Indicators of Real Effective Exchange Rates of Major Trading Nations from 1922 to 1937

Abstract

From the beginning of the First World War to the beginning of the Second World War trade was affected by frequent, varied and unusually extensive shifts in international price relations and exchange rate parities. The First World War and the varying degrees of inflation caused by the war economy in every country gave rise to the first wave of extensive change. The situation was further distorted by the success in combatting inflation in some countries and the progressive deterioriation in the currency in others during the immediate postwar years. The violent fluctuations took place during a period when exchange rates were free to move. In the mid-twenties relative calm was restored when most of the major international currencies returned to the gold standard and the price trends steadied somewhat. But, of course, the inherent deviations from the price and exchange rate relations of the ‘halcyon’ prewar days in world trade continued to have an effect. Moreover, the calm was of short duration, and the world slump set off a second wave of hectic fluctuations in price and exchange rates, which only gradually ebbed after 1934. This was a period of arbitrary changes in exchange rates that were on principle fixed1, and it corrected or accentuated the results of the first wave.