Procedimiento

Assessments of Britain’s return to gold tend to fall into one of two categories. The first of these is that the policy was a complete disaster which created, or at least substantially contributed to domestic economic depression, chronically high unemployment, and industrial unrest. This interpretation derives from the original Keynesian critique of the decision, with its central claim that the re-stabilisation of sterling at $4.86 overvalued the pound by an estimated 10% against the US dollar given relative prices in Britain and America. This is seen to have made Britain’s exports more expensive, and to have compelled employers to try and reduce their production costs, the largest element of which was frequently the cost of wages. In turn, the attempt to impose large wage cuts is thought to have provoked fierce trade union resistance, leading to industrial unrest and ultimately to the general strike of 1926. Moreover, although the return to gold is seen as having facilitated a revival in the City’s financial earnings, the effect of the high pound is thought to have depressed exports and to led to an increase in imports, thereby putting pressure on the balance of payments and necessitating high levels of tax and

interest rates in order to defend the parity. The combined result therefore, is that while the City prospered, Britain’s economy as a whole stagnated and unemployment rose to unprecedented heights.21

According to this analysis, the return to gold at the prewar par is considered to have been a serious policy mistake and an abject failure. Britain’s authorities are believed to have misjudged the difficulties that the return would entail, basing their assessments of the expected level of adjustment on inappropriate price indices and on the erroneous belief that domestic prices and wages would adjust themselves quickly and smoothly to the new exchange rate. Any adjustment difficulties were thus believed to have been temporary, easily surmountable, and largely incidental to the long-term benefits of economic stability and prosperity.22 _{As such, proponents of this viewpoint also argue that sterling should have}

been valued at a lower rate more conducive to maximising British trade and employment. This, it is claimed, would have lessened the pressure on Britain’s exporters, thus helping to ensure a higher level of economic growth, lower interest rates and unemployment, and industrial peace.23

In contrast to this interpretation however, the second assessment of Britain’s return to gold argues that the problems experienced after 1925 were not as bad as is often maintained (a key claim for example is that Britain’s rate of economic growth during the 1920s was comparatively favourable in historical terms),24 _{and that they were primarily due}

21 _{See Keynes (1925); Sayers (1960), pp.92-3; Pollard (1969, 1970; 1976); Moggridge (1972), pp.98-105;}

Winch (1969), pp.68ff; Ham (1981), pp.55-6; Peden (1988), pp.19-20; Eichengreen (1992), p.303: Estimates on sterling’s overvaluation against the dollar vary from 11-14% by Dimsdale (1981), to 20% by Wolcott (1993), to 20-25% by Redmond (1984).

22 _{Keynes (1925); Sayers (1960), pp.88-9; Winch (1969), p.83; Moggridge (1972); Pollard (1976), pp.221-3.} 23 _{Keynes (1925); Harrod (1951), p.358; Moggridge (1969); Pollard (1969); Skidelsky (1969, 1992); Winch}

(1969), p.90; Pelling (1974), p.306; Pressnell (1978); Dimsdale (1981); Ham (1981); Peden (1988), pp.22-3; Wolcott (1993).

to factors other than the return to gold at $4.86. The unexpected behaviour of the US trade cycle for example is seen by many as a key contributory factor. US prices at the time of Britain’s return were widely expected to rise and to therefore ease the pressure of adjusting to $4.86, whilst the actual course of American prices proved to be downwards, thus making the degree of adjustment required that much greater than had originally been anticipated. In addition, the difficulties of British industry are thought to have been compounded by economic dislocation in its traditional export markets, and by competitive devaluations by France and Belgium, both of whom returned to gold in 1926 at substantially undervalued exchange rates. Growing speculation on Wall St. throughout the latter half of the 1920s is also thought to have exacerbated the situation by forcing many other countries, including Britain, to maintain high interest rates in defence of their gold reserves, while domestic factors such as the rigidity of prices and wages is also seen to have exerted a large causal influence, buoyed by overly generous and freely available unemployment benefits, excessive trade union power, the immobility of labour, and the persistence of uncompetitive production methods and practices.25

From this perspective it is contended that the return to gold at $4.86 cannot therefore be seen as the primary cause of Britain’s difficulties. The decision to return is not seen as a policy error, but is instead regarded as having been sound and justifiable on the basis of those conditions that were known at the time. Supporters of this view maintain that it was not unreasonable in 1925 to have expected Britain’s economy to withstand an exchange rate of $4.86, that there was no viable alternative to a gold standard in the circumstances of the 1920s, and indeed that the policy itself was supported by the vast

majority of domestic opinion.26 _{As such, proponents of this assessment also claim that}

while returning to gold at a lower rate might have helped Britain’s export industries in the short-term, it would not have resolved Britain’s longer-term economic problems, and indeed may even have made matters worse. A lower par, it is argued, would not have obviated the need for improved competitiveness from British industry, would not have solved the problems of domestic price and wage rigidity, and would not have enabled Britain to escape from economic dislocation in its export markets, or from the undervaluations of France and Belgium. In consequence, it is argued that while a devaluation may have eased the immediate pressure on British industry, it would have ultimately served to delay the process of adjustment, thus making the eventual changes that difficult to achieve.27