18:28
The circumstances leading up to the Bank of England’s abandonment of the gold standard in 1931 have been detailed by letters between the Bank and the government from the period, which were released today.
Amid the Great Depression, during which many countries around the world sufferered economic turmoil, investors in Paris and New York lost confidence in the pound.
At the time, sterling was pegged to bullion. This meant that the pound was worth a fixed amount compared to other currencies and gold itself. In order to ensure that sterling retained its value, the Bank of England was obligated to exchange gold for pounds at the specified rate.
However, as political turmoil engulfed the UK, the country’s first national government – a coalition between Labour and the Conservatives – presided over a budget crisis that triggered a run on the pound.
Minutes from the Bank’s court in 1931, published on Wednesday, detailed how foreign exchange reserves were being drained to such an extent that the gold standard had to be abandoned.
Up to that point, the gold standard had been preserved by loans from the Federal Reserve and the French central bank, with the Bank’s bullion reserves used as collateral. But Threadneedle Street decided in September that its reserves would run dry if New York and Paris withdrew support.
Ernest Harvey, the Bank’s deputy governor at the time, wrote to Ramsay MacDonald, the prime minister, and Philip Snowden, the chancellor, on September 19, 1931, saying that reserves worth more than £100m were close to running out.
Mr Harvey wrote: “I am directed to state that the credits for $125,000,000 and Fcs 3,100,000,000 arranged by the Bank of England in New York and Paris respectively, are exhausted, and that the credit for $200,000,000 arranged in New York by His Majesty’s Government, together with credits for a total of Fcs 5 milliards [5bn] negotiated in Paris, are practically exhausted also."
The minutes from the Bank in 1931
“The heavy demands for exchange on New York and Paris still continue. In addition the Bank are being subjected to a drain of gold for Holland.
“Under these circumstances, the Bank consider that, having regard to the above commitments and to contingencies that may arise, it would be impossible for them to meet the demands for gold with which they would be faced on withdrawal of support from the New York and Paris exchanges.
“The Bank therefore feel it their duty to represent that, in their opinion, it is expedient in the national interest that they should be relieved of their obligation to sell gold under the provisions of [the Gold Standard Act 1925].”
With a pound worth $4.87, the credits were worth around £100m.
Part of the letter from the Bank to the government
In response, the prime minister wrote back:
“Gentlemen, His Majesty’s Government have given the most serious consideration to your letter of the 19th instant in which you inform them of the grave difficulties with which you are faced in meeting the obligation placed on the Bank of England by the Gold Standard Act…
“His Majesty’s Government are of the opinion that the Bank of England should place such restrictions on the supply of gold as the Bank may deem requisite in the national interest.”
Part of the letter in response
The gold standard was thus swiftly abandoned, leading to a sharp devaluation in sterling. This helped the UK recover from the crisis in 1931. The UK had previously abolished the gold standard during the First World War, but restored it under Winston Churchill in 1925.
Gold standards were popular around the western world in the 19th and early 20th centuries, but no country uses them today. Instead, central banks issue “fiat currencies” – money that is not convertible on demand.
This gave governments and central banks flexibility to promote growth or devalue currencies to deal with debts, although the rise of quantitative easing has seen some pine for the days when money had a fixed value
.
source:Telegraph.uk
No comments
Post a Comment