Genuine Gold Standard vs Gold-Exchange Standard (Pound Sterling) in the Years Leading to the Great Depression
Under the genuine gold standard, inflating the number of pounds in circulation would cause pounds to flow into the hands of other countries, which would demand gold in redemption. Therefore gold would move out of British banks and pressure would be put on Britain to end its inflation and to contract credit.
But, under the gold-exchange standard, the process was very different. If Britain inflated the number of pounds in circulation, the result was a deficit in the balance of trade and the sterling balances piling up in the accounts of other nations. But now that these nations have been induced to use pounds as their reserves rather than gold, these nations, instead of redeeming the pounds in gold, would inflate, and pyramid a multiple of their increased stock of pounds.
Thus, instead of checking inflation, a gold-exchange standard encourages all countries to inflate on top of their increased supply of pounds. Britain is now able to “export” her inflation to other nations without paying a price.
Comment: Today, because the last gold-exchange standard which ended in 1971 was based on the USD, the USD is still considered the reserve currency of the world. But without gold in the picture, there is no limit to the amount of USD that can be created by the Fed. And the United States is still able to export its inflation. It will all fall apart when countries lose confidence in the USD, which is currently starting to happen.