Book Review: British Monetary Policy 1924-1931, D.E.Moggridge, 1972. Cambridge University Press.
The subtitle for this book is the intriguing, “The Norman Conquest of $4.86” and I had a devil of a time finding a copy. I managed to find a good condition second hand copy. And mighty glad I am. The subtitle refers to Montagu Norman, the Governor of the Bank of England during the period in which theBritain “returned to gold” in 1925 at the now infamous pre-war level exchange rate of $4.86. The book provides insight into the thinking of leading financial policy makers, in the UK and the US, as those countries sought to re-establish exchange rate and price stability in the post-war period.
The writing of Moggridge is easy to follow, and the analysis provides the reader with a confident understanding of what lead to essentially, a bad decision, executed effectively, at a time when the ability to execute was enfeebled with incomplete and sometimes erroneous tools. The personalities involved and relationship between Norman and also Benjamin Strong, the Chairman of the Federal Reserve Bank of New York, are covered in detail and you get the feeling that personal relationships (and in this case, common understanding and close collaboration) played a key role in helping the two countries manage what was indeed a complex and troubled period.
The conclusion one reaches after reading the book goes like this: Political energy was organized around the assumption that Britain needed to reassert the pre-war price level to gold. If Britain did not, it would lose political face, and being the presumptive center of the global trade network (it was before the War), the result might lead to an unwarranted and harmful run on the pound. This was to be avoided for a number of reasons; the UK was in dire need of economic recovery due to the costs of WWI, it’s gold reserves were low, especially compared to its war debts to the US; the economy and particularly global trade was depressed and in need of support.
At the same time the US economy was beginning to grow toward the dominant role in the world that we take for granted today. But in 1924 the UK still dominated the globe financially in terms of trade settled in sterling and as a source of long term capital funding. This could not continue, and the U.K. needed the help of the US in order to ‘re-establish’ sterling in order to support a stable exchange.
Equally there was belief that Germany needed to be stabilized first, since it was the source of the entire reparations and related (or unrelated in the eyes of Congress) war debt issue. If Germany’s return to gold could be sustained, then other currencies would have a chance. This was of course where the Dawes plan comes into play as the chiefly the US, supported by the UK, France and others, provided funding to help Germany and European reconstruction.
The U.K. also suffered two other misconceptions that only hindsight can clear up. First, political and financial leaders assumed France (and other nations, for that matter) would follow the UK’s move and most likely seek to establish the franc’s exchange rate along similar, pre-war levels. This was not to the case. France, seeing the difficulties that the UK attracted by rejoining gold at its pre-war level (i.e. over valued), decided against this and chose a more competitive (i.e. lower) rate in order to improve its economic position specifically via a vis the UK. Thus France took advantage of the situation. This led to real issues in maintenance of the gold standard.
The second issue concerned the rate itself. The tools, analysis and instruments used by the leaders setting the policy were ineffective, incomplete, and positively embarrassing if we look at the tools used by those in power today. Basic analytic insight was often not even sought after as banking officials set policy more by intuition than insight. Moggridge nicely captures the point that Keynes was actually doing some analysis that did suggest that, with the prices and inflation as they were, the pre-war exchange rate of $4.86 would result in sterling being overvalued by 10% or more. However, the intuition of the majority, and specifically Norman, was that either, perhaps automagically, prices in in the US would fall in order to help level the playing field, or the UK economy would deflate of its own accord without too much hardship for workers and firms. The result was most interesting.
The book suggests that on the whole the return to gold was mechanically successful. This is a fair point, but as the book summarizes at the end, the realty was not so comfortable as policy makers thought it would be. The flow of gold fluctuated between the US, UK, and France, and back again, and the result was that social and economic struggles and strife in the UK were costly.
More to the point, the over valuing of sterling meant that yes, the return to gold was successful, but the UK did not rebuild the economic and financial strength it needed to return to its formal position. It never could have done this economically, but even its financial reserves were in no fit state to help weather the storm that came in 1931. Congress’s refusal to accommodate the Treary of Versailles, and thus not accepting (until too late) the link between German reparations and the debts owed to it by its main allies, cannot gloss over the valuable assistance from Strong in helping Britain return to gold. However, their was no real hope that this could be sustained. The roots of the Norman Conquest of $4.86 can be found in the Irreconcilables conquest of Congress in 1920.
Well Recommended: 9 out of 10.