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NOTE 53. Return to Gold at $4.86: The Cunliffe Committee and After

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Return to Gold at $4.86 – The Cunliffe Committee and After

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Britain's post-war course had already been set during the war.

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In January 1918, the British Treasury and the Ministry of Reconstruction established

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the Cunliffe Committee, the Committee on Currency and Foreign Exchanges after the war, headed

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by the Venerable Walter Lord Cunliffe, Retiring Governor of the Bank of England.

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As early as its first interim report in the summer of 1918 and confirmed by its final

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report the following year, the Cunliffe Committee called in no uncertain terms for return to

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the gold standard at the pre-war par.

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No alternatives were considered.

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This course was confirmed by the Vassar-Smith Committee on Financial Facilities in 1918,

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which was composed largely of representatives of industry and commerce, and which endorsed

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the Cunliffe recommendations.

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A minority of bankers, including Sir Brian Cochkein and incoming Bank of England Governor

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Montague Norman, argued for an immediate return to gold at the old par, but they were overruled

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by the Majority, led by their economic advisor, the distinguished Cambridge economist and

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chosen successor to Alfred Marshall's professorial chair, Arthur Cecil Pigou.

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Pigou argued for postponement of the return, hoping to ease the transition by loans from

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abroad and, particularly, by inflation in the United States.

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The hope for US inflation became a continuing theme during the 1920s, since inflated and

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and appreciated Britain was in danger of losing gold to the United States, a loss which could

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be staved off and the new 1920 system sustained by inflation in the United States.

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After exchange controls and most other wartime controls were lifted at the end of 1919, Britain,

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not knowing precisely when to return to gold, passed the Gold and Silver Export Embargo

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Act in 1920 for a five-year period, in effect continuing a fiat paper standard until the

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end of 1925 with an announced intention of returning to gold at that time.

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Britain was committed to doing something about gold in 1925.

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The United States and Great Britain both experienced a traditional immediate post-war boom continuing

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between the wartime inflation in 1919 and 1920, followed by a severe corrective recession

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and deflation in 1921.

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The English deflation did not suffice to correct the overvaluation of the pound since the United

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States, now the strongest country on gold, had deflated as well.

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The fact that Sterling began to appreciate to the old par during 1924 misled the British

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A crucial point.

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While prices and wage rates rose together in England during the wartime and postwar

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inflationary boom, they scarcely fell together.

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When commodity prices fell sharply in England in 1920 and 1921, wages fell much less, remaining

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high above pre-war levels.

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This rise in real wage rates, bringing about high and chronic unemployment, reflected the

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severe downward wage rigidity in Britain after the war, caused by the spread of trade unionism

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and particularly by the massive new unemployment insurance program.

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The condition of the English economy, in particular the high rate of unemployment and depression

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of the export industries during the 1922-1924 recovery from the post-war recession, should

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have given the British pause.

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From 1851 to 1914, the unemployment rate in Great Britain had hovered consistently around

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3%.

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During the boom of 1919-1920, it was 2.4%.

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Yet, during the post-war quote, recovery, British unemployment ranged between 9 and 15 percent.

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It should have been clear that something was very wrong.

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It is no accident that the high unemployment was concentrated in the British export industries.

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Compared to the pre-war year of 1913, most of the domestic economy in Britain was in fairly good shape in 1924.

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Setting 1913 as equal to 100, real gross domestic product was 92 in 1924, consumer expenditure

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was 100, construction was 114, and gross fixed investment was a robust 132.

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But while real imports were 100 in 1924, real exports were in sickly shape at only 72.

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For in monetary terms, British imports were 111 in 1924, whereas British exports were

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only 80.

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In contrast, world exports were 107 as compared to 1913.

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The sickness of British exports may be seen in the fate of the traditional major export

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industries during the 1920s.

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Prior to 1913, iron and steel exports in 1924 were 77.5, cotton textile exports were 65,

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coal exports were 80, and shipbuilding exports a disastrous 35.

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Consequently, Britain was now in debt to such strong countries as the United States, while

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a creditor to such financially weak countries as France, Russia, and Italy.

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It should be clear that the export industry suffered particularly from depression because

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of the impact of the overvalued pound, and that, furthermore, the depression took the

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form of permanently high unemployment, even in the midst of a general recovery because

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wage rates were kept rigidly downward by trade unions, and especially by the massive system

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of unemployment insurance.

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There were several anomalies and paradoxes in the conflicts and discussions over the

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CUNLIF committee recommendations from 1918 until the actual return to gold in 1925.

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The critics of the committee were generally discredited for being ardent inflationists

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as well as opponents of the old par.

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These forces included J.M.

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Keynes, the Federation of British Industries, the Powerful Trade Association, and Sir Reginald

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Richard McKenna, a wartime chancellor of the Exchequer and after the war head of the

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huge Midland Bank.

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And yet, most of these inflationists and anti-deflationists, with the exception of Keynes and of W. Peter

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Rylands, Federation of British Industries president in 1921, were willing to go along

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with return at the free war par.

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This put the critics of deflation and proponents of cheap money in the curiously anomalous

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position of being willing to accept return to an overvalued pound, while combating the

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logic of that pound, namely deflation, in order to attain English exports competitive

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in world markets.

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Thus McKenna, who positively desired a policy of domestic inflation and cheap money and

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and cared little for exchange rate stability or gold, was willing to go along with the

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return to gold at $4.86.

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The Federation of British Industries, which recognized the increasing rigidity of wage

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costs, was fearful of deflation, and its 1921 President Peter Rylands argued forcefully

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that stability of exchange, quote, is of far greater importance than the reestablishment

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of Any Pre-War Ratio, and went so far as to advocate a return at the far more sensible

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rate of $4 to the pound.

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We have got accustomed to a relationship of about $4 to the pound, and I feel that the

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interests of the manufacturers would be best served if it could by some means be fixed

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But apart from Rylans, the other anti-deflationists were willing to go along with the pre-war

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par.

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Why?

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The influential journal, The Roundtable, one of their number, noted the anomaly,

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While there is a very large body of opinion which wants to see the pound sterling again

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at par with gold, there are very few, so far as we know, who publicly advocates in order

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to secure such a result an actively deflationary policy at this particular moment, leading

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to a further fall in prices.

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There are several solutions to this puzzle, all centering around the view that deflationary

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adjustments from a return to the pre-war par would be insignificant.

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In the first place, there was a confident expectation, echoing the original view of

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Pigou, that price inflation in the United States would set things right and validate

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the $4.86 a pound.

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This was the argument used on behalf of $4.86 by the round table, by McKenna and by his

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A second reason we have already alluded to, the inevitable rise in sterling to par as

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the return date approached misled many people into believing that the market action was

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justifying the choice of rate.

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But a third reason for optimism particularly needs exploring, that the British were subtly

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but crucially changing the rules of the game and returning to a very different and far weaker

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quote gold standard than had existed before the war. When the British government made its final

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decision to return to gold at $4.86 in the spring of 1925, Colonel F. V. Willey, head of the

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Federation of British Industries, was one of the few to register a perceptive warning note.

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The announcement made today will rapidly bring the pound to parity with the dollar and will

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increase the present difficulties of our export trade, which is already suffering from a greater

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rise in the value of the pound than is justified by the relative level of sterling in gold

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prices.

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The way was paved for the final decision to return to gold by the Committee on Currency

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and Bank of England Note Issues, appointed by Chancellor of the Exchequer, Philip Snowden,

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on May 5th, 1924, at the suggestion of influential British Treasury official, Sorato Niemeyer.

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The committee, known as the Chamberlain-Bradbury Committee, was co-chaired by former Chancellor

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Sir Austin Chamberlain and by Sir John Bradbury, a former member of the old Cunliffe Committee.

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Also on the new committee were Niemeyer and Professor Pagu of the Cunliffe Group.

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We have a full account of the testimony before the Chamberlain-Bradbury committee and of the

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arguments used to induce Chancellor of the Exchequer Churchill to go back to gold the

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following year.

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It is clear from those accounts that the dominant theme was that deflation and export depression

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could be avoided because of expected rising prices in the United States, which would restore

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for the British export position and avoid an outflow of gold from Britain to the United

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States.

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Thus, Sir Charles Addis, a member of the old Cunliffe committee, a director of the Bank

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of England and the director upon whom Bank Governor Montague Norman relied most for advice,

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called for a return to gold during 1925.

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Addis welcomed any deflation as a necessary sacrifice in order to restore London as the

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The World's Financial Center, but he expected a rise in prices in the United States.

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After listening to a great deal of testimony, the committee leaned toward recommending not

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a return to gold, but waiting until 1925 so as to allow American prices to rise.

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Bradbury wrote to Gaspard Farrer, a director of Barclays and a member of the Cunliffe committee,

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that waiting a bit would be preferred.

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Odds are that within the comparatively near future, America will allow gold to depreciate

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to the value of sterling.

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In early September 1924, Pagu stepped in again, reworking an early draft by the committee

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secretary to make his economist's report.

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Pagu once more asserted that an increase in U.S. prices was likely, thereby easing the

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Acting on Pagu's recommendation, the Chamberlain-Bradbury Committee, in its draft report in October,

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urged a return to $4.86 at the end of 1925, expecting that the alleged gap of 10-12% in

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American and British price levels would be made up in the interim by a rise in American

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and Prices.

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Even influential Treasury official Ralph Hawtry, a friend and fellow Cambridge apostle of Keynes,

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an equally ardent inflationist and critic of gold, and chief architect of the European

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Gold Exchange Standard of the 1920s, favored a return to gold at $4.86 in 1925.

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He differed in this conclusion from Keynes because he confidently expected a rise in

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and American Prices to bear the brunt of the adjustment.

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The British Labour government fell in early October 1924 and the general election in late

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October swept a conservative government into power.

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After carefully listening to Keynes, McKenna and other critics, and after holding a now

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famous dinner party of the major advocates on March 17th, the new Chancellor of the Exchequer,

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Winston Churchill made the final decision to go back to gold on March 20th, announcing

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and passing a gold standard act, returning to gold at $4.86 on April 28th and putting

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the new gold standard into effect immediately.

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It cannot be stressed too strongly that the British decision to return to gold at $4.86

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is not made in ignorance of deflationary problems or export depression, but rather in the strong

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and confident expectation of imminent American inflation.

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This dominant expectation was clear from the assurances of Sir John Bradbury to Churchill,

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from the anticipation of even such cautious men as Sir Otto Niemeyer and Montague Norman,

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from the optimism of Ralph Hawtry, and above all, in the official Treasury memorandum attached

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to the Gold Standard Act of 1925.