Modes of going back to the Gold Standard

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As World War I brought countries to abandon the two major rules of the Gold Standard game, exchange rate stability and currency convertibility, many European currencies became overvalued due excess money printing during the war. Eventually, countries returned back to the international monetary standard. The three major ways states went back on to gold was through currency reform, stabilization and restoration. In short (because a post has already been done on currency reform), countries undertook currency reform by adopting a completely new currency and backing it by gold. States that experienced hyperinflation (Germany, Austria, Poland) were the main countries to undergo currency reform.

With currency stabilization, the currency is devalued so that the official price is brought down, in-line with the market price. Practically speaking, the government would have to increase the money supply to devalue the currency, commonly performed by lowering interest rates. Belgium, France, and Italy all underwent this process in the mid-1920s. Although this policy signals a weakness in a country’s commitment to the gold standard, it also safeguards the country from deflation, which often has the effect of increasing unemployment.

Finally, that last principal method that countries adopted to return to the gold standard was restoration. Britain, the major example in this case, returned its currency to the pre-war parity by revaluing its currency. In order to get its currency in-line with its gold reserves at the pre-war parity, the Bank of England had to contract the money supply. This signaled a very strong commitment to the gold standard, one that was arguably centered in London. However, it also led to deflation, causing unemployment and a mini economic crisis, and eventually leading to a balance of payments deficit.