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Keynessandra No More: JM Keynes, the 1931 Financial Crisis, and the Death of the Gold Standard in Britain
Abstract
Britain's suspension of gold convertibility in September 1931 was one of the most surprising and significant events in the history of the global financial system. Whereas London had traditionally been the center of the international gold standard, in the 1930s Britain led the world into the era of adjustable exchange rates. Previous explanations have maintained that the configuration of domestic institutions and interest groups determined Britain's response to changing international conditions. There was, however, ample domestic political will and international support to save the gold standard. Britain was actually forced to suspend convertibility because key policymakers possessed the wrong ideas about how to save the gold standard. Even after the National Government balanced the budget on the terms dictated by international financiers, the attack on sterling continued. Fixated on the budget deficit, the Bank of England overlooked sterling's 30% overvaluation and failed to make the necessary interest rate increases. When Prime Minister MacDonald consulted JM Keynes at the height of the crisis, Keynes deliberately avoided exposing the Bank’s mistake precisely because he hoped to force a suspension. The collapse of the gold standard in Britain was thus the product of the Bank's mistaken monetary policy and Keynes’s deliberate political strategy.
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This paper studies the role of unemployment in sterling's interwar experience. According to most narrative accounts, the proximate cause of the 1931 sterling crisis was a high and rising unemployment rate that placed pressure on British governments to pursue reflationary policies. We present a model which, in the spirit of the second generation' approach to currency crises, highlights the conflict between the objective of low unemployment and defense of the currency and show that it can reproduce the main features of sterling's interwar experience. Econometric evidence lends further support to the view that the proximate cause of the sterling crisis was the dramatic rise in unemployment brought about by external deflationary forces.
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First published more than a decade ago, Globalizing Capital remains an indispensable part of the economic literature today. Written by renowned economist Barry Eichengreen, this classic book emphasizes the importance of the international monetary system for understanding the international economy. Brief and lucid, Globalizing Capital is intended not only for economists, but also a general audience of historians, political scientists, professionals in government and business, and anyone with a broad interest in international relations. Eichengreen demonstrates that the international monetary system can be understood and effectively governed only if it is seen as a historical phenomenon extending from the period of the gold standard to today's world of fluctuating prices. This updated edition continues to document the effect of floating exchange rates and contains a new chapter on the Asian financial crisis, the advent of the euro, the future of the dollar, and related topics. Globalizing Capital shows how these and other recent developments can be put in perspective only once their political and historical contexts are understood.
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This volume represents the first section of Friedrich A. Hayek's comprehensive three-part study of the relations between law and liberty. Rules and Order constructs the framework necessary for a critical analysis of prevailing theories of justice and of the conditions which a constitution securing personal liberty would have to satisfy.
Economic historians have devoted enormous attention to the collapse of the interwar gold standard. This article proposes a discrete time duration model (using a panel data set of 24 countries for 1928 1936) to analyze how economic and political indicators affected a country's term on the gold standard. High per capita income, international creditor status, and prior hyperinflation increased the probability of continuation. In contrast, democratic regimes left early. Unemployment, sterling group membership, higher inflation, and the experience of banking crises reduced the time a country remained on the gold standard. This study also predicts sample countries' survival probabilities.
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Discussion of Eichengreen and Mirowski Papers
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Thomas, Mark. “Discussion of Eichengreen and Mirowski Papers.” The Journal of Economic History 44, no. 2 (June 1984): 375-379
Golden fetters: the gold standard and the Great Depression, 1919-1939Hegemonic Stability Theories of the International Monetary System Washington: Brookings Institution
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Eichengreen, Barry. Golden fetters: the gold standard and the Great Depression, 1919-1939. New York: Oxford University Press, 1992. ———. “Hegemonic Stability Theories of the International Monetary System.” In Can Nations Agree? Issues in International Economic Cooperation, 255-98. Washington: Brookings Institution, 1985. ———. Sterling and the Tariff, 1929-32. Princeton: International Finance Section, Department of Economics, Princeton University, 1981