‘You have been kind enough to refer in your letter to the assistance given by means of these credits during the crisis of last year. For our part, we look back upon these transactions with great satisfaction ….’
George Harrison to
Montagu Norman
8 December 1932
Addressing the Anglo-American Conference of Historians in London on 13 July 1931, Ramsay MacDonald said:
When the road is made and the facts are settled, the historian comes along in a charabanc, as it were, informing the world - when the roadmaker is dead or forgotten - whether the passage was smooth or bumpy.[1]
The Prime Minister’s timing was flawless. The events about to unfold would be examined and debated not by coaches but by planeloads of historians fascinated by the British political and financial crisis of 1931.
While explanations of the departure of Great Britain from the gold standard were not long in coming (The Times was first into the field with a series of articles published in early October) the first scholarly treatments of the events of 1931 appeared in the 1950’s and 1960’s. They fall into two categories. The first, to which Reginald Bassett’s 1931 and Robert Skidelsky’s Politicians and the Slump were the most notable contributions, focused on the political events of the year.[2] Valuable as they are, works of this kind are inevitably incomplete since the battle to maintain the British gold standard was waged primarily by bankers and not by politicians.
In the second category are books on central banks. Chief amongst them are Henry Clay’s biography of Montagu Norman, Governor of the Bank of England, and Central Bank Cooperation 1924–1931 by Stephen Clarke, followed by Robert Sayers’ The Bank of England 1891–1945[3]. While providing much new information on the work of the Bank of England and the Federal Reserve Bank of New York (‘FRBNY’) both of which played crucial roles during 1931, these studies were not primarily focused on the British crisis and further did not cover the vital contributions made by private bankers to the attempt to rescue the pound. This same reservation applies to the treatments of the 1931 crisis published by economists such as Charles Kindleberger, Susan Howson and Sir Alec Cairncross and Barry Eichengreen[4].
The place of private bankers in the world monetary order has never received more attention than in the last ten years. Not since the 1930’s were major money centre banks delegated so much authority, this time not to manage reparations but to recycle petrodollars. When the seemingly efficient international monetary order of the 1970’s metamorphosed into the massive third world debt crisis of the 1980’s, the actions taken by private banks and the supervisory monetary authorities who regulated their activities came under increasing scrutiny. Thus an examination of the role played by central and private bankers during the 1931 crisis and the underlying principles which governed the choices these men made is interesting as an historical question and also as a way of illuminating one of the major problems of our own time.[5]
The focus of this study, then, is on central bankers, especially Governor Montagu Norman and his colleagues at the Bank of England, and the merchant bankers of the House of Morgan since it is argued that a detailed examination of their actions is crucial to an understanding of the loss of the battle to keep Britain on the gold standard.[6]
A study of this kind demonstrates the ways in which central and merchant bankers exercised power and interacted with other interest groups notably the governments under whose jurisdiction they operated. No better topic than Britain’s campaign to retain the gold standard in 1931 could be devised for this purpose. Given the historic role of sterling, the crisis itself was a paradigm of currency defence operations. Just as important, the events of 1931 marked not only the apogee of the bankers’ power but also the beginning of its decline. Bankers, believing their calling to be above politics, achieved virtual autonomy during the 1920’s. During 1931, however, the mounting economic crisis forced both Norman and Morgan’s increasingly to look to governments to solve the problems with which they were faced. Simultaneously, unresolved monetary and fiscal problems compelled governments to begin the process of reclaiming control over financial matters. As bankers grew to accept that financial issues could not be addressed in a political vacuum, politicians grasped the basic point that by abdicating control over monetary issues, they had allowed the bankers’ cart to pull their horse. The detailed chronological narrative herein is thus intended both to illuminate the battle for Britain’s gold standard and to delineate the process by which bankers ceded power to politicians and civil servants.
Events pertaining to British governments - even the fall of the Labour Ministry - are examined only insofar as they relate to the struggle to keep sterling on the gold standard. For the same reason very little mention is made of members of the City community such as leading Clearing Bankers and Chairmen of Accepting Houses who, although prominent in financial circles, were of slight significance in the 1931 crisis.
As the pound had remained the currency franca, occupying the central position in world finance until the events of 1931, sterling’s rise or fall was also a matter of great international importance. Other countries viewed the battle of Britain’s gold standard as one in which they too had a stake. Indeed, the supranational aspects of the crisis were heightened by two developments. The first was Norman’s espousal of the doctrine of central bank cooperation and the adoption of this goal by other central banks. Thus the major role played by the Bank of England’s chief allies during the crisis, the Federal Reserve Bank of New York and the Bank of France, must be examined. The second factor was that to a significant extent the causes of Britain’s departure from the gold standard were international in nature; the British struggle came after a series of banking crises had devastated the financial systems of Central Europe. Therefore the impact on Britain of catalytic events in Austria and Germany during the spring and early summer of 1931 forms an essential part of the analysis.
The year 1931 occupies a pivotal place in twentieth century British history because that year marked the conclusive failure of the widespread attempt made by financiers and politicians to return to the Edwardian Era. In Britain and elsewhere, a key component of the pre-war world was the role of sterling as the global currency and as the lynch pin of the gold standard which had been almost universally adopted in the thirty years prior to 1914. For this reason it became an accepted goal to return the pound, whose relationship to gold had been greatly eroded by wartime exigencies, to a gold bullion standard as soon as possible. That it was to be revalued at its pre-war dollar parity ($4.86 5/8) was virtually taken for granted, and for good reason. Britain’s industrial supremacy had been steadily declining from the turn of the century. To compensate for this it was believed crucial to maintain the pre-eminent financial position of the City of London. The Bank of England, the City and various British governments, to the extent they focused on the issue, believed that this goal could be accomplished only by returning the pound to gold at a value which would ensure that confidence in sterling remained unshaken, namely $4.86 5/8. Furthermore a devaluation could have been read as a sign of the decline of British financial power, a statement that few in Britain were willing to make.
The pound was returned to the gold standard in April 1925 but instead of marking the culmination of post-war normalization, the return signalled the beginning of an increasingly difficult struggle for Norman and the Bank of England. The deteriorating British balance of payments coupled with the increasingly strong financial position of the United States and France kept the pound under constant pressure. Thus the first skirmishes of Britain’s battle to retain the gold standard began in April 1925. Moreover, those in command of the battle had an insufficient understanding of how the pre-war gold standard worked. They viewed the mechanism as a self-correcting one which would automatically remain in balance through imports and exports of gold. This was an inaccurate depiction of the gold standard mechanism at its most efficient point and was even less applicable in the post-war world where, inter alia, countries deliberately sterilized gold flows.[7]
More importantly, the British believed the prewar gold standard to be automatic because in large measure the adjustments necessary to keep the pound on gold had been unconscious. Before 1914 it largely suited the British economy to keep money cheap in London and to allow foreign issues easy access to the London financial market. This in turn helped to ensure a ready supply of capital in London with which to protect the pound. Given that there was no substitute for the pound, London’s position as the world’s financial capital was assured. But the centripetal forces which in combination had made the maintenance of the pre-war gold standard a relatively easy task switched direction during the 1920’s. Then powerful centrifugal factors (such as the growth of alternative financial centres, the weakening of Britain’s competitive position and the political force both of a Labour Party come of age and the newly enfranchised ‘mass electorate’) eroded the position of sterling and made its relationship to gold increasingly precarious. Faced with this situation, a determined effort involving financial sacrifices from all classes could have ensured the continuance of the gold standard. However, both politicians and many of their constituents thought the price was too high.
Yet the pound might have remained on the gold standard throughout the inter-war period (and with it many other currencies) but for one other factor. In a financial battle just as in a military confrontation a general cannot be victorious if he is not lucky. That fortune assuredly did not smile on Norman and the British helps explain the course of events between 1925–1931. Virtually all the economic predictions made prior to the return of gold proved wrong. Had they not been - particularly had there been the expected American inflation instead of a world wide depression with massive deflation - the course of monetary history could well have been different. Even so, 1931 might not have been the year of the gold standard’s last stand had Britain not been dealt, within a three week period, a powerful triple blow. The German banking collapse of July 1931 was the first disaster to strike. Also in July came the publication of the Report of the Committee on Finance and Industry (known as the Macmillan Committee) which, at the worst possible time, revealed the large German exposure of British financial institutions. Finally on 1 August, the May Committee report exposed what was, for its era, a massive British budget deficit.
By the third week of July 1931 it began to be evident that the position of sterling was under serious threat and by the middle of August it had become obvious that the climax of the battle for Britain’s gold standard had been reached. An examination of the months of intensive action - July, August and September - thus forms the core of the analysis as the central banks of Britain, the U.S. and France, the three Morgan houses and, to a lesser extent, various governments, joined to save the British gold standard. The way in which these institutions acted during the emblematic monetary crisis of the inter-war period represented both the logical culmination of their activities during the preceding decade and also provided the last example of its type. Examining their actions during this time of trial illuminates both the institutions themselves and their larger role in British and world affairs. Furthermore it is possible to analyse the tactics used to defend the British gold standard, evaluate the effect the defeat had on Britain, and speculate on the answer to a question so many asked after 1931: had the battle been worth the candle?
Notwithstanding the concerted and sometimes heroic efforts of the Bank of England and its comrades in arms, the fight ended in surrender on 20 September 1931, in the process shattering forever the belief that sterling was as good as gold. This dénouement also fatally damaged the gold standard as it had been defined until then since the role of the pound in world monetary affairs was still such that its departure from gold caused most of the world’s currencies to follow suit, culminating in the demise of the American gold standard in April 1933.
The fall of sterling brought many other changes in its wake. It helped to end the dominance of the Bank of England over the fate of the pound. Thereafter no senior Treasury official could say as did Sir Richard Hopkins in 1930: ‘the control of the currency is exclusively a matter for the Bank of England. It is not a matter in which the Government intervenes….’[8] As the aura of omnipotence shielding the Bank’s activities disintegrated, Government officials and Cabinet Ministers began to assume control over monetary matters. The decline in central bank cooperation greatly accelerated when, after the British collapse, the U.S. and France felt themselves increasingly threatened by the actions and inaction of their erstwhile ally. The power of merchant bankers, which had been invaluable to governments and central banks for centuries, was eclipsed as economists usurped their role as monetary magicians. None of these changes came about solely because of the demise of the British gold standard in 1931, but both the nature of the British decision and the way in which it was made accelerated these developments and therefore heavily influenced our own pattern of international monetary relations.
NOTES
1. The New York Times, 14 July 1931, p. 1.
2. R. Bassett, 1931 (Macmillan, London, 1958); R. Skidelsky, Politicians and the Slump (Macmillan, London, 1967).
3. H. Clay, Lord Norman (Macmillan, London, 1957); S.V.O. Clarke, Central Bank Cooperation 1924–1931 (Federal Reserve Bank of New York, New York, 1967); R.S. Sayers, The Bank of England 1891–1944 (Cambridge University Press, Cambridge, 1976).
4. C.P. Kindleberger, The World In Depression 1929–1939 (University of California Press, Berkeley, 1973); S. Howson, Domestic Monetary Management in Britain 1919–1938 (Cambridge University Press, Cambridge, 1975); A. Cairncross and B. Eichengreen, Sterling In Decline, (Basil Blackwell, Oxford, 1983).
5. Concerning the role of private bankers during August 1931 see also, P. Williamson, ‘A Bankers’ Ramp? Financiers and the British Political Crisis of August 1931’, English Historical Review, xcix, October 1984.
6. The House of Morgan was composed of three inter-related banks: J.P. Morgan & Co. (New York), Morgan Grenfell & Co. (London) and Morgan et Cie. (Paris).
7. For a discussion of the ways in which pre-1914 gold standard was a managed rather than an automatic one, see, e.g., A.I. Bloomfield, Monetary Policy Under the International Gold Standard 1884–1914 (Federal Reserve Bank of New York, New York, 1959).
8. Evidence Before the Committee on Finance and Industry, Day 29, 16 May 1930.