The diplomacy of the dollar

Any stable system of international relations must be built on economic foundations, and the situation in the 1920s was no exception. Indeed, given the devastation brought upon the European economies, no postwar order could be conceived that did not include an economic agenda. How to restore the European economies and, through them, reestablish stable international economic relations was a key issue of the postwar period, the more so since, as noted earlier, the Versailles peace treaty had failed to address the issue squarely.

The Great War had cost Europe dearly; 9 million of its youths had died in war, another 20 million had been wounded, and more than $400 billion had been expended on battle. Inevitably, the European countries, victors and vanquished alike, suffered from a decline in industrial and agricultural production, which, combined with a severe inflation, caused social and political instability. Moreover, foreign exchange mechanisms remained confused. The system of multilateral trade and investment that had functioned before the war had been based on the gold standard and the principle of currency convertibility, both of which had been given up during the war and could not be automatically restored when the peace came. (Only the United States lifted the ban on gold shipments right after the war.)