Fernando Teixeira dos Santos
After World War I, and following the recommendations of the Brussels (1920) and Genoa (1922) Conferences, several European countries returned to the gold standard. After the inflationary experiences during the war and post-war years, it was expected that the gold standard would provide for long-run price stability, exchange rate stability and promote conditions favorable to the development of international trade and finance. Sweden was the first European country to return to a de facto gold standard, in 1922, which became de jure in 1924, at the pre-war parity. Among the belligerent countries, Germany was the first one to return to gold convertibility, in 1924, Great Britain returned to the gold standard in 1925 at the pre-war parity, and France returned in 1928.
By a decree of June 1931, Portugal decided to adopt the gold standard as of July of that year, after a forty-year suspension of the convertibility of her currency. While the major Western European countries were under some kind of gold standard until World War I, Portugal had an inconvertible regime between 1891 and 1931. Portugal had suspended convertibility in 1891 in the aftermath of a financial crisis. 1 The return to convertibility however, had represented an important goal for Portugal's authorities before the war. The importance of the relations between Portugal and Great Britain, and the international prestige of the gold standard in the promotion of long-run price stability and exchange rate stability, explain the relevance of such goals to the Portuguese authorities.
Following a period of exchange rate instability, in 1906-07 the Portuguese currency stabilized at a level close to its former parity (£1=4.50 escudos). Government budget surpluses during the 1912/13 and 1913/14 fiscal years (the first Afonso Costa administration) made conditions favorable for a return to the gold standard. 2 However, the outbreak of war and Portuguese participation in the conflict did not allow such an outcome.
The war period, and resulting financing needs, generated significant public budget deficits, partially alleviated by loans from the Bank of England. 3 After