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POLI 243 Lecture 18 Notes
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POLI 243 Lecture 18 Notes: Britain's Return to Gold
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Lecture 18 - March 20th, 2019Britain’s Return to Gold in 1925
Overvaluing the Pound
James Morrison “1925 Return to gold”
2 dimensions to this puzzle: 1. the decision to go back on gold (what this means /refers to) 2.
Overvalued the pound (this will make it hard to export goods and services, and imports will look
relatively cheap if you’ve overvalued your currency. ← Not a wise decision in terms of trade, but
we want to understand what this decision meant for Britain in terms of monetary policy.
, The Question: Why aim for such a high valuation for the pound?
WW1 disrupted monetary policy in Britain
- Most importantly, WW1 forced many European countries to go heavily into debt (to
prosecute the war, governments had to borrow internationally, tax their societies more,
etc)
- Britain had been following the gold standard prior to 1914
- Key feature of gold standard: a promise that you can take the paper money in circulation
to the Bank of England and exchange it for gold, and vice versa. The rate was fixed, little
room for fluctuation
- Bank of England had followed this policy for nearly a century by the time WW1 broke
out.
- Other countries that followed the gold standard made the same kind of promise in their
country; this created a series of fixed exchange rates (between France, Britain, etc)
- WW1 breaks out: British gov’t tells Bank to stop using the gold standard, because they
fear that people will bring cash in, take out gold, and that gold will leave the country and
end up in the hands of the German government or other Axis power etc.
Government had borrowed more
- Sells bonds to citizens
- Changes dynamics in the financial market: government becomes a big player in finance,
broken one of the restraints on domestic monetary policy.
- Part of what the gold standard did was prevent the Bank of England from issuing more
paper money than its reserves.
- This creates a problem because it is now possible for money to be created without the
reserve lacking; this would be a problem across several countries in WW1.
Peace raises questions about best route to economic recovery
- What should monetary policy look like after the war?
- Trade had been severely disrupted by WW1
- Britain’s production must be altered; first big industrialized war, so had to make artillery,
machine guns, etc.
- When war ends in 1918, the policy makers had to figure out how to return to a peacetime
production.
Key element in plan: return to gold standard
- Politicians across all major parties agreed that going back on the gold standard was
crucial; that this was the foundation of Britain's economic success.
- Pursued this until they attained it in 1925
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