Resumen ejecutivo

During the latter half of 1926, just as the world appeared to be recovering from over a decade of trauma, with many countries now back on gold and with the international economy enjoying a mild boom, global conditions again began to deteriorate.156 _{This was}

expressed as a growing unevenness in conditions for the exploitation of labour within the global circuit of capital, assuming the more concrete form of a disequilibrium firstly between the various branches of the world economy, and secondly between national conditions for capital accumulation. For the former, the disproportionality was manifest in the overproduction and subsequent decline in the price of key commodities such as coal,

155 _{BE:ADM34/16. Norman Diaries 21/11/27; BE:G14/55. Committee of Treasury Extracts; BE:OV9/479.}

Niemeyer to Grigg 19/7/28; Clay (1957), pp.320-59; Boyle (1967), pp.208-22; Sayers (1976), Ch.14; Heim (1984), pp.535-6; Kynaston (1999), pp.131ff.

heavy metals, and agricultural goods. This was not simply a result of the strains and the aftermath of the war, but was also due to the secular spread of industrialisation driven by capital’s search for ever greater surplus value extraction, and by the uncoordinated character of capitalist production ignoring the limits of the market.157 _{For the latter, the}

unevenness took the geographical form of a sharpening contrast between conditions for capital accumulation in most parts of the world, with those in America (now the world’s most productive economy), leading to a vast expansion of global debt and a growth in speculation on the New York stock market. The roots of this crisis lay in the attempt by the United States to facilitate the postwar reconstruction of the world economy by providing a series of large foreign loans, primarily to Latin America and Germany under the 1924 Dawes scheme. For the most part however, these loans were not invested by their recipients in ways that would ensure the smooth expansion of global capital accumulation, or that would enable them to repay the debt, but were largely invested in already overexpanded sectors such as primary goods, or were spent on unproductive schemes designed to contain social tensions and shore up balance of payments weaknesses such as public works and welfare provisions.158

The continued disparity in global conditions for capital accumulation meant consequently that despite the huge scale of American foreign lending (around $6.4 billion between 1924-29) the United States nonetheless remained a net importer of world capital in the form of gold, further exacerbating its global maldistribution.159 _{In addition, the US}

economy was itself now also exhibiting signs of overproduction, with a swathe of mergers and the development of mass production techniques during the past decade having raised

157 _{See for example Kenwood and Lougheed (1971), Chs.11-13; Ziebura (1990), passim.}

158 _{Kindleberger (1986), pp.39-41; Marichal (1989), Ch.7; Feinstein et al (1997), Table 5.2; Bulmer-Thomas}

(1998), p.70.

the growth of American industrial output far above that of real per capita income.160 _{As US}

producers curtailed by international and domestic overaccumulation now found it increasingly difficult to maintain present levels of production at a sufficient rate of profit, and as fears of a domestic recession therefore began to grow, American industry and commerce sought to avoid the consequences of the overproduction crisis with an expansion of domestic (especially consumer) credit. As such, by the latter half of the 1920s the scale of economic activity in both the global and US circuits of capital was thus being increasingly sustained only on the basis of an ever-growing mountain of debt.161

The problems within the US circuit of productive capital were also adding to the expansion of the US circuit of money capital, and hence to the growth of speculation on Wall St., as capital increasingly sought to bypass the need to engage in the productive exploitation of labour and instead sought to gain expansion on a purely financial basis.162

Attempts by the FRBNY to address this with higher interest rates however, served merely to compound the magnetism of the United States for international capital and also forced central banks around the world to raise interest rates in defence of their gold reserves. As higher rates added to the burden of debtor nations by putting further downward pressure on world commodity prices (especially of the primary goods on which debtors were frequently dependent) many states, particularly in Latin America, began to experience an intensification of their balance of payments difficulties. As the crisis deepened, many debtor nations now found themselves unable to respond with higher interest rates due to economic weakness and domestic resistance to deflation, and instead turned to a further expansion of primary goods production and to even greater borrowing in a bid to sustain

160 _{Soule (1947), passim; Beaudreau (1996), Tables A3.2, A3.6.}

their position.163

The impact of these events on the British state was felt in the form of renewed pressure upon the reserves of the Bank of England. Gold was lost to the US for speculation; to France as refugee capital returned following the cessation of the financial crisis; and to Germany, which was now borrowing heavily from London to sustain its balance of payments. The drain was also enhanced by an excessively high level of foreign lending by the City, and by a deterioration in the current account, both of which weakened sterling.164 _{The Bank however were now constrained in their response by the political}

concerns surrounding the condition of the British economy. With unemployment rising, with industry struggling, with Churchill growing ever more anxious, and with the Bank themselves keen to avoid any adverse public opinion, considerations of a rise in interest rates were abandoned in favour of defending the pound once more with the use of open market operations.165

By 1927 it was increasingly clear that the gold standard was not functioning in the way in which officials had originally envisaged. As Norman complained, international gold flows were frequently ‘irrelevant’ to economic circumstances, while central banks were frequently ignoring the ‘rules of the game’ by intervening in order to neutralise their effects on national price levels.166 _{Moreover, both France and Belgium had by now effectively}

returned to the gold standard at competitively undervalued exchange rates, further distorting the operation of the international monetary system, and the regime itself was

163 _{Kenwood and Lougheed (1971), pp.186-97; Kindleberger (1986), pp.73-91; Bulmer-Thomas (1998), Table}

2.1.

164 _{Sayers (1976), ps.184-7, 213, 336; Cairncross and Eichengreen (1983), pp.46-8; Butler and Butler (1994),}

pp.373-4.

165 _{BE:ADM34/15. Norman Diaries 8/10/26; Sayers (1976), pp.212-16; Eichengreen (1992), pp.209-11.} 166 _{BE:G1/464. Norman to Sir Edward Cook 4/1/27; Clay (1957), pp.223-5.}

also coming under renewed criticism.167 _{Hawtrey for example was arguing that the costs of}

the return had been ‘much heavier than could have been foreseen’ and that tight credit had ‘frightfully aggravated’ Britain’s difficulties, the FBI were also protesting against the ‘abnormally high’ level of interest rates, and the labour left, increasingly of the view that government policy was being dictated by the interests of finance, were continuing to call for the Bank of England to be nationalised.168 _{In addition, rumours were now circulating}

that Norman himself was ‘extremely worried’ about the situation, that he believed the return to gold to have been a mistake, and that he was even considering its abandonment if things did not soon improve.169

In April a brief respite in the pressure allowed a politically expedient cut in interest rates to 4.5%, though the ease was soon revealed to have been a false dawn. In May problems resumed when the Banque de France began converting its reserves of sterling into gold in a bid to force British rates back up so as to ease upward pressure on the Franc.170 _{Moreover, senior Treasury officials and the Governor were now under increasing}

fire from Churchill, whose disappointment with Britain’s slow rate of recovery and the persistence of high unemployment was palpable. Though Norman was insistent that unemployment was the government’s responsibility, the Chancellor was equally insistent that it was ‘an immense fault and shortcoming in our economic organisation’, and that it could not be ignored. Although the gold standard policy had secured international confidence in the pound and lowered the cost of living, it had he argued, also produced

167 _{Sayers (1976), pp.192ff; Kindleberger (1986), pp.34ff.}

168 _{PRO:T176/5. Pt.2. ‘Recent Price Movements’ (Hawtrey), 1/3/27; PRO:T176/13. Pt.2. ‘The Monetary}

Outlook According to the Times’ (Hawtrey), 18/3/27; MRC:MSS.200/F/3/S1/14/6. FBI General Economic Department to Secretary of Ley’s Malleable Castings Co. Ltd. 11/4/27; Lansbury’s Labour Weekly (April 1927 issues).

labour unrest, a huge increase in unemployment, and had raised the threat of a dangerous political backlash in the not too-distant future. In all, Britain’s monetary policy since the war had, Churchill warned, been ‘entirely unsatisfactory’.171

Again however, such events cannot be seen as evidence of the failure of the gold standard strategy. Contrary to the rumours for example, Norman did not now view the return to gold as having been a mistake and nor was he remotely contemplating its abandonment, while even Churchill, in spite of his dissatisfaction, could see no alternative to the regime. Indeed, for all its problems the Chancellor was nevertheless of the view that the gold standard had been ‘less disastrous’ than would have been the case under a discretionary monetary policy with all its ‘successive alterations and reversals’.172

Moreover, the criticism from Hawtrey was also not considered by Norman to be representative of any significant body of official opinion in Britain. As he later remarked:

“Except perhaps in the range of pure theory I have never heard anyone agree with him: and indeed it would have been true to say, for years past, that he represents neither opinion in the City, nor the official views of Whitehall, nor any deliberate and instructed views in political circles.”173

Furthermore, the pressures of the global economic situation also soon subsided. French sales of sterling quickly halted once it was realised that Norman could not raise interest rates and that damaging the pound would also endanger the Franc, and indeed the gold standard as a whole. In July international tensions were further eased as central bank Governors from the United States, Britain, France, and Germany gathered in New York to

171 _{BE:G1/464. Churchill to Norman 18/5/27; Note by Norman; PRO:T175/11. Churchill to Niemeyer 9/4/27;}

PRO:T208/121; ‘Memo. on Draft Currency and Bank Notes Bill’ (Churchill), 1927.

172 _{BE:G1/421. Strong to Norman 12/4/27; Norman to Strong 7/5/27; PRO:T175/11. Churchill to Niemeyer}

9/4/27.

discuss ways of improving global stability. One of the most important outcomes of this conference was a cut in US rates to 3.5% in August, a move designed as much to address growing fears of domestic recession as to ease the pressure on Europe. Nonetheless, the reduction provided a welcome relief for the global economy, diverting capital away from the US, enabling the lowering of European interest rates, and aiding the recovery of sterling throughout the rest of the year.174