England's Cross of Gold

Keynes, Churchill, and the Governance of Economic Beliefs

James A. Morrison

• Publisher: Cornell University Press
• Year: 2021
• ISBN:
  9781501758430
• Topic: Economics
• Subtopic: Economic History
• Index: Economics

In England's Cross of Gold, James Ashley Morrison challenges the conventional view that the UK's ruinous return to gold in 1925 was inevitable. Instead, he offers a new perspective on the struggles among elites in London to define and redefine the gold standard—from the first discussions during the Great War; through the titanic ideological clash between Winston Churchill and John Maynard Keynes; to the final, ill-fated implementation of the "new gold standard."

Following World War I, Churchill promised to restore the ancient English gold standard—and thus Britain's greatness. Keynes portended that this would prove to be one of the most momentous—and ill-advised—decisions in financial history. From the vicious peace settlement at Versailles to the Great Depression, the gold standard was central to the worst disasters of the time. Economically, Churchill's move exacerbated the difficulties of repairing economies shattered by war. Politically, it set countries at odds as each endeavored to amass gold, sowing the seeds of further strife.

England's Cross of Gold, grounded in masterful archival research, reveals that these events turned crucially on the beliefs of a handful of pivotal policymakers. It recasts the legends of Churchill, Keynes, and their collision, and it shows that the gold standard itself was a metaphysical abstraction rooted more in mythology than material reality.

PART ONE

Introductory

Belief in the gold standard was the faith of the age.… The war between heaven and hell ignored the money issue, leaving capitalists and socialists miraculously united. (Polanyi, The Great Transformation)

CHAPTER 1

Genesis and Exodus

The Tragedy of England’s Return to Gold

In the spring of 1925, Winston Churchill settled upon a plan to make Britain great again: he would restore the gold standard. This was Churchill’s first significant policy initiative since becoming the chancellor of the exchequer in the new Conservative government. It was a quintessential “conservative” policy. For one thing, it advanced the interests of the Conservatives’ key constituents. It similarly aligned with the Conservatives’ economic ideology. And it fit with tradition. After all, the gold standard traced it roots back to the era of the Glorious Revolution, when the Bank of England was founded and when John Locke convinced Parliament to permanently fix the metallic value of the pound.¹ Since then, the metallic convertibility of the pound had almost never been suspended. The most conspicuous exception was during the French Revolutionary and Napoleonic Wars. Crucially, however, the pound’s prewar gold value was restored shortly after the wars ended. Churchill thus faced a strong precedent. For all of these reasons, it seemed fated that he would make the 1920s follow the 1820s by similarly resurrecting the gold standard.

Yet, it was anything but an easy decision. In the wake of the First World War, Parliament extended the UK’s wartime capital controls. This gave the monetary authorities some time in which to prepare for the return. But it also created an opportunity for the revered economist—and feared polemicist—John Maynard Keynes to wage an aggressive, highly visible campaign against this very course of action. Driving up the value of the pound, Keynes explained, really meant driving down prices and wages—and, thus, exacerbating national unemployment. With more than a million Britons already out of work, Churchill could scarcely afford to ignore these warnings. Indeed, he did not. He took them more seriously than did most of his colleagues in the Treasury, in the Bank of England, and in the Conservative Party.

Yet after much consternation, Churchill resolved to maintain the long continuity of this institution, whatever the cost.² Parliament’s capital controls were not due to expire until the end of 1925, but on the afternoon of April 28, Churchill informed the House of Commons, “We have … decided … that a general license will be given … for the export of gold bullion from today. We thus resume our international position as a gold standard country from the moment of [this] declaration.”³ With that, the United Kingdom was “back on gold.”

It was a disaster. The UK began to hemorrhage reserves immediately, losing nearly two million pounds’ worth of gold in as many weeks.⁴ In the months that followed, the overvalued pound hammered the UK’s export industries; but, committed to the gold parity, the Bank of England refused to cut interest rates. Unemployment swelled to 1.75 million.⁵ The following spring, the Trades Union Congress organized a national general strike. It brought Britain to the brink of revolution. Several million workers downed tools and walked out. Prime Minister Stanley Baldwin denounced the action as “a challenge to Parliament and … the road to anarchy and ruin.”⁶ Rather than seeking absolution, Churchill took to the offensive in a massive media blitz. “It is a very much more difficult task to feed the nation than it is to wreck it,” he told one skeptical editor.⁷ There were surprisingly few physical assaults. But saboteurs derailed trains and cut the power to the London docks, imperiling the capital’s food supply. When mobs began burning public buses, the Conservative government deputized “auxiliary constables,” deployed tanks on the streets, and dispatched warships to the UK’s industrial north.⁸

These were only the immediate, local results. The long-run and systemic consequences were vastly worse. Churchill’s announcement set the tone—and the standard—for the other countries of the world: despite the wartime inflation, the UK would do whatever it took to drive the pound back to its prewar gold parity.⁹ The effects were as lamentable as the motivations were laudable. “Far from being synonymous with stability,” Eichengreen has shown, “the gold standard itself was the principal threat to financial stability and economic prosperity, between the wars.” It became “a central factor in the worldwide [Great] Depression,” and “[economic] recovery proved possible … only after abandoning the gold standard.”¹⁰ The implications for international relations were worse still. “So far from currency laissez-faire having promoted the international division of labor,” Keynes subsequently observed, “… it has been a fruitful source of all those clumsy hindrances to trade which suffering communities have devised in their perplexity as being better than nothing in protecting them from the intolerable burdens flowing from currency disorders.”¹¹ And as trade war led to real war across the 1930s, Keynes exclaimed, “Never in history was there a method devised of such efficacy for setting each country’s advantage at variance with its neighbors’ as the international gold (or, formerly, silver) standard. For it made domestic prosperity directly dependent on a competitive pursuit of markets and a competitive appetite for the precious metals.”¹² Thus, the return to gold in the 1920s—the very paragon of classical liberal political economy in action—both sowed the seeds of the Great Depression and propelled beggar-thy-neighbor international relations.

Why did Churchill drive the world down this road? Why was Keynes unable to change this calamitous course? Why, as William Jennings Bryan had famously lamented, must humanity be crucified upon this cross of gold?

The passage of time has only underscored the significance of this essential puzzle. There are the ceaselessly fascinating historical and counterfactual questions of whether the calamities of the 1930s and 1940s could have been avoided had the UK chosen a more attainable, less ambitious course. Perhaps for this reason, debates about the interwar gold standard have become central to the study of international political and economic relations. Thus, since Polanyi’s landmark Great Transformation, several generations of scholars have analyzed the structures—material and ideational, system level and subsystem level—that led the UK, and the world, down this perilous path.

And yet the gold standard is back. It is back in spirit in currency unions like the Eurozone, in the competitive undervaluation of China’s renminbi, and in the global propagation of financial crises. In Europe, the orthodoxy once again reigns supreme as the commitment to limit inflation everywhere ensures that changes in the money supply are not optimal anywhere. For surplus countries like Germany, only careful labor market management prevents wage-price spirals. For deficit countries like Greece, all other policy goals are subordinated to retain the euro—the supply of which they do not control, the destabilizing flows from which they cannot block, and the austerity for which they must abide.¹³ China, too, has discovered the benefits of being a surplus country. Its foreign economic policy can only be described as neomercantilism. Of course, the People’s Bank amasses reserves so as to retain export markets rather than promoting exports so as to acquire reserves, but the trade war this instigates is indistinguishable from those engendered by the gold standard a century ago.¹⁴ For now, our global economy remains as deeply integrated as ever before—for better and for worse. The good goes in every direction, and so too does the bad. With a level of capital market integration that rivals that brought by the gold standard system, it is hardly surprising that the latest financial crisis became a global one—and that it swept us into a Great Recession to rival the Great Depression. Of course, gold plays no formal role in any of these instances, and yet the international dynamics are precisely those brought—imposed—by the gold standard itself.

At the same time, a growing number of pivotal policymakers have spoken explicitly with fondness about the gold standard era. The last several presidential elections have seen increasing support among Republicans for another return to gold. Senator Ted Cruz was emphatic: “Instead of adjusting monetary policy according to whims and getting it wrong over and over again and causing booms and busts, what the Fed should be doing is … keeping our money tied to a stable level of gold.”¹⁵ The experience of the 1920s taught Keynes and Churchill the dangers of prioritizing a strong currency over the preservation of free trade, but then-candidate Donald Trump declared, “We have fallen into the Chinese trap. We are now destroying the dollar in order to try and compete.… We should be keeping the dollar strong and stable and we should tax Chinese products.” True to his word, President Trump launched his promised trade war and sought to appoint avowed gold bugs to the Federal Reserve Board.¹⁶

The 1930s show us where 1920s-style policies lead. As “the people” around the world march against the liberal postwar order that Keynes and Churchill themselves helped to create, we must again probe the relationship between unfettered economic integration and political radicalism. All of this raises the transcendent, timeless question of whether the ascent of liberal internationalism inevitably generates its own antithesis: national socialism.

This book grapples with these crucial questions. It directly challenges the conventional wisdom that the course advanced by Churchill in 1925 was inevitable given the UK’s position in the international system, the design of the UK’s policymaking institutions, and the dominance of financial and trade interests in British politics at the time. Instead, it argues that the UK’s particular path back onto gold in the 1920s followed directly, although not inevitably, from a combination of three things: a zealous and widespread faith in “orthodox” political economy; the reality that such beliefs were less an “orthodoxy” than a mythology; and the theocracy to which this gave rise.

The gold standard is meant to be the simplest and the most materialistic of all monetary systems. After all, is not the gold standard simply the reality that money is either gold itself or costlessly convertible into gold? In fact, this has never been true anywhere. This book shows that “the gold standard” was a highly complex intellectual abstraction.¹⁷ As such, on the path “back to gold,” ideas proved decisive at every turn. From political and economic elites in London to ordinary people at the fringes of the British Isles, conceptions of the gold standard defined these actors’ perceptions of themselves and of their interests. Their beliefs about how the gold standard worked—and that it had worked—defined the policies Britons believed to be viable and delimited those that they accepted as appropriate given the UK’s extraordinary identity as the center of the international gold standard system. Their understanding of the practical operation of the gold standard constructed—and reconstructed—the political and economic institutions that defined England’s imperial order.

Yet the gold standard itself was less a political or economic institution than it was a religion born of the capitalist age. As money seeped into ever more relations, ordinary people increasingly felt monetary power working in their lives; but they could not fathom its depths, anticipate its droughts and deluges, or control its ebbs and flows. Just as the earliest people conjured the supernatural as the superintendents of the seasons, so too have modern people created economic religions to ascribe some meaning, purpose, and direction to the forces that govern our lives. This is the abiding allure of the gold standard to the public: it appears to be a simple, concrete way of encasing mammon, of curbing the caprice of those deities whose whims rule our world. In reality, however, our central banks are not tombs but temples, and our central bankers their high priests.

Most social scientific treatments of central banking examine the structures—the institutions, the social context, and the political climate—that select particular individuals and advance specific monetary policies. This book shows, however, that the elites orchestrating the UK’s return to gold did far more to define the government than the government did to govern the Bank of England’s governors.¹⁸ It suggests that to understand sorcery, we must seriously study the sorcerers. To understand monetary policy, we must seriously study the governors of the Bank of England and England’s chancellors of the exchequer. Compared with the usual social scientific studies, this bo...