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Under fixed gold parities, a monetary contraction in one major country forced others to tighten too. When the US raised interest rates and pulled capital home, deficit countries lost gold reserves and had to deflate to defend their parities. The shock spread along the channels of the gold standard itself, so the system turned a national downturn into a global one.
Countries that left gold early, such as Britain and Scandinavia in 1931, stopped deflating and began recovering sooner. Countries that held on, like the gold bloc led by France until 1935–36, stayed depressed longest. Leaving gold freed monetary policy to reflate, so the timing of exit predicts the timing of recovery.
The classical pre-1914 gold standard worked because markets believed governments would put convertibility first, so capital flows stabilized the system instead of destabilizing it. When one country came under pressure, central banks cooperated to support it. Once either pillar weakened, the same institution became fragile.
After World War I, wider suffrage, labor unions, and sticky wages made deflation to defend a parity politically costly and less believable. Markets expected governments might devalue rather than accept unemployment, so speculative capital flight began to attack weak currencies. The rules were unchanged, but the political base under them had shifted.
Under the interwar gold standard, countries losing gold were forced to contract, but countries gaining gold faced no pressure to expand. France and the US sterilized their large gold inflows instead of letting them raise their money supplies. This drained reserves from everyone else and built a deflationary bias into the whole system.
Central bankers and politicians treated gold convertibility as the foundation of financial rectitude and saw devaluation as a path to chaos. This belief led them to answer banking panics and falling prices with more tightening, and to rule out reflation. The ideology that made the system credible also stopped leaders from leaving it when it had become destructive.