross of gold. In reality, the blame for the Great Depression must be laid at the feet of Western leaders who blundered repeatedly in re-establishing an international monetary system following the First World War. Their mistake was establishing a fatally flawed mixture of gold, flat money, and central banking, known as the “gold exchange standard,” instead of returning to the “classical gold standard” that existed prior to the Great War.

As Lehrman Institute founder and Chairman Lewis E. Lehrman wrote in the Fall 2011 issue of The Intercollegiate Review:

In 1922, at the little-known post–World War I Monetary Conference of Genoa, the gold-exchange standard was officially embraced by academic and political elites. It was there that the dollar and the pound were confirmed as official reserve currencies, so that these national currencies might substitute for what was said to be a “scarcity” of gold. But there was no true scarcity—only overvalued national currencies caused by the inflation of World War I. The overvaluation, relative to the gold monetary standard, was maintained after World War I despite a doubling and tripling of the general price level in national currencies during the war. The greatest economist of the twentieth century, Jacques Rueff, warned in the 1920s of the dangers of this flawed official reserve currency system, designed “in camera” by the experts. Rueff predicted a collapse of this newly rigged official reserve currency system. And it did collapse, in 1929–1931, with catastrophic effects.