Britain doesn't return to the Gold Standard in the 1920s

Something for our British comrades.

From the 1870s on, the world was on the gold standard, where the value of one’s currency was linked to how much gold it was worth. This helped keep money relatively interchangeable, and also prevented inflation; a government couldn’t print more money than it had gold to back it up.

Now, during the Great War, this went out the window, and everyone printed fiat money; money worth what the government says it’s worth. This led to widespread inflation across the world.
Anyway… after the Great War, the various nations tried to link their currency to gold once again. This hurt some nations more than others; the UK was hit particularly hard, and suffered massive deflation as a result, which led to high interest rates. The British government, by returning to gold, had less money available than was previously the case; so you can see why this would be a problem.It hit Germany especially hard because Germany was being sucked dry of gold to pay for the reparations.


Churchill, who was lord of the Exchequer at the time, later called it one of his worst mistakes; and Keynes said it would lead to a depression, which either proves he was a genius or a time traveller.

So, WI Keynes convinces Churchill not to return to the gold standard? "Screw this," declares Churchill. "An England with an inflationary money policy is a strong England!"

Big social effects, the labour movement in Britain is nowhere near as strong. Probably a much less severe Depression.

It could also forestall the rise of Hitler and or the far right, were Germany able to recover from the war quicker (less strain on its repayments), it would be difficult to blame anyone for the after effects of the defeat. Certainly extremism of one sort or another within the Reich would be limited. Perhaps leading to a western alliance against communism.

The return to the Gold Standard probably had a more negative effect on British economy than WWI, so without it we might very well still have the British Empire alive and kicking.

I doubt if the "revanchist" sentiments in Germany or Imperial ambitious in Italy or Japan will vanish, but the British disarmament from 30-35 is unlikely to take place. The first to feel that will be Mussolini when/if trying to invade Abbyssinia in 1935. Mussolini meets his end almost ten years ahead of shedule.

From the the multitude of ATLs will be more countless than the stars...

In the end however, there is unlikely to be the power vaccuum after OTL WWII when the Europeans gave up their overseas possessions. This also means that USA feels no global responsibility, but rather will jealously guard the Monroe doctrine and be a partner among others in the race for Asian loot.

By pure size of the Empire the British will be the closest you get to a "global cop", but with the other imperial powers (incl. USA) still expected to keep their own backyards tidy. There will still be a lot of potential conflict areas, but for some time the imperial powers will have a common enemy in the Soviet Union.

Regards

Steffen Redbeard

Redbeard said:

The return to the Gold Standard probably had a more negative effect on British economy than WWI, so without it we might very well still have the British Empire alive and kicking.

I doubt if the "revanchist" sentiments in Germany or Imperial ambitious in Italy or Japan will vanish, but the British disarmament from 30-35 is unlikely to take place. The first to feel that will be Mussolini when/if trying to invade Abbyssinia in 1935. Mussolini meets his end almost ten years ahead of shedule.

From the the multitude of ATLs will be more countless than the stars...

In the end however, there is unlikely to be the power vaccuum after OTL WWII when the Europeans gave up their overseas possessions. This also means that USA feels no global responsibility, but rather will jealously guard the Monroe doctrine and be a partner among others in the race for Asian loot.

By pure size of the Empire the British will be the closest you get to a "global cop", but with the other imperial powers (incl. USA) still expected to keep their own backyards tidy. There will still be a lot of potential conflict areas, but for some time the imperial powers will have a common enemy in the Soviet Union.

Regards

Steffen Redbeard

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Steffen

Most of what relatively little I've read about it suggests that the problem was not the return to the fold standard per-say but the level at which it occurred. The financiers wanted Britain to return at the same level to the dollar as prior to WWI and unfortunately got their way. This meant, given the increasing economic and financial domination of the US, that the industrial basis of the British economy was hit very hard.

Britain was still too weak to prevent the depression as the Us was economically too powerful but it could have been a lot more powerful and hence suffered a lot less economic and social damage.

Not saying that this would have been better than not going onto the gold standard but I think the damage was primarily the level it was set.

Steve

Quiet_Man said:

It could also forestall the rise of Hitler and or the far right, were Germany able to recover from the war quicker (less strain on its repayments), it would be difficult to blame anyone for the after effects of the defeat. Certainly extremism of one sort or another within the Reich would be limited. Perhaps leading to a western alliance against communism.

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In effect not being on the Gold Standard or on it at a different rate would be a form of devaluation, which would by and large be bad for Germany if anything, but would probably not have much effect.

The main effect would be on British politics - with no "banker's ramp" in 1931 splitting the Labour party, although perhaps with the improved economic conditions labour would not be in power at all?

Certainly the British economy would be stronger, perhaps making the British more bullish in international affairs. It is hard to envisage sufficient butterflies for this to solve the problems of international economic and diplomatic co-operation of the early 30s.

One of the reasons Britain returned to the gold standard at its pre war rate I was told in my economics lesions, was Churchill thought Britain had a moral obligation to repay its debits at the rate at which they were borrowed. And that by doing so it would make it easier to borrow money in future, maintaining confidence in the city.

Now let us try to have the best of both worlds, some way to keep the borrowers happy and industry at the same time. This does require a level of complexity not normally seen in finance in the 20’s and 30’s but not the impossible.

Britain announces that it is to consolidate all loans made before date X, into one which will be repaid at a fixed rate in gold, equal with the pre war rate. And that as of date X the new rate of exchange will apply, to all new transactions.

Now to get shoot down by Wozza who will tell us that this idea is just not possible.

Ramp-Rat said:

Now to get shoot down by Wozza who will tell us that this idea is just not possible.

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I have not heard this explanation before actually. Indeed the papers from the time indicate that Churchill was opposed to a return.

Surely international debts were not made in sterling though? Although they were certainly run up on future assumptions about the strength of sterling/ the British financial system.

Are you 100% sure you have not got it the wrong way around? A weaker sterling could make it harder to repay debts in dollars.

Wozza said:

Surely international debts were not made in sterling though?

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During WWI, I would perfectly imagine Britian would issue its debt in sterling. It was then the world currency.

No return to the Gold standard might make Economic conditions better in May 29. That might give the tories the election victory that year,


However There is still the Wall Street Crash. Again not trying to sustain a stupid parity might make the depression a little less bad but surely it will be bad enough to make it pretty well impossible for Baldwin to win in 33 or 34.

Some people might even say the troubles were partly caused by the dumping of the Gold standard. (People would not have the ability to compare time lines in practice of course)

Labour had lots of people who believed in a very orhodox (ie stupid in a slump) view of public finances.

Wozza, as always I bow to your greater knowledge in the area than mine. Could it be that while in privet Churchill was opposed to the return, he used this argument in public to justify his actions, as I have heard it given as a reason on more than one occasion. Don’t ask me to give examples of where, it was a long time ago since I was last in a class room, and economic theory has moved on since then; I had to learn about MRAR, minimum reserve asset ratios. We are talking about pre Maggie, the days of free school milk, and proper school meals, you know the sort just like in HM Prisons, and joy of joys the twig.

Ramp-Rat said:

Wozza, as always I bow to your greater knowledge in the area than mine. Could it be that while in privet Churchill was opposed to the return, he used this argument in public to justify his actions, as I have heard it given as a reason on more than one occasion. Don’t ask me to give examples of where, it was a long time ago since I was last in a class room, and economic theory has moved on since then; I had to learn about MRAR, minimum reserve asset ratios. We are talking about pre Maggie, the days of free school milk, and proper school meals, you know the sort just like in HM Prisons, and joy of joys the twig.

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No I am working blind here, and beginning to think you are right - devaluing sterling would lessen the value of sterling holding worldwide (dollar devaluation in the 80s helped to do over the Japanese economy).

Not only that, but the city would have been seen to have acted in bad faith. The view was that these people had lent us the money in the belief that they would be repaid, and it was our moral obligation to repay them.

I have read that far from being the disaster that it was made out to be, it was in the long term good news for the city. And given that despite appearances Britain had by the 1890’s been making more money from the city than it did from exports, it was this trade that it was vital to support, not industrial exports. I remember reading I think it was in, (dam with so many books in storage I can’t get my hand on the book): that in 1913 for ever pound made in industrial and commodity exports thirteen were made by the city. This at a time when if memory serves me right, over 100,000,000.tons of coal was exported from Cardiff alone, Britain being a major coal exporter right up until WWII.

Could it be that the right thing was done for the wrong reason; and that by maintaining conference in the city, which once lost would be hard to regain, Britain has in the long run benefited; our industry was in decline even then and had been for many years.

Ramp-Rat said:

Not only that, but the city would have been seen to have acted in bad faith. The view was that these people had lent us the money in the belief that they would be repaid, and it was our moral obligation to repay them.

I have read that far from being the disaster that it was made out to be, it was in the long term good news for the city. And given that despite appearances Britain had by the 1890’s been making more money from the city than it did from exports, it was this trade that it was vital to support, not industrial exports. I remember reading I think it was in, (dam with so many books in storage I can’t get my hand on the book): that in 1913 for ever pound made in industrial and commodity exports thirteen were made by the city. This at a time when if memory serves me right, over 100,000,000.tons of coal was exported from Cardiff alone, Britain being a major coal exporter right up until WWII.

Could it be that the right thing was done for the wrong reason; and that by maintaining conference in the city, which once lost would be hard to regain, Britain has in the long run benefited; our industry was in decline even then and had been for many years.

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R-R

I agree it was better for the city but I think a more balanced economy would have been better for Britain. Possibly I'm just old fashioned but I would have preferred a stronger industrial economy, which we could have had with some relatively minor changes. There were still several areas we were world leaders at despite the trading disadvantage and reduced emphasis on education. Apart from anything else those foreign investments proved fairly superficial and short-termed when lasting staying power was needed in two world wars.

Steve

Steve, please do not take my explanation as approval of what was done, I would much rather have seen Britain follow my original post; and go for the two tear route.

As for Britain’s industrial base, from what I have read by the 1930’s Britain had only one company of world class standard that was ICI. Who were called in by the Americans to help with the gas diffusion problems at Hanford, after DuPont had refused to help.

Rolls-Royce, while good was not as good as it is now, as it like all British industry suffered from lack of investment. As for Britain’s education system, don’t get me started, what was bad then is now hopeless.

Note ICI was set up by two Germans; maybe that is why it was so good.

RR.

stevep said:

Steffen

Most of what relatively little I've read about it suggests that the problem was not the return to the fold standard per-say but the level at which it occurred. The financiers wanted Britain to return at the same level to the dollar as prior to WWI and unfortunately got their way. This meant, given the increasing economic and financial domination of the US, that the industrial basis of the British economy was hit very hard.

Britain was still too weak to prevent the depression as the Us was economically too powerful but it could have been a lot more powerful and hence suffered a lot less economic and social damage.

Not saying that this would have been better than not going onto the gold standard but I think the damage was primarily the level it was set.

Steve

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You are probably right, but anyway the effect was a drastic decrease in British competiveness from 1925, and that was in years where not at least USA where booming.

I guess the main problem about a gold standard in itself is that you basically give up some good instruments with which to cntrol your economy. Which I guess is also why Keynes was so bitterly opposed (although he also then pointed to the exchange rate being wrong).

Although fixed exchange rate systems has worked well in recent years (basically giving up the devaluation instrument) any instrument with which to boost economy would have been handy as a well known practice when the crisis hits in 1929. I know the gold standard was given up in 1931, but apparently the general consensus still was to save yourself out of the crisis, probably at that time making it all much worse.

Regards

Steffen Redbeard