This is not an exhaustive exposition, since I am not an endocrinologist, but merely a recitation of sufficient background information for the broad principles to be understood.
John Money describes the process which is often referred to as “the hormonal bath” in his paper The Development of Sexual Orientation (with American spelling corrected):-
“Genes determine directly whether the primitive gonadal cells in the embryo will become testicles or ovaries. After that the sex hormones take over; they govern the sexual differentiation of the foetal brain by determining whether its sexual pathways will be masculinised or not. This process is mainly prenatal but in human beings extends for some time past birth.
In the absence of special hormonal conditions, the brain is feminized. A foetus with neither ovaries nor testicles will ordinarily develop as sexuoerotically female. Masculine differentiation requires testicular hormones supplied either directly from the foetus's own testicles or from a substitute source; brain cells change testosterone into a metabolite which can be used as a masculinising agent. The foetal brain may be demasculinised without feminisation or defeminised without masculinisation. Both processes may also coexist to varying degrees, causing both masculine and feminine behaviour in the same person. In other words, sexuoeroticism may be bisexual...In human beings, hormones influence brain masculinisation even after birth. Beginning at the age of two weeks, the testes produce a surge of testosterone [the so-called “hormone bath”], which reaches the same level attained at puberty and then subsides totally within three months. No more testosterone is produced until sexual maturity.”
Now, I have encountered vague and unscientific claims that cross-dressing is somehow caused when either:-
(a) there is some unspecified interference with this “hormonal bath”, or
(b) if its “intended” effects are not properly achieved for some unspecified reason or another, and
(c) that either one or both of the foregoing circumstances is ultimately the cause of the child subsequently being born with the biological prerequisites or predisposition to become a cross-dresser.
Needless to say, I have encountered absolutely no evidence whatsoever to substantiate these claims.
Until such evidence is forthcoming, simply alleging that problems during the foetus’s hormonal bath period cause the child to exhibit cross-dressing behaviour during its subsequent growth and development after parturition seems specious in the extreme to me.
Admittedly, experiments have been done on sub-primate mammals which claims to have demonstrated that early hormonal differentiation of the brain largely determines mating behaviour. For example, by injecting a pregnant ewe with testosterone at a critical period during her pregnancy, it was claimed that the brain and behaviour of her lamb was masculinised in her womb and that the lamb subsequently grew up to be a “lesbian ewe”, in that its mating behaviour, including mating rivalry and the courtship ritual, was exactly like a ram's, although its ovaries were secreting oestrogen and not androgen. Apparently it even adopted the stance of a ram to urinate, and other sheep responded to it as if it were a normal ram.
Nevertheless, the foregoing is not conclusive evidence per se that cross-dressing is caused directly by something “going wrong” during this so-called hormonal bath, and neither are any of the other similar experiments done on guinea pigs, songbirds, or laboratory animals. for it is readily acknowledged that even in sub-primate mammals, mating behaviour can be modified by infant care and socialisation. Furthermore, in human beings and other primates, the generally held view is that the ultimate effects of prenatal hormones depend more extensively on social environment, beginning with parent-infant pair bonding. Thus it is true to say that hormonal history combines with upbringing to determine a primate’s sexual orientation.
There is yet another obstacle to the hormone bath being a valid explanation in its own right for cross-dressing, however, and one that is even more difficult for its proponents to overcome. Thus, even if there had been what might be termed “malfunctions” during the hormonal bath period and accepting for the sake of argument that these malfunctions caused the child in question to be born with the biological predisposition necessary to become a cross-dresser, that fails completely to explain how the child subsequently came to actualise itself as a cross-dresser. In other words, the hormonal bath theory is neither sufficient evidence of direct causation of cross-dressing per se, nor can its proponents prove that every foetus who had the alleged prerequisites to be a cross-dresser actualised them by becoming one after birth.
Until these issues are addressed, it seems to me that the so-called hormonal bath explanation for cross-dressing is simply an attempt by those who promulgate it to try to divert societal disapprobation of cross-dressing and to excuse the activities of cross-dressers themselves by suggesting that their behaviour is out of their control and therefore not their “fault”. Effectively, therefore, the so-called hormonal bath explanation for cross-dressing is a plea that cross-dressers should neither be held directly responsible for their behaviour, nor stigmatised for it. Nevertheless, I think that it is a mistake to see cross-dressing as something that has to be excused or apologised for - which is not to say that cross-dressers should overcompensate by proclaiming that it is something to be “proud” of, or a “special gift”, as some cross-dressers like to assert.
Frankly, it is no more necessary to attempt to explain why some people cross-dress than it is to do so regarding any other aspect of human behaviour, though the fact that so many feel the compulsive need to offer explanations for the world they find themselves in is an interesting phenomenon in its own right - and one which has not been satisfactorily answered either.
As the sage Lao Tzu said almost two-and-a-half millennia ago in the Tao Te Ching, Chapter 56:-
“He who knows does not speak.
He who speaks does not know.”
It is enough that one exists; simply experience it.