Was Adherence to the Gold Standard a "Good Housekeeping Seal of Approval" During the Interwar Period?
World War I dramatically altered the world's financial landscape. Most countries left the gold standard, and New York replaced London as the major lender in world capital markets. This paper discusses how the gold exchange standard was reconstructed in the 1920s. We show that the U.S. capital market viewed returning to the gold standard as a signal of financial rectitude, what we have referred to in other work as a 'Good Housekeeping Seal of Approval.' When countries returned to gold, especially when they did so at the prewar parity, they were rewarded with the ability to borrow at substantially lower interest rates. Other signals of financial rectitude, such as small fiscal deficits, apparently carried little weight with lenders.
Published: Engerman, Stanley L., Philip T. Hoffman, Jean-Laurent Rosenthal, and Kenneth Sokoloff (eds.) Finance, Intermediaries, and Economic Development. New York: Cambridge University Press, 2003.