Reducing the standard of living of the workmen by 50 percent … would be the effect of departing from the gold standard.
—Philip Snowden, Labour Chancellor (August 1931)First and foremost, the Bank rate should be reduced as rapidly as may be to say 3 percent … we want cheap money and plenty of it to stimulate industry.
—Frederick Phillips, HM Treasury (February 1932)Britain's 1931 departure from the gold standard system remains one of the most shocking policy shifts in the history of the global economy. For centuries, London had been the keystone of the international gold standard. When sterling came under attack in summer 1931, Britain's most powerful interests dictated that the standard be defended whatever the cost. The British Parliament answered the call by passing one of the most austere budgets in history. Yet on 18 September the Bank of England abruptly, unilaterally suspended the gold standard, leading the world into the era of flexible exchange rates.
From Polanyi's “great transformation” thesis to Kindleberger's hegemonic stability theory, Britain's suspension is the central case in several of the most influential analyses of international political economy.Footnote 1 This scholarship focuses on changing systemic conditions alongside the rise of social democracy. The former forced policymakers to choose between internal and external adjustment, and the latter ensured that they acceded to emerging demands for domestic stability.
We know now that “the international gold standard was a central factor in the worldwide Depression. Recovery proved possible … only after abandoning the gold standard.”Footnote 2 Armed with hindsight, scholars have puzzled “why countries stayed wedded to gold for so long.”Footnote 3 But in the case of Britain, this puts the question the wrong way. Before Britain “demonstrated the feasibility of devaluation without inflation,” most policy-makers did not know that they even “could” leave gold—let alone that they should.Footnote 4
Drawing on numerous primary sources held in several archives, this article constructs an alternative account of Britain's departure from gold. It contends that this shift crucially depended on the ideas held by key actors. Prior to suspension, British policy-makers believed that leaving gold would precipitate financial chaos and increase unemployment. The Bank's mistaken responses to the 1931 financial crisis, however, led to an ostensibly “temporary” suspension of the gold standard. This generated an unintended experiment with an unexpected result: the low, flexible exchange rate stimulated the domestic economy without generating hyperinflation. Recognizing the benefits of this newly discovered equilibrium—long heralded by Keynes—even the most ardent defenders of the gold standard embraced the new paradigm.
Revisiting this case promises to enhance our understanding of ideas’ influence on foreign economic policy. Conventional models of exchange rate politics maintain that fixed-exchange-rate regimes collapse “when politicians are either unwilling or unable to muster the political and/or economic resources needed to defend the exchange rate peg.”Footnote 5 Such models assume that actors recognize the full range of policy options and those policies’ implications for their interests.Footnote 6
Exchange rates, however, are more difficult for actors to grasp than other areas of foreign economic policy.Footnote 7 It is probably even truer here than elsewhere that “interest groups may … be unable … to act in support of policies that favor their interest.”Footnote 8 This complexity increases the significance of actors’ ideas because their theories of monetary political economy are more likely to be limited or wrong.
My analysis reveals how such cognitive limits are expanded. Previous models of the origins of policy paradigms focus on intellectuals’ theoretical development and policy-makers’ deliberate experimentation. However, Britain's experience in 1931 shows how unintended policy experiments can elucidate new policy options unexpectedly.
The Puzzle: Britain's Abandonment of Gold
On 21 September 1931, Parliament voted to abandon the gold standard. As a formal matter, the Gold Standard (Amendment) Act suspended the Bank of England's obligation to convert pound notes into gold at the official price. As a practical matter, it relieved Britain from subordinating macroeconomic policy to the maintenance of exchange rate stability. After an initial, defensive interest rate hike to 6 percent, the Bank steadily cut interest rates.Footnote 9 By July 1932, Bank rate was at 2 percent, where it remained until August 1939.Footnote 10
In early 1932, the Bank was granted a £150 million fund to intervene in the exchange market, directly influencing sterling's market value. But rather than a step back toward gold, the account was created “to keep down the pound.”Footnote 11 By 1933, the transition was complete: the exchange rate regime had moved from fixed to flexible, and the exchange rate had moved from “high” to “low.”Footnote 12
In Britain, “cheap money … served to initiate the housing boom and hence general recovery.”Footnote 13 Breaking the “gold fetters” actually strengthened Britain's ties to its empire. Most of its members followed the metropole off gold.Footnote 14 Combined with the Ottawa Agreements’ reinvigoration of historical trade linkages, the emergence of a “sterling bloc” diverted trade and investment into intra-imperial exchanges.Footnote 15 Britain's devaluation also fostered goodwill among its overseas possessions by reducing the burden of their sterling debts.
The turn toward the empire, however, “symbolized a radical change in the structure of international economic relations.”Footnote 16 The devaluation was widely viewed as a beggar-thy-neighbor competitive exchange rate depreciation. The secretive operations of the Bank's exchange fund only heightened concerns that Britain sought to shift the burden of adjustment abroad.Footnote 17 Twenty-five countries responded by devaluing likewise. Others levied tariffs, import restrictions, and exchange controls to relevel the playing field.Footnote 18
Britain's departure was not only one of the most significant events in the history of global capitalism. It was also one of the most surprising. Since 1717, Britain had suspended convertibility just twice—both times in the context of war.Footnote 19 In each case, Britain not only reinstated the fixed regime after hostilities ceased, but it actually returned at the prewar parity. The 1931 abandonment of gold cut against centuries of policy—including what had been championed as recently as 1925.Footnote 20
Britain maintained this tradition for good reason. Its fixed regime was correlated with its ascent. Conventional wisdom—bolstered by classical economic models—maintained that the “unshakable British commitment to gold” had garnered wealth, power, and prestige.Footnote 21 The Central Europeans’ ruinous hyperinflation in the 1920s provided fresh evidence that “there is no alternative to the international gold standard as an international monetary system.”Footnote 22
The primary beneficiaries of this policy—traders and financiers—were intimately connected to Britain's policy-makers.Footnote 23 Indeed, they were often one and the same.Footnote 24 Beyond the City of London, the British economy had been organized around the premise that sterling was “as good as gold.”
Yet Britain was one of the first major economies to leave gold.Footnote 25 Although it left in the midst of a financial crisis, it had weathered such storms before.Footnote 26 Additionally, the gold standard's much-vaunted network effect militated against Britain's exit.Footnote 27 Relative to other countries, Britain left gold “early,” when “economic conditions did not necessarily warrant such a move.”Footnote 28
The nature of Britain's departure was also exceptional. Germany, Austria, and neighbors slid off gold gradually. Initially, they raised interest rates. Austria went to 10 percent.Footnote 29 Germany went as high as 15 percent. Then each country slowly tightened capital controls.Footnote 30 When the pressure persisted, they opted for implicit depreciation rather than overt devaluation. Austria maintained the official parity even as “the domestic price of gold and the black market discount rose … to 40 percent above par.”Footnote 31 Germany “continued to try to target [its] exchange rates at levels prescribed by the gold standard even after ‘leaving.’”Footnote 32
Britain, by contrast, left abruptly and boldly. The Bank did not push interest rates past 4.5 percent—two points below their high in the 1929 crisis.Footnote 33 Nor did it impose capital controls prior to suspension. Instead, it severed the pound's link to gold in a single stroke. While other departures were de facto, Parliament passed a law that announced “the suspension of the Gold Standard.” Thus, “the 1931 devaluation of sterling [was] foreseen by few and desired by fewer.”Footnote 34 How can we explain this revolutionary shift?
Previous Explanations: It's the Politics, Stupid
Even in ideal conditions, the gold standard suffered from “considerable latent instability.” Before World War I, Britain's “leadership” and support from other major powers had stabilized the system.Footnote 35 The “Carthaginian peace” of 1919, however, both upset the delicate prewar economic balance and reconstructed states’ identities and interests.Footnote 36 The breakdown of international cooperation undermined the credibility of states’ commitments to the gold standard, inviting speculative attacks.Footnote 37 Financial markets remained intertwined, ensuring that crises propagated like contagion.Footnote 38 At the same time, postwar adjustment and increasingly sticky wages made gold standard commitments more painful than ever.Footnote 39
However, international dynamics are only half the story. “Policies that implicate the exchange rate,” Frieden reminds us, “call into play well-defined economic interests.”Footnote 40 As a result, countries chose to “go on or off gold … in the context of often bitter debates among groups in society that had vested interests for or against the fixed-rate standard.”Footnote 41
Virtually every subsystemic analysis of the gold standard's demise follows in the tradition of Polanyi's The Great Transformation—the “locus classicus of political-economy analysis of the gold standard.”Footnote 42 Throughout the interwar period, Polanyi argued, policy-makers became increasingly unwilling to subordinate “questions of social organization … to the needs of the restoration of the currency.”Footnote 43
Rationalist exponents of the Polanyi thesis insist that workers’ increasing organization and empowerment enabled them to resist the austerity required to maintain the peg. Scholars have focused on the party in power and the independence of the monetary authority.Footnote 44 In Britain, “the rise of the Labour Party, the growth of trade unionism, and the prewar extension of the franchise” ensured that “deflation that once might have elicited mute acceptance … provoked hunger marches and mass demonstrations.”Footnote 45
Constructivists acknowledge the role material changes played in political representation but they emphasize the broader shift in “attitudes concerning the role of the state in the conduct of national monetary policy.” “Demands for social protection,” after all, “were very nearly universal, coming from all sides of the political spectrum and from all ranks of the social hierarchy.”Footnote 46 “Neither management nor labour nor their representatives in Parliament were willing to pay the price” to save the gold standard.Footnote 47
These explanations—systemic and subsystemic, rationalist and constructivist—are often combined to claim that the gold standard's demise was overdetermined and inevitable.Footnote 48 Such a synthesis differs little from Polanyi's original story. Developments in the global economy, particularly after World War I, made maintaining the gold standard increasingly painful. Diminished international cooperation combined with Britain's relative economic decline to exacerbate its difficulties. At the same time, a newly empowered working class harnessed evolving “social purpose” to resist the austerity necessary to defend gold.Footnote 49 Simply put, Britons abandoned the gold standard because “a consensus in favour of making major sacrifices for this battle of Britain did not exist.”Footnote 50
The Argument: Policy Choices Depended on Actors’ Ideas
These accounts impute incredible prescience to the actors responsible for Britain's departure. They assume both that Britons knew how to save the gold standard and that they recognized that abandoning the gold standard could alleviate unemployment. Yet neither was obvious.
Prior to suspension, few Britons advocated leaving gold.Footnote 51 Keynes, of course, was exceptional. After he correctly prophesied the disastrous “economic consequences” that followed the 1925 return to gold, few could deny the brutality of the “barbarous relic.”Footnote 52 But most still saw it as a necessary evil. Although depreciation might provide a “temporary” stimulus, the orthodoxy insisted, preserving these “ill-gotten gains” required “more and more depreciation”—a formula for hyperinflation.Footnote 53 Keynes's elucidation of the modern alternative proved decisive—but only after the Bank had suspended convertibility for altogether different reasons.
To say that the gold standard was deeply rooted in Britain is not to say that it was easy to maintain it there. Whenever the market exchange rate threatened to drop below the gold export point, the Bank of England had to divine the forces at work. On the one hand, exchange rate pressure could result from transitory phenomena, such as a “temporary disturbance” or a momentary loss of confidence.Footnote 54 In these cases, the official parity reflected the long-run equilibrium, and the Bank typically intervened with reserves to prevent herd mentality from exacerbating small fluctuations. On the other hand, exchange rate pressure could also follow from evolving economic fundamentals. If the supply of—and/or the demand for—the pound were to significantly change, the official parity would become over- or undervalued. To maintain the parity, the Bank would adjust interest rates to reequilibrate supply and demand at a rate within the gold band. Determining the cause of any particular crisis was rarely straightforward. As the Bank's historian puts it, “central banking is an art, not a book of rules.”Footnote 55
British economic stability depended on the Bank's capacity to thread that needle. Overreacting—by resorting to interest rate adjustments whenever a fluctuation occurred—might inspire panic and generate violent shifts in domestic macroeconomic conditions.Footnote 56 Underreacting would risk the exchange rate regime. “While there was no obvious right or wrong,” Sayers explains, “inept handling could have had rapid and cumulative effects in accelerating the flight from sterling.”Footnote 57
This is precisely what occurred in 1931. Britons were committed to maintaining the gold standard, but those responsible for its defense misjudged the causes of the flight from sterling. At this “critical juncture,” the Bank's governors divided over the appropriate policy response.Footnote 58 Following the collapse of the Bank's governor, the deputy governor shifted Bank strategy from making defensive rate hikes to pursuing fiscal austerity. He then prematurely suspended gold convertibility in a gambit to save the gold standard coalition in Parliament from electoral defeat. This generated an unintended experiment that tested the central prediction of orthodox theory: leaving the gold standard would precipitate uncontrollable inflation. When this did not occur, Britons discovered that a managed float was a viable—indeed, a desirable—policy option.
The Model: Learning from Experiments
A large body of scholarship on the “dynamics of policy learning” shows that ideas define crises and construct identities and interests.Footnote 59 A smaller set of scholars focus on how ideas define the range of recognized equilibria and specify the means by which these equilibria could be reached.Footnote 60 Most of these scholars, however, concede that ideas “do not acquire political force independently of the constellation of institutions and interests already present there.”Footnote 61 By contrast, I proceed along an “informational vein” where ideas are selected based on “objective, environmental stimuli.”Footnote 62
Following Kuhn, most scholars have conceptualized ideas as “policy paradigms”—syntheses developed after empirical anomalies “gave rise to policy failures that discredited the old paradigm and led to a wide-ranging search for alternatives and to a process of experimentation with modifications to policy.”Footnote 63 In several prominent cases, however, policy-makers began to experiment with trade liberalization even before the old paradigm had been “discredited.”Footnote 64
Policy-makers’ willingness to experiment with untested ideas is partly a function of the expected net benefits. In the case of trade liberalization, for example, these costs are relatively low. The level of liberalization is a continuous variable, and policymakers can increase or decrease the amount of liberalization with comparative precision. It is also easier to confine the experiment to a limited number of trading partners and to subsets of goods and services.
By contrast, it is far more costly to experiment with changes to the exchange rate regime. Although trade and exchange rate policies can serve many of the same ends, exchange rate policy is a far blunter instrument than trade policy.Footnote 65 Exchange rate adjustments affect virtually every facet of the domestic economy along with its relationship with the global economy.Footnote 66 As Britain's gold standard orthodoxy argued, anything short of remaining “on gold” was tantamount to a choice to “go off.” Moreover, such adjustments liquidated credibility that could not be regained.Footnote 67 These factors raise the stakes of exchange rate policy and ought to elevate policymakers’ focus from the sectoral level to the national and international levels.Footnote 68 They also strengthen policy-makers’ status quo bias.
Such a bias can be circumvented when policy-makers’ mistakes lead to an unintended experiment. This model differs from the “self-reinforcing path-dependent processes” that predominate in historical institutionalist accounts.Footnote 69 Here, ideas work as “road maps.”Footnote 70 In that mode, old ideas “constrain” policy-makers by limiting the range of options they consider viable.Footnote 71 But new ideas can shatter these constraints by leading actors to discover new paths to their destinations. In 1931, the results of Britain's unintended policy experiment were so strong—and so clear—that policymakers and scholars alike were forced to rethink their core assumptions.Footnote 72
The Narrative
The Bank's Responses to the 1931 Sterling Crisis
Throughout the 1920s, Britain relied on income from foreign investments to offset its sizable trade deficit.Footnote 73 In summer 1931, however, a string of European bank failures threatened this precarious balance. When Germany imposed capital controls, British banks lost more than £70 million in a stroke.Footnote 74 Foreign bankers responded to the crunch by liquidating their sterling balances.Footnote 75 Britain's deteriorating balance of payments created immense downward pressure on the exchange rate. In July alone, the Bank expended half of its international reserves (£56 million) to prop up sterling.Footnote 76
The traditional response had been to raise Bank rate—the Bank's discount rate. This would stem capital outflows by increasing the real return on holding sterling and demonstrating the Bank's commitment to battle inflation. Raising borrowing costs would also pressure the politicians to balance the budget. The Bank had used this tool successfully in previous crises.Footnote 77 This strategy was heartily endorsed by the major London clearing banks.Footnote 78 But at the end of September, the Bank suspended convertibility with the interest rate at just 4.5 percent. Many contemporaries were dumbfounded that the rate was not pushed at least twice as high—as it had been by other countries defending their currencies.Footnote 79 Some ex post calculations suggest that a mere two-point increase may have been enough to right Britain's imbalance of payments.Footnote 80
To explain this, scholars typically invoke the Polanyi thesis. “The explanation,” we are told, “is that the authorities feared that interest rate increases would worsen unemployment.”Footnote 81 Who were these “authorities?” In some accounts, the Bank itself relented once the unemployment rate passed a “tipping” point.Footnote 82 In others, the Bank feared “drawing fire from Labour MPs.”Footnote 83 These conclusions, however, are based on little more than the recognition that Britain's unemployment rate was high.Footnote 84 There is no first-hand evidence that the Bank of England was willing to hazard the gold standard to battle unemployment.Footnote 85
Everything we know about the “choices and values” of the Bank of England suggests the reverse.Footnote 86 Prior to the crisis, Keynes grilled the Bank's governors on the trade-off between exchange rate stability and domestic macroeconomic conditions. They eventually admitted that “the international consideration” took precedence.Footnote 87 Nor did the Bank of England bow to external pressure. Politically, it was “the most independent of central banks.”Footnote 88 There were strong connections between London's financial interests in “the City” and the British government in Westminster. Throughout the crisis the Bank provided the government with daily reports on the financial situation.Footnote 89 But the pressure flowed from the bankers to politicians, as this narrative makes clear.
The Bank similarly asserted its independence from the City. The powerful clearing banks had always been excluded from the Bank's Court of Directors.Footnote 90 Merchant bankers—those most exposed in the 1931 financial crisis—enjoyed some formal representation. But they included less than a third of the directors.Footnote 91 Moreover, the 1920s brought new efforts to insulate and professionalize the Bank's staff. Appointed governor in 1920, Montagu Norman became the first of what he envisioned as a “group of whole-time professionals” running the Bank.Footnote 92 He ensured that the Bank appointed and promoted his old friend, the Canadian businessman, Edward Peacock. Hoping to extend his own influence, Norman likely pushed to have Peacock installed as a leading partner of Barings, London's most significant merchant bank.Footnote 93 Deputy Governor Ernest Harvey, by contrast, had virtually no ties to the City. The son of a vicar, Harvey spent four decades at the Bank working his way up from a clerkship.Footnote 94 Thus, if there were a “bankers’ ramp” in 1931, it was conceived by these three dominant men inside the Old Lady of Threadneedle Street.
In late July 1931, a burgeoning fiscal crisis complicated sterling's defense. Projecting a £120 million deficit, the budget committee recommended £24 million of new taxes and nearly £100 million of “economies”—including a £67 million reduction in unemployment support.Footnote 95 Although this might have balanced the budget, it risked prolonging the depression. For investors, financing the deficit was a nonstarter. Faced with ballooning public debt, policy-makers might be tempted to impose “haircuts” on bondholders or even resort to inflation.Footnote 96 More broadly, the revenue shortfalls signaled a weakening British economy. News of the deficit accelerated sterling's slide.
Within the Bank, “two schools of thought” arose over how to defend sterling in this context.Footnote 97 Deputy Governor Harvey zealously believed that the Labour Government's profligacy was the root cause of the flight from sterling. “The crisis,” he explained, “had been one of confidence.” Because “people were less concerned about securing the margin of interest than of safeguarding capital,” Bank rate increases would prove ineffective. Indeed, resorting to the heavy artillery would be interpreted as a sign of panic and “stimulate the lack of confidence.” Instead, sterling's “future prospects must … depend upon the course of political developments,” meaning whether and how the budget was balanced.Footnote 98 In the meantime, the Bank could secure foreign credits to help it ride out the storm.Footnote 99 If these efforts stymied, this would only increase the pressure on the politicians to balance the budget.Footnote 100
Governor Norman, however, did not want to leave sterling's fate in the hands of politicians or foreigners.Footnote 101 At the first sign of trouble, he elaborated a program of “progressive increases in bank rate.”Footnote 102 He insisted, “to cope with such disorganisation [in the exchanges] would require 7% or 8%.”Footnote 103 On 23 July, Bank rate was raised to 3½ percent.Footnote 104 Norman did inquire into obtaining foreign loans. But the amount needed would require parliamentary action, and “because of the early adjournment of Parliament,” he concluded, “the whole matter was now dead.”Footnote 105 Whatever credits the Bank could secure on its own would merely “allow the Government time in which to facilitate plans for balancing the Budget.” Instead, Bank rate was raised another full point at the end of the month.Footnote 106 After that, Norman collapsed. Having led the Bank through its most difficult decade to date, Norman was left with no reserves of his own. He remained bedridden for days.Footnote 107
Norman's absence granted Harvey the opportunity to redirect the Bank's approach. He immediately reopened foreign loan negotiations.Footnote 108 Beyond the shift in strategy, Harvey also brought a difference in style. Harvey was less interested in consulting the City and more willing to play politics.Footnote 109 So, when the United States and France offered credits of £25 million each, Harvey informed Chancellor of the Exchequer Phillip Snowden “that the Bank are not prepared to enter into the credit without some promise of support by the Government.”Footnote 110
On 5 August, Norman mustered the energy to return to the Bank—just in time for the weekly discussion of interest rate adjustments.Footnote 111 His arrival refocused the Bank on its traditional mechanisms.Footnote 112 Rather than employing the credits to support sterling, the Bank “considered it necessary to lose gold and to raise the discount rate again, in order to make the … Government understand the seriousness of their position.”Footnote 113 The policy shift, however, confounded the markets. Assuming that the credits had been exhausted, sterling's slide was “misinterpreted all over the world as a fundamental weakness in the London position.”Footnote 114 Shocked that their credits were not being used as intended, the French and the Americans demanded that the Bank reverse course.Footnote 115
When Norman stayed home again on 6 August, Harvey happily complied. He empowered the foreign banks to fully utilize the credits to buoy sterling above the gold export point.Footnote 116 Once again, the Bank embraced the doctrine “that the increased loss of confidence abroad, which might follow any immediate rise in the Bank Rate, outweighed all other considerations.” “However black the Governor may have painted the picture,” Harvey explained to Chancellor Snowden, “his picture cannot have been more black than [the Bank's] to-day.” “We are doing all that we can,” Harvey claimed, “but our power to act is rapidly diminishing.” Instead, “the sign which foreigners expect from this country is the readjustment of the budgetary position.” To increase pressure on the Labour Government, Harvey also sought “to lay [the Bank's] views before the Leaders of the Opposition Parties.” Thus began Harvey's relentless campaign to badger the politicians into balancing the budget.Footnote 117
Snowden passed the desperate message to Prime Minister Ramsay MacDonald: “You will note … the belief of foreigners that our budgetary position is unsound and until that is remedied … this uneasiness abroad will continue…Whatever real foundation there may be for this … there can be no doubt about its reality and it is up to us to take immediate action to remove it.”Footnote 118 MacDonald accepted Harvey's diagnosis entirely. He noted in his journal, “Bank considering how much more it is justified in using [the foreign credits] … Situation got beyond them & only Govt. can act … the failure to balance Budget is forfeiting confidence in sterling.”Footnote 119
Austerity Politics and the Division of Labour
Believing that the mantle of the international gold standard rested on their shoulders, how did the politicians respond?Footnote 120 Conventional models of exchange rate politics predict that opinion would have divided along party lines: “The preference of the conservatives was to … defend the currency; that of the Left was to devalue.”Footnote 121 Since the 1929 election, Labour had enjoyed a plurality in Parliament. With MacDonald, a socialist, at the head of the government, Simmons counts Britain's suspension foremost among those that “occurred … in the presence of left-wing governments for which the costs of deflation were intolerable.”Footnote 122
This account, however, does not fit the facts. The crucial cleavage developed not between the parties but within the Labour Party. Following Labour's division, MacDonald headed a coalition dominated by the Conservatives. No historian could characterize the government that presided over the suspension as a “left-wing progressive polit[y].”Footnote 123
In late July, Snowden announced that the Labour Government would take “every possible step to ensure that the proud and sound position of British credit shall be in no way impaired.”Footnote 124 He then endorsed the combination of retrenchment and broad-based tax increases demanded by the bankers.Footnote 125 When the cabinet objected in August, MacDonald “warned … of the calamitous … consequences which would immediately and inevitably follow from a financial panic and a flight from the pound.”Footnote 126 Snowden foreboded, “if sterling went the whole international financial structure would collapse, there would be no comparison between the present depression and the chaos and ruin that would face us.”Footnote 127 Safeguarding the pound was in the interest of every Briton—especially those in the working class. “Departing from the gold standard,” Snowden declared, would “reduc[e] the standard of living of the workmen by 50%.”Footnote 128 MacDonald similarly warned, “the situation would rapidly worsen and unemployment would rapidly increase.”Footnote 129
Armed with Keynes's arguments, the Trades Union Congress (TUC) challenged the bankers’ diagnosis and prescription.Footnote 130 They were “not convinced that the situation was quite so desperate as was alleged.”Footnote 131 Moreover, “proposals to economise at the expense of the poor are not only unjust but economically unsound.” “They will increase unemployment and aggravate the basic problem underlying the present crisis by reducing the consuming power of the masses.”Footnote 132 Ideally, Britain would lead the world in a coordinated reflation. But “devaluation … would theoretically be the most effective means within the power of this country, if we have to act alone.”Footnote 133
Even before the TUC attacked, MacDonald faced the unenviable task of brokering a compromise between the bankers and his more radical cabinet members.Footnote 134 The TUC, however, narrowed the range of bargains acceptable to the politicians. First, its “declaration of war,” as MacDonald termed it, raised the political costs of compromise.Footnote 135 It also provided the “ideological cover” renegades would need to rationalize their defection.Footnote 136 But the TUC's analysis must have been persuasive—few would have revolted if they believed that doing so invited Armageddon. In effect, the TUC's alternative perspective on the crisis lowered the costs the radical cabinet ministers expected to bear if bargaining with the bankers failed.
Following the TUC disputation, MacDonald's radical cabinet ministers dug in their heels. None proposed devaluation. But half of his cabinet voted against Harvey's “very substantial economies … effected on Unemployment Insurance.” On 21 August, they balanced the budget—but with merely £56 million of cuts, including a £22 million reduction in unemployment support. That afternoon, MacDonald approached the Bank and the opposition leaders with the best budget he had been able to squeeze through his cabinet.Footnote 137
The Bank replied that it was not only “wholly unsatisfactory” but that it would “probably worsen the position by further diminishing confidence.” Having given up on the Labour government, Harvey played for its imminent ousting. The Bank foreclosed further cabinet negotiations by informing MacDonald—and the leaders of the opposition—that its reserves would not last more than a few days.Footnote 138 This sensitive information then leaked to the press, where it fueled demands for a change of government.Footnote 139 It also cost the Bank nearly £12 million, its largest single-day loss yet.Footnote 140 Convinced that forming a “National Government” was now “the best possible arrangement,” the Bank broached the possibility with leading financiers.Footnote 141
MacDonald was unwilling to capitulate. He made one last overture to his dissenting ministers, calculating that they might be more willing to compromise if they were certain that doing so would save the gold standard. So he proposed asking the US financiers if promising greater economies would dispose them to make a firm commitment to support the pound. A third of the cabinet immediately voted against the “humiliating” gesture.Footnote 142 In any event, the Americans proved unwilling to make such a promise. When Harvey delivered the news to the cabinet, “pandemonium [broke] loose.”Footnote 143 The Labour Government had disintegrated.
MacDonald acknowledged that the bankers’ demands “represented the negation of everything that the Labour Party stood for, and yet he was absolutely satisfied that it was necessary in the national interests, to implement them.”Footnote 144 He admitted “the T.U.C. undoubtedly voice the feeling of the mass of workers,” but he questioned their understanding of the crisis: “They do not know & their minds are rigid.” Committed to the plight of workers, MacDonald ignored their demands to advance their interests. He did so knowing that it meant, in his words, “political suicide.” On 24 August, MacDonald gave himself over to the Conservatives and formed a “National Government.”Footnote 145 There was nothing “national” about it. Most of the Labour MPs went into opposition. MacDonald served as the government's titular head, but the Conservatives called the shots.Footnote 146
A National Solution?
Eichengreen and Temin argue that the Conservatives “hesitated to stay the course for fear of inciting a political backlash.”Footnote 147 In fact, the National Government did everything it believed necessary to save the gold standard. It embraced “budget orthodoxy … with puritanical devotion.”Footnote 148
Finance welcomed the Conservatives’ ascent. Markets had panicked in the face of the collapsing government and rumors that the Bank's credits were “approaching exhaustion.”Footnote 149 Once news broke that a National Government had been formed, however, sterling rallied to its best position in weeks.Footnote 150
The foreign bankers received the formation of a National Government equally well. With the Conservatives on the ascent, the French and Americans assumed that a balanced budget was ensured. On 28 August, the Bank announced the receipt of new credits totaling £80 million.Footnote 151
If Harvey's interpretation of the run on sterling were correct, resolving the budget crisis ought to have restored confidence. But Harvey had misread the markets. Departing from the Bank's tradition of defensive rate hikes generated uncertainty about sterling's future while reducing the return on holding sterling. By early September, the flight from sterling had resumed. But rather than rethinking his strategy, Harvey resumed badgering the politicians—this time to push the budget through Parliament.Footnote 152
Within just a few days, the National Cabinet embraced a budget designed to satisfy the bankers.Footnote 153 The matter then passed to Parliament. The government, MacDonald explained, faced “something like a typhoon.” It was not possible to merely devalue slightly. Britain faced a binary choice between monetary stability and a currency that “tumbled without control.” He invoked the specter of German hyperinflation: “I am not scaremongering; I am giving you some history. That happened in Berlin.”Footnote 154 When Labourites attacked, MacDonald insisted, “This is an emergency.” “I hope hon[orable] Members opposite … know perfectly well that an emergency measure like this is distasteful to me, and that I should never … dream of proposing it unless I was driven by my sense of national necessity.” But although MacDonald's pride and political future were threatened, the issue was not.Footnote 155
The 300 MPs who voted for the budget recognized the devastating effects it would have on the British economy. The Conservative Neville Chamberlain conceded, “To make these economies is as disagreeable and distasteful a task as could be undertaken by any Government … Everybody admits that these proposals must have an immediate effect on increasing unemployment.” But these painful policies were “the steps necessary to avert the crisis which had brought us to the verge of national ruin.”Footnote 156
In Westminster, Snowden's budget received “an astonishing ovation.”Footnote 157 In the City of London, the reaction was largely the same, and it temporarily bolstered sterling.Footnote 158 But how did the public react to this—the most austere budget in British history?
Britons’ Resolve
Conventional accounts of the public's response play up the “staged demonstrations” and “the symbolism surrounding the Royal Navy ‘mutiny.’”Footnote 159 These events supposedly “served to undermine confidence and complicate the defense of the pound.”Footnote 160 “Without … consensus or … a dictatorial regime which could render public opinion largely irrelevant,” Kunz argues, “a drastic program on the scale necessary to be effective could not be mounted.”Footnote 161
When Parliament passed Snowden's budget, the unemployment rate exceeded 20 percent,Footnote 162 but Britons typically took the austerity measures in stride. There was no general strike as there had been in 1926. Indeed, there were few strikes of any kind.Footnote 163 Time described the pathetic protests: “Outside … Parliament little groups collected under their ringleaders shouting … Bobbies did not charge but nudged them out of the square.”Footnote 164 The infamous naval “mutiny” was embellished by the press. Historians agree that it was akin to “passive disobedience” or even just “a mild protest.”Footnote 165 The government allowed the Admiralty to reconsider specific, egregious cases, which pacified the sailors “without materially affecting the Budget Estimates.”Footnote 166
Throughout the crisis, the National Government appealed to Britons’ distinct sense of “national purpose.”Footnote 167 Kunz's suggestion that the “will … to fight had been lost” does incredible disservice to Britons’ fortitude at the height of the Great Depression.Footnote 168 When the Bank of England drew on the reserves of the British people, it did not come up short. The issue was that the policy-makers running the Bank were deeply misguided.
The Forbidden Experiment: Suspension
The standard narrative is that “Britain was forced to suspend convertibility on September 19.”Footnote 169 But it was not “Britain” that suspended convertibility—it was, essentially, the Bank of England. And the Bank was not “forced” but chose to do so. This choice was the final maneuver in a campaign Harvey waged to save conservatives in Parliament from electoral defeat. Harvey, simply put, suspended the gold standard to save it.
When Parliament's passage of the bankers’ budget failed to end the crisis, the Bank blamed calls for a general election.Footnote 170 If “such an Election might jeopardise the measures contemplated for dealing with the situation,” Harvey cautioned, “foreign opinion might be greatly disturbed.”Footnote 171 Specifically, he feared a repeat of the 1929 election in which division between the Conservatives and the Liberals granted Labour a plurality: “if they go to the country … on the old basis of a three-party election the results will be bad; but … if the election is one between the Nationalists party and the non-Nationalists, the effect will not be so disturbing.”Footnote 172 Thus, Harvey believed, a carefully managed election was necessary to protect the gold standard coalition in Parliament. He soon learned, however, that this possibility was about to be obviated by Norman's return to the Bank.
Most previous accounts assume that Norman's absence from the Bank (from late July to mid-September) had little effect on the Bank's approach to the crisis.Footnote 173 Norman was indeed virtually incapacitated by his nervous breakdown. Harvey's vigorous opposition further undermined Norman's confidence in his own judgment. But Norman never surrendered the fight. His dramatic return in September proved crucial to the outcome.
Just before his first collapse at the end of July, Norman sought succor from New York Federal Reserve Governor George Harrison. While Norman hinted at the growing division within the Bank, he “was obviously very cautious over the telephone in his use of words and names,” which “made it difficult for [Harrison] to understand … what [Norman] specifically had in mind.” Norman “wanted very much to see [Harrison],” and he had already dispatched an emissary “who understands the whole situation.” Norman “hoped [Harrison] would do absolutely nothing before talking with” this delegate.Footnote 174
By mid-August, Norman had mustered the energy to travel abroad. Hoping to avoid the press speculation that would attend a visit to the United States, Norman traveled to Quebec City instead. When Harrison described Harvey's budget over the telephone, Norman had to resist discussing interest rate hikes on the open line. But he could not mask his perturbation. He “felt the proposed program was not sufficiently severe to avoid trouble later on.” Instead, Britain must embrace massive deflation. “If the Government … did enough by way of drastic readjustment,” he intimated, “then … they would not need a credit at all.”Footnote 175
Still hoping to see Harrison, Norman travelled to Nova Scotia slowly. In mid-September, Harrison finally agreed to meet, and Norman doubled back to Montreal.Footnote 176 The private meeting evidently steeled Norman's resolve. As Harrison informed Harvey, Norman “was much disturbed about the way the exchange situation was [being] handled … [I]t was most important not to peg [the exchange rate]”—meaning support it with credits rather than using Bank rate.Footnote 177 Harrison warned, “the chief reason [Norman] was hurrying home before he was quite ready to do so was to … handl[e] the exchange situation more satisfactorily.”Footnote 178
Harvey feared the effect of Norman's return on the ensuing election. He knew that Norman would insist on raising Bank rate ruthlessly. Harvey assumed this would provoke a backlash against the gold standard. Suspending convertibility in that circumstance would irreparably damage the credibility of Britain's commitment to the gold standard.Footnote 179
Harvey thus implored the government “to announce … that in view of the National Emergency a General Election is not contemplated at the present time.” Although the credits might last a fortnight, “It would be impossible with existing resources to maintain the Gold Standard during the period necessary to conduct a General Election.” On 18 September, however, MacDonald resolved to hold an election in October.Footnote 180
Harvey concluded (incorrectly) that this decision made the suspension of the gold standard inevitable. It was only a question of whether the suspension occurred before or after the election—and who was in power at the time. Assuming (incorrectly) that an October election would deliver Parliament to the radicals, Harvey decided to orchestrate a “temporary” suspension while the gold standard coalition still controlled the government. Such a sudden suspension, Harvey calculated, would force the politicians to postpone the election. This would buy time, “giv[ing] the British government opportunity to turn around … its internal affairs.”Footnote 181 After resolving the fiscal crisis, the (Conservative-controlled) coalition government could then restore the gold standard and hold the election when Britain had returned to a more conservative mood.
That afternoon, 18 September, the Bank elected to initiate the suspension of the gold standard. It shockingly resolved to allow gold to fall below the export point.Footnote 182 This decision not only violated the understanding established with the Bank of France,Footnote 183 it also gave the illusion that the credits had been exhausted, which accelerated sterling sales.
Meanwhile, Norman's travel itinerary leaked to the press.Footnote 184 But rather than mollifying the markets, the news fanned rumors that the governor was returning to step down.Footnote 185 Harvey could have quashed this speculation by announcing Norman's intention to resume control of the Bank. Instead, he merely expressed a hope that Norman “might be well enough to join the Court [of Directors] again before very long.”Footnote 186 The statement deliberately exaggerated the uncertainty about Norman's future at the Bank: the governor chaired the Court; but, according to Bank custom, retiring governors remained on the Court to advise their successors.Footnote 187
For these reasons, the Bank's daily loss rate nearly doubled (to £18 million) on Friday. That evening, the Bank presented MacDonald with a fait accompli: “however things were on Saturday morning it would be inevitable to suspend gold payments on Monday.”Footnote 188
The situation on Saturday was better than Harvey predicted. The sale of sterling continued, and the Bank lost £10 million. This, however, did not nearly exhaust its range of reserves. Just as important, the loss rate stopped accelerating.Footnote 189 As Harrison noted, the crisis had peaked.Footnote 190
However, Harvey refused to change course. Finding this “a great shock,” Harrison implored him to “fight to the last minute.”Footnote 191 The French offered another credit of £50 million, but the Bank demurred. The American bankers clamored for interest rate hikes and emergency capital controls.Footnote 192 The Bank, however, categorically ruled out capital controls; and it chose not to mobilize its overseas assets.Footnote 193 It voted to raise Bank rate to 6 percent—but not until after the suspension.Footnote 194
Thus, it was misleading to suggest that Britain's 1925 return to gold “put on the Bank rate policy a task … which it proved to be incapable of performing.”Footnote 195 In the 1931 crisis, Bank rate did not fail the Bank. The Bank failed to utilize Bank rate.Footnote 196 Instead, Harvey requested formal authorization to temporarily suspend convertibility. Trusting Harvey that there was no other option, MacDonald acquiesced.Footnote 197 The Bank then informed the London clearing banks, and the suspension was announced the following evening.Footnote 198 So far from “consulting” the Governor, Harvey notified Norman no earlier than he informed the public: “Sorry we have to go off tomorrow and cannot wait to see you before doing so.”Footnote 199 To buy extra time, Harvey even encouraged Norman to prolong his absence.Footnote 200
Norman did just the opposite.Footnote 201 He wired instructions en route to expedite his return to the Bank. “Customs and Aliens officials” intercepted his ocean liner “midstream” on 23 September and took him past “the crowd waiting at the quayside.” He then rushed “to the railway station at Liverpool just before the train was due to leave, locked himself into a first-class compartment, and at once began dictating letters to his secretary.”Footnote 202 At Euston station, “greater precautions were taken to prote[c]t him than are usually taken to protect the king.”Footnote 203 “A police inspector, two sergeants and ten constables” kept the press at bay while Norman was received by a Bank director.Footnote 204 Norman became “engaged … in serious conversation as soon as he stepped on to the platform.” The police escorted the pair into a “waiting motor-car” “and the two drove away at once to the Bank of England.”Footnote 205
When Norman stormed into the Bank, tempers flared as he demanded explanations.Footnote 206 But recriminations were counterproductive. Too late to prevent the suspension, Norman could only hope to drive sterling back onto gold. To do so, he would have to court the market, which meant embracing the official story that Britain had been “forced” off gold. Within the Bank, he could hardly hold Harvey accountable. It was not in the Governor's province to choose his deputy.Footnote 207 Indeed, there was open discussion whether Norman's own governorship would be renewed.Footnote 208 If he wished to remain at the helm during the next crucial phase, Norman needed to regain the trust of those whom he had “left to face the music in London” while he was “on vacation in Canada.”Footnote 209
The next day, Norman met with political leaders. He also returned to the Bank, where he issued an official denial of the rumors concerning his resignation.Footnote 210 At 3:00 pm, he departed, retreating to the country to reconcile himself to Britain's new realities.Footnote 211
The Ascent of Cheap Money
Suspension did not ensure the gold standard's demise. After all, convertibility had been restored after the wartime suspension. The London Times even reported, “the suspension provided for in the Bill … is limited to a period of six months.”Footnote 212 What made things different this time?
“There are few Englishmen who do not rejoice at the breaking of our gold fetters,” Keynes wrote one week after the suspension.Footnote 213 Following Keynes, Eichengreen and Temin argue that democracy triumphed over the gold standard: “The world economy did not … recover when [political and economic leaders] changed their minds; rather, recovery began when mass politics … removed them from office.”Footnote 214
The opposite was true in Britain. The general election came one month after the suspension. It was “clear during the campaign,” the Times reported, that the currency question was “the only issue.” Leading Conservative Stanley Baldwin framed it as the “acid test of democracy.”Footnote 215 Defying Harvey's cynical expectations, Britons rose to the challenge, granting the National Government the largest electoral mandate in modern British history.Footnote 216 Pledging currency stability, the Conservatives won 470 seats.Footnote 217 Labour, which forswore a commitment “to force sterling back to the old gold parity,” lost 215 of its 267 seats. Here, “mass politics” overwhelmingly endorsed “gold-standard ideology.”Footnote 218 The “cultural hegemony of economic orthodoxy” was displaced only after an unexpected experiment established new ideas.Footnote 219
Financial markets had reacted to Harvey's surprising announcement “with comparative calm.”Footnote 220 Hesitant to resume convertibility prematurely, the Treasury recommended “a waiting policy” to “allow sterling to settle at whatever level circumstances suggest is most appropriate.” In the first week, sterling slid from the fixed rate of $4.86 to $3.40. The government then proposed a managed float: “the Bank of England should as a provisional policy endeavour to keep sterling within certain limits, by buying sterling at the lower limit and selling foreign currencies at the higher.”Footnote 221 This worked better than expected, and the Treasury were pleasantly surprised at their ability to “save the pound from the danger to which … other currencies, similarly situated, have succumbed.”Footnote 222 After falling to a nadir of $3.23 the pound stabilized within a band between $3.40 and $3.80.Footnote 223 The suspension was nothing like the “very great disaster” predicted by these same officials.Footnote 224 They had no choice but to update their beliefs. As a chagrined Norman subsequently put it, “We have fallen over the precipice … but we are alive at the bottom.”Footnote 225
The decision to forestall a return to gold created space for the Treasury to experiment with new ideas about “the role of the exchange rate in the regulation of the economy.”Footnote 226 As the Treasury investigated the possibilities, it became clear that no one had done more to develop the alternatives than Keynes.Footnote 227 In October, his staunch critic in the Treasury—Frederick Leith-Ross—reached out to him. When Keynes's push to remake the international monetary system met with intransigence abroad, he proposed that Britain form an imperial currency bloc with a fixed-but-adjustable parity vis-à-vis gold. This would allow Britain to achieve the true purpose of monetary policy: domestic price stability.Footnote 228
Keynes did not prevail on all of the specifics of implementation, but he converted much of the orthodoxy to his broad vision.Footnote 229 While Norman questioned the Bank's capacity to manipulate the floating exchange rate, he nonetheless embraced Keynes's metrics. “We should eventually return to gold,” Norman told the government in December—but only after Britain had achieved, among other things, “an active trade balance” and a “competitive price level.” Prior to the suspension, Norman had religiously sacrificed Britain's current account and internal stability to maintain the gold standard. But now that Harvey had tarnished the Bank's sterling record, there was no point in returning before the depreciation had put Britain on a level footing.Footnote 230
Frederick Phillips became Keynes's first apostle in the Treasury. “First and foremost,” he proclaimed in March, “the Bank rate should be reduced as rapidly as may be to say 3 per cent … we want cheap money and plenty of it to stimulate industry.” He insisted, “[A] (relatively) low value of the pound is desirable—not because that is a good thing in itself but because it seems the only way to prevent sterling prices following gold prices down.” In April, Phillips persuaded Chamberlain (now Chancellor) to create the Exchange Equalisation Account (EAA), a £150 m fund for the Bank to manage sterling's exchange rate.Footnote 231 As one contemporary journal put it, the EEA “is designed to obviate sterling fluctuations; the way is thus open for a lower Bank Rate and cheap money.”Footnote 232
By the end of January 1932, the Bank had acquired sufficient reserves to repay the credits from the previous year. This boosted confidence—and the pound. No longer fearing hyperinflation, Chamberlain repeatedly delayed the return to gold in favor of further rate cuts. With gold flowing into its reserves, the Bank could offer few objections. It cut interest rates to 5 percent in February and to 3.5 percent in March. By July, Bank rate was at 2 percent. The policies had their intended effect. One year later, the Treasury proclaimed, “Practically every economic signpost in this country now points to a slow but steady … recovery.” The Conservative Government explicitly connected the recovery to the policy of cheap money, and it continued to embrace that policy until the outbreak of World War II. London's monetary elites did not look back as Britain led the world off gold and out of the Great Depression.Footnote 233
Was the Gold Standard Salvageable?
The 1931 sterling crisis, like so many financial crises, “shows how much depends on the presence of one or more outstanding individuals willing to assume responsibility and leadership.”Footnote 234 In this case, the individual who ultimately directed the defense of sterling—Harvey—relied on a proto-Polanyian perspective. However, Harvey was out of touch with reality. He misdiagnosed the causes of the flight from sterling and consequently confounded market expectations. Politically, he exaggerated Labour's willingness to abandon gold just as he exaggerated their political prospects in the 1931 general election. What if the defense had depended on an actor with different ideas about how to approach the crisis?
It is easy to imagine that counterfactual.Footnote 235 Had Norman remained healthy—or had he returned sooner—he would have ruthlessly raised interest rates. Such increases probably would have bolstered confidence.Footnote 236 They almost certainly would have alleviated Britain's imbalance of payments.Footnote 237 Thus, “if ever the action of a single individual matters, the collapse of The [Governor] has been one of the decisive … events of history.”Footnote 238
But even if Britain had weathered the 1931 crisis, could the Bank have preserved the gold standard in the years that followed? The Polanyian narratives maintain that the deterioration of international economic conditions and the rise of the working class combined to make the demise of the gold standard unavoidable. The economic and political challenges to maintaining the regime in Britain, however, were not as formidable as has been imagined.
Just as Keynes had predicted, the decision in 1925 to restore the prewar parity imposed years of painful deflation. Britain suffered repeated financial crises. Hallwood, MacDonald, and Marsh, however, find that these crises did not significantly increase in severity.Footnote 239 And although the successive crises tested Britons’ resolve, overcoming those crises strengthened the credibility of their commitment to defend sterling. At the same time, “for the 6 years until mid-1931 macroeconomic variables behaved well enough for financial markets to believe that the United Kingdom would remain on the gold standard.” Throughout, the Bank's orthodox responses aligned with market expectations, and panic was averted. In 1931, however, Harvey embraced “perverse monetary policies” that drove markets away from sterling.Footnote 240 Thus, there is reason to believe that conventional monetary policy could have taken the gold standard through the 1931 crisis and beyond.
Beyond the “macroeconomic fundamentals,” Britain also suffered a sharp decline in its capital account in 1931.Footnote 241 To maintain the exchange rate in the face of this balance-of-payments pressure, Britain would either need to reduce its trade deficit or generate a new way to pay for its imports. The latter appeared unlikely short of a global economic recovery. Deflation could accomplish the former, but how much further could Britons tighten their belts? Believing that Britain had drifted between Scylla and Charybdis, many scholars conclude that these pressures made departure “inevitable.”Footnote 242
As Keynes recognized at the time, commercial policy offers a way to outflank the trilemma.Footnote 243 Tariffs could have alleviated both the budget and the trade deficits. Redressing the former would stem capital flight. Alleviating the latter would allow Britain to maintain its gold standard commitments—of a fixed exchange rate and open capital markets—without having to resort to deflation.Footnote 244 On these grounds, tariffs became politically salient even before the Conservatives dominated the 1931 general election.Footnote 245 Upon being granted a mandate, they coopted Keynes's rationale to justify the protectionism they had long sought for altogether less enlightened reasons. The Conservatives needed only associate the tariff with the defense of sterling to ensure that many of Keynes's “free trade friends … were found voting for” the General Tariff (1932) even after the suspension had ensured that it “was no longer necessary.”Footnote 246 Clearly, Britons would have been willing to sacrifice free trade on a cross of gold.
Although deteriorating economic conditions would have increased the challenges of staying on gold, the disintegrating international political environment might well have redoubled Britons’ resolve. If Britain had not left gold, then most of the Empire and many of its major trading partners likely would have remained on gold as well. This would have rendered the central Europeans’ suspensions all the more exceptional—and conspicuous. The Conservatives probably would not have resisted the temptation to link the European departures to the rise of fascism: fearing a repeat of 1923, the story might run, the Germans donned Nazi jackboots to stamp out inflation along their road to serfdom. Given the Conservatives’ success in rallying anti-German sentiment in the 1931 election, it is easy to imagine both that the Conservatives would have drawn this contrast and that it would have been politically potent.Footnote 247
To say that Britain could have remained on gold is not to suggest that gold might not have been abandoned elsewhere. The British case, however, remains the touchstone of the Polanyi thesis precisely because the gold standard was rooted more deeply there than anywhere else. If the gold standard were vulnerable even in Britain, it would be hard not to conclude that “international automaticity stands in fundamental and potentially explosive contradiction to an active state domestically.”Footnote 248 It was only a question of time before democratic demands for state intervention swept the ancient superstition into the dustbin of history.Footnote 249
Reimagining Britain's departure prompts us to reconsider whether social democracy invariably trumps economic orthodoxy. Subsequent cases suggest that it may not be so. In the 1970s and 1980s, a broad range of developed democracies—including Britain—proactively “disembedded liberalism.”Footnote 250 In the subsequent decade, a dozen European social democracies—excluding Britain—eagerly embraced the fetters of fixed exchange rates.Footnote 251 Since then, however, liberal dreams have given way to austere reality. How much more can Europe's core wring from its frayed edges before it tears the threadbare fabric of the patchwork union?
Conclusion
Britain's abandonment of the gold standard shocked the world. Harvey's suspension was almost entirely unexpected.Footnote 252 Although it scandalized the sensibilities of the sanctimonious “lords of finance,”Footnote 253 the suspension did not bring the hyperinflation that most expected. It did, however, radically reorient the global financial system. Previously, the Bank of England had been, as Keynes put it, “the conductor of the international orchestra.”Footnote 254 When that maestro abruptly exited, the symphony fell into disharmony.Footnote 255
Beyond the economic effects, the sterling crisis had considerable intellectual and political implications. It reconstructed perspectives on the gold standard, disconfirmed central tenets of the gold standard orthodoxy, and furnished the template for modern, flexible regimes.Footnote 256 Subsequently, these insights became so deeply internalized that the canonical analyses of Britain's departure took them for granted. Learning this lesson, however, came at the cost of tremendous political upheaval. The battle to save Britain's gold standard initiated Labour's interwar decline, finalized the fall of the Liberals, and inaugurated the Conservatives’ decade of “Parliamentary Dictatorship.”Footnote 257 Appeasing their imperial ambitions, the Conservatives accelerated the collapse of international cooperation. As Europe once again let slip the dogs of war, Labour was left to wonder whether this havoc could have been averted had their government not been interred along with the gold standard.Footnote 258
For all these reasons, Britain's abandonment of the gold standard has become the iconic case in some of the most important works in the field of international relations. By challenging these seminal interpretations, this article bolsters the call to enlarge the focus of our scholarship to include other levels and dimensions of international politics.
Over the past several decades, the “third image” of international politics has been “reversed,” displaced, and replaced. Modern scholarship begins with the “interpenetrated quality of international relations and domestic politics.”Footnote 259 Taken together, however, domestic and international politics define the context in which policy is formulated. As a burgeoning literature recognizes, the structure itself says nothing about how specific individuals perceive and react to their circumstances.Footnote 260 From military to monetary intervention, men and women still make their own history.Footnote 261
Although the “ideas and foreign policy” genre is more vibrant than ever, mainstream “American” international relations still eschews ideational variables from its analyses.Footnote 262 “Interests,” one prominent textbook explains, “are the fundamental building blocks of politics. Explanations of international political events begin by specifying the relevant actors and their interests.”Footnote 263 Britain's departure has been the archetype of this species of explanation: knowing now that Britain's suspension served the working class, scholars have not been disappointed in their search for signs that workers ascended as the gold standard sank. The analysis presented in this article, however, demonstrates that it is not enough merely to specify actors and their interests. Explanations of political events must also explicitly reconstruct the theories, perceptions, and strategies upon which those actors relied in pursuing their interests. Otherwise analyses that begin with cui bono might come to end with post hoc ergo propter hoc.
Britain's abandonment of the gold standard was one of the greatest policy innovations in the history of the global economy. But the actors responsible for this shift did not undertake it in a moment of foresight. Nor were they perpetual “slaves of some defunct economist.”Footnote 264 Britons broke their golden fetters only after they learned from the Bank's mistakes. We too ought to learn from this history, lest we continue to repeat it.
Supplementary Material
Supplementary material for this article is available at http://dx.doi.org/10.1017/S0020818315000314.
