‘Your leadership in monetary reconstruction gave the world the best chance it had after the First World War for peace and law and order.’
Russell Leffingwell to Montagu Norman
19 April 1944
Having unaccustomed free time during the Second World War, Russell Leffingwell and Montagu Norman corresponded regularly. Their letters were in large part devoted to reminiscences of that brief era spanning the fifteen years between 1918 and 1933 when central bankers and their merchant bank allies played a major part in the rehabilitation and running of the world’s monetary systems. Not surprisingly both men believed that their cause had been a just one. They had sought to establish a system of global monetary stability and, as Leffingwell said: ‘it was well worthwhile for both of us to keep our promises.’[1] Knowing that their views were out of favour, Leffingwell and Norman hoped that in the future more dispassionate assessments of the inter-war period would bring the vindication of both their underlying philosophy and subsequent actions. It is not the historian’s role to convict or to exculpate: a distanced examination of the fight for the British gold standard has been the goal of this monograph. Having described the campaign in some detail, it is now possible to attempt to answer the questions set forth in the Introduction; were the tactics used during the last phase of the battle the correct ones, what was the effect on Britain of the loss of the battle; and finally, little Peterkin’s query - what was the use of it, anyway?
i
There is no question that severe underlying problems caused the guardians of the pound’s stability ever-increasing difficulties from the moment sterling was returned to the gold standard in April 1925. Already feeling the effects of Britain’s declining industrial position, the nation’s economy was hit by the global economic depression. This contributed to the further deterioration of the British balance of payments and caused other countries to seek ever greater liquidity, a quest bound to damage London’s financial standing. Yet the existence of these and other contributory causes did not necessarily ensure that defeat would come when and in the way it did. That September 1931 marked the end of Britain’s battle for the gold standard owed much to the uniquely unfavourable circumstances of 1931, chief among them the economic collapse of Central Europe, but its ending was also affected by the tactics used during the final campaign.
The key weapon used in the battle was the war chest of £130 m ($650 m) raised by borrowings in the U.S. and in France. This represented a turning away from the classic gold standard defensive weapons of rises in Bank rate combined with the sale of gold. Was the Bank of England correct to renounce the use of these traditional weapons? The answer is that while their use might have made a difference, it would have been difficult for the Bank, given the domestic and foreign pressures present during the summer of 1931, particularly during August, to have made full use of Bank rate or to have allowed gold to leave Great Britain.
The Americans and the French were adamantly opposed to a rise in Bank rate and/or a loss of gold. The British knew they needed allies both to provide credits and to form a united front behind which to fight off the attack. Needing these allies, the British had little choice but to take their advice which was motivated by Harrison and Moret’s belief that given the prevailing investment climate either a large rise in Bank rate or a loss of gold would be interpreted as a sign of panic. To have ignored the counsel of the FRBNY and the Bank of France would have been difficult and impolitic for the Bank of England, whose room to manoeuvre was further limited by the lack of domestic support for the drastic Bank rate rises coupled with exchange controls which possibly might have stemmed the tide of sterling. With investors already discounting the pound, a Bank rate approaching German levels during June and July (i.e., 8–15%) would have been necessary to have been effective. Yet this was simply not a viable option. With business already very depressed, neither management nor labour nor their representatives in Parliament were willing to pay the price which such a high Bank rate would exact. Although the return to gold was largely welcomed and most influential British supported the struggle in July and August, a consensus in favour of making major sacrifices for this battle of Britain did not exist. Yet without such a consensus or, in the alternative, a dictatorial regime which could render public opinion largely irrelevant, a drastic program on the scale necessary to be effective could not be mounted.
This being said, three points need to be made. First during July Norman clearly acted in a manner ill-calculated to achieve victory. Suffering badly from battle fatigue, the Governor projected a negative attitude at the worst possible moment. Perception plays a very large part in financial affairs and Norman’s panicked attitude, particularly during the height of the German crisis, encouraged speculators to pounce and investors to flee the pound at a time when, notwithstanding the Macmillan and May Reports, they could well have first turned their attention to the U.S. whose budget deficit and German exposure both exceeded that of the British. Indeed in September and October the U.S. faced a gold drain larger in amount than that suffered by Britain during the summer. Second, both Harrison and Morgan’s (N.Y.) criticized the British handling of the credits because they believed that the obvious pegging of sterling simply encouraged speculators to sell the pound while they were assured of receiving the highest possible rate. These criticisms were probably right in that holding the pound at the gold point rather than at or close to parity might actually have encouraged those with sterling deposits to adopt a wait and see attitude. Such a tactic might have proved beneficial because time could have been on Britain’s side. With the U.S. financial position deteriorating, and given that foreign dollar holdings exceeded foreign sterling holdings, it would not necessarily have taken Britain’s departure from the gold standard for the speculative fever to leap across the Atlantic. But by the middle of September the British will to continue to fight had been lost. Having been under constant strain for years, Norman and his colleagues had concluded that the battle was futile. This attitude made a continuance of the fight unlikely, though Harrison suggested it on 19 September as did Morgan’s (N.Y.) the next day, particularly since it would probably have been necessary to use gold as ammunition.
This leads to the third point. The British reluctance to use gold was initially a response to external pressure; by early September this was no longer the case. Yet the British never let gold go in the quantities many contemporaries expected, and later commentators regretted this.[2] The explanation may well have to do with the increasingly defeatist tone exhibited from mid-August by certain officials at the Bank of England. Whether out of increasing xenophobia, expressed in a desire to allow the U.S. and France to wither away behind their gold barricades, or out of a sense of futility, men like Henry Clay, H.A. Siepmann and Francis Rodd appeared increasingly less wedded to the gold standard. Assuming that their attitude was shared by more senior officials at the Bank and elsewhere, it was quite sensible to spend French and American funds while retaining the British gold reserves not least because, if Britain went off the gold standard, it would be very difficult to accumulate comparable ones. This was not quite in the spirit that Norman and the Bank of England had been projecting for the past thirteen years but, at a transitional time when international monetary cooperation was breaking down, and when the British believed that it was the violation of the rules of the gold standard game by others which had greatly contributed to if not largely caused their problems, it was not a wholly unexpected attitude to take.
That Britain did not remain on the gold standard while simultaneously devaluing the pound was in part due to the increasing acceptance by influential British opinion of the respectability and even desirability of a British departure from the gold standard. Nevertheless, several other factors were probably more important. Given the German inflation of 1919–1923, there was a real fear that any change in the gold value of the pound would inexorably lead to a series of drastic devaluations. Consequently there was an overwhelming reluctance to take the responsibility for such a decision. Contributing to this attitude was a total lack of consensus - indeed even of prior consideration as to what level was appropriate for the pound in such an event.
Another important cause was the consistent inclination of the Bank of England and its various allies when faced with a threat to sterling to opt for cuts in government spending rather then devaluation. This was the result of several factors. That most bankers were philosophically opposed to increased government spending, especially for social service benefits, played a large part. A related motivation was the honest belief of most bankers that unbalanced budgets both verged on the immoral (it being wrong to live beyond one’s means) and were indicative of an untrustworthy hence uncreditworthy borrower. Thus not only did they exert themselves to prevent such an eventuality but Morgan’s and other merchant bankers would not participate in support operations if they thought their purpose was to obviate the need for budget cuts. Also, the Bank of England took its role as the guardian of the gold standard very seriously. Therefore opting for devaluation when there was any alternative would have seemed a derogation of duty.
Finally making an unmistakable choice to leave the gold standard would have been psychologically very difficult for those in authority in 1931. As we shall see it was easier to wait until the decision, for that is what it was, could be portrayed by those who made it both to themselves and to others as an inevitability thrust upon Great Britain by forces beyond her control.
ii
The loss of the battle for the gold standard had consequences both expected and unexpected for Great Britain. In the international sphere, the British decision to go their own way put paid to Norman’s theories of international monetary cooperation. Furthermore, on all sides the dénouement of the crisis produced bitterness and ill feeling. Whether out of guilt, a new found freedom, or from justifiable anger at French and American gold sterilization, the British were increasingly anti-American and anti-French. For their part the French were surprised by the sudden British surrender and aghast at the huge losses they had sustained in connection with the defense of sterling. The U.S. was deeply troubled over the gold drain affecting New York after 21 September and also by Britain’s increasingly isolationist approach to monetary affairs. The result was the triumph of competition over cooperation. Increasingly an attitude of autarchy dominated the sphere of international monetary relations.
The domestic effects of the British departure from the gold standard were rather more unexpected. Even as astute an observer as Keynes believed at the end of August that the British public would not favour devaluation.[3] In the event, the fear of leaving the gold standard proved far worse than the actuality which, in certain respects, was liberating.[4] The burden of protecting the gold standard appeared to have had an inhibiting effect on British financial and economic policies. The absence of a gold standard contributed to the innovative financial policies of the 1930’s such as the establishment of the Exchange Equalisation Account and the provision of cheap money.[5] Two factors were chiefly responsible for this. The first was that Britain’s departure from the gold standard was successfully portrayed as a bowing to the inevitable which left the British without any guilt over what they had done. In contemporary documents one reads that Britain was ‘forced’ to leave or was ‘pushed off’ the gold standard. This was simply not true. Although it can be argued that the result was foredoomed, its manner and timing were not. By choosing to portray the demise of the gold standard in this fashion, the British were freed from the psychological burden of having taken what might otherwise have appeared as the coward’s path.
The second factor was that by their actions the British partially succeeded in destroying the international nature of the gold standard. With virtually the whole of the British Empire and the Scandinavian countries off the gold standard within a matter of weeks after the British decision, the gold standard in the traditionally accepted sense no longer existed. Furthermore, this string of devaluations meant that the British devaluation did not have the usual effect of a full scale increase in the cost of British imports. The development of the sterling bloc subsequently served many of the same purposes as the gold standard and at first proved easier for Britain to live with.
The departure from gold also had a significant effect on the administration of Britain’s economic and financial affairs. It caused a major decline in the power of the Bank of England. Having wrested back control over monetary matters after the Treasury’s encroachments during the First World War, Norman’s reign as chief arbiter of the pound’s fate lasted a mere eleven years. It would be an exaggeration to say that the events of September 1931 were solely responsible for this change but the battle and subsequent defeat certainly accelerated the process. It left the Cabinet and the Treasury determined to have an increased voice in determining currency matters. Their attitude was partly the result of a not unreasonable feeling that the Bank of England had failed to live up to its reputation. There was also a growing realization, prompted by the fall of the Labour Government, that not only was Norman’s portrayal of currency questions as an objective and apolitical science untrue but, by abdicating jurisdiction over monetary affairs, the Government was necessarily surrendering a great deal of power in other spheres. Finally, by admitting in July 1931 that the German crisis was too big for central banks to handle, Norman himself contributed to the diminution of his power. The Governor’s request for limited Government intervention in financial affairs led to the exacerbation of an already unstable situation in which the authority over monetary matters was increasingly split between the Bank of England and the Government. It could not last; that the result was an increase in government power at the expense of the Bank of England is not surprising in a century which has seen a general, massive enlargement of governmental power. In this, as in so many other things, Britain was first off the mark. In both the U.S. and France the departure from the gold standard brought with it the demise of the independent power previously exercised by the FRBNY and the Bank of France, respectively. The bankers had fallen short of their own or their countries’ expectations and it was now the turn of others.
iii
The final issue simply put is: was there a point to a battle that cost Great Britain much pain and suffering and within a relatively short time proved to be futile? To answer this question, one must examine the facts without looking backwards. Remembering how the world financial situation appeared in the aftermath of the First World War, the British response made great sense. It was increasingly clear that the exports on which Britain had relied for her financial supremacy no longer produced the income they had before 1914. It then followed that invisible exports must be protected and encouraged to grow. The best way to do this seemed to be to return the pound to gold at the rate which would produce the maximum confidence and certainty; that is, at the pre-war dollar parity, notwithstanding the possibility of inflicting some hardship on the British economy for a transitional period. In so doing the Bank of England and the British Government heeded not only their financial experts and representatives of industry but also the pleas of most other countries. As it happened the period of adjustment never ended, not least because Britain was to be the only European country to reestablish pre-war parity and also because almost all the predictions made prior to 1925 about the future course of monetary affairs proved wrong. But as it would have taken extraordinary prescience to anticipate the unprecedented financial events of this period, it may be said that the path taken in 1925 was far more sensible than would appear later.
Moreover, the decision to return to gold, which was, after all, made right after the war’s end, was a product of its time, reflecting two important intellectual currents present in 1918–1920. The first of these was the desire to set the clock back, ignoring the fact that the First World War had produced major structural alterations in global financial relationships. With this as a goal the only possible course of action was to return Britain to gold at its previous parity. Connected with this response was the belief that the ghastly conflict had to have a purpose; hence the slogan ‘the War to end all Wars.’ While no one would have claimed that British soldiers died to protect $4.86 5/8, a failure to return to it could have seemed to have been in a sense a negation of their sacrifice.
Second, Montagu Norman’s determination to return Britain to the gold standard and his proselytizing approach to international monetary cooperation and to the gold standard as a global goal reveals him as a spiritual comrade of Woodrow Wilson. Just as the American President believed that the League of Nations would end future conflicts, Norman believed that the adherence to the gold standard by independent, apolitical central banks would ensure world financial stability. His goal of international financial cooperation built upon the gold standard was a laudable one. That it was not attained does not make the attempt any less worthwhile.
One may fault the Bank and the Government for unquestioningly accepting the return to gold itself, particularly given our experience of floating exchange rates. Unfortunately a smoothly functioning system such as the pre-war international gold standard is rarely questioned; thus the battle for Britain’s gold standard had to be fought and lost before its raison d’être could be transformed from an assumption to a debatable issue.
The waging of this battle achieved a second result which was to establish the two prerequisites necessary for the abandonment of the gold standard: its discrediting and the emergence of viable alternatives. As it was the traumatic experiences of the British economy from 1925 to 1931 which made possible the development of both preconditions, it is not surprising that the decision to abandon the gold standard was not made earlier. Thus one may conclude that, if nothing else, the battle for Britain’s gold standard in 1931 contributed to the evolution of monetary policy which produced the economic progress of the 1930’s and the post-war era. That, in itself, was no small achievement.
NOTES
1. Leffingwell Papers, 1/6/133, Leffingwell to Norman, 31 July 1944.
2. See, e.g., B/E, G 14/316, Niemeyer Memorandum, 21 September 1931.
3. Keynes, op. cit., p. 596.
4. In this connection, an article by Dr. Hjalmar Schacht is instructive. Written for the Deutsche Allgemeine Zeitung on 25 September 1931, Schacht’s theme was that the British departure from the gold standard was a masterful stroke which showed that the real spirit of England was still alive. He went on to credit Britain with having chosen to effect her recovery by her own will rather than allowing a slow bleeding to death and advocating that Germany follow the lead of her fellow Saxons.
5. This is not to say definitively that the departure from the gold standard either alone or in conjunction with other decisions taken with respect to monetary matters was responsible for Britain’s rapid recovery from the slump during the 1930’s. For a discussion of the various factors which influenced Britain’s economic progress, see, e.g., D.H. Aldcroft and H.W. Richardson, The British Economy, 1919–1939 (Batsford, London, 1969), B.B. Gilbert, British Social Policy 1914–1939 (Batsford, London, 1970), and Howson, op. cit.