Return to Gold at $4.86 – The Cunliffe Committee and After
Britain's post-war course had already been set during the war.
In January 1918, the British Treasury and the Ministry of Reconstruction established
the Cunliffe Committee, the Committee on Currency and Foreign Exchanges after the war, headed
by the Venerable Walter Lord Cunliffe, Retiring Governor of the Bank of England.
As early as its first interim report in the summer of 1918 and confirmed by its final
report the following year, the Cunliffe Committee called in no uncertain terms for return to
the gold standard at the pre-war par.
No alternatives were considered.
This course was confirmed by the Vassar-Smith Committee on Financial Facilities in 1918,
which was composed largely of representatives of industry and commerce, and which endorsed
the Cunliffe recommendations.
A minority of bankers, including Sir Brian Cochkein and incoming Bank of England Governor
Montague Norman, argued for an immediate return to gold at the old par, but they were overruled
by the Majority, led by their economic advisor, the distinguished Cambridge economist and
chosen successor to Alfred Marshall's professorial chair, Arthur Cecil Pigou.
Pigou argued for postponement of the return, hoping to ease the transition by loans from
abroad and, particularly, by inflation in the United States.
The hope for US inflation became a continuing theme during the 1920s, since inflated and
and appreciated Britain was in danger of losing gold to the United States, a loss which could
be staved off and the new 1920 system sustained by inflation in the United States.
After exchange controls and most other wartime controls were lifted at the end of 1919, Britain,
not knowing precisely when to return to gold, passed the Gold and Silver Export Embargo
Act in 1920 for a five-year period, in effect continuing a fiat paper standard until the
end of 1925 with an announced intention of returning to gold at that time.
Britain was committed to doing something about gold in 1925.
The United States and Great Britain both experienced a traditional immediate post-war boom continuing
between the wartime inflation in 1919 and 1920, followed by a severe corrective recession
and deflation in 1921.
The English deflation did not suffice to correct the overvaluation of the pound since the United
States, now the strongest country on gold, had deflated as well.
The fact that Sterling began to appreciate to the old par during 1924 misled the British
A crucial point.
While prices and wage rates rose together in England during the wartime and postwar
inflationary boom, they scarcely fell together.
When commodity prices fell sharply in England in 1920 and 1921, wages fell much less, remaining
high above pre-war levels.
This rise in real wage rates, bringing about high and chronic unemployment, reflected the
severe downward wage rigidity in Britain after the war, caused by the spread of trade unionism
and particularly by the massive new unemployment insurance program.
The condition of the English economy, in particular the high rate of unemployment and depression
of the export industries during the 1922-1924 recovery from the post-war recession, should
have given the British pause.
From 1851 to 1914, the unemployment rate in Great Britain had hovered consistently around
3%.
During the boom of 1919-1920, it was 2.4%.
Yet, during the post-war quote, recovery, British unemployment ranged between 9 and 15 percent.
It should have been clear that something was very wrong.
It is no accident that the high unemployment was concentrated in the British export industries.
Compared to the pre-war year of 1913, most of the domestic economy in Britain was in fairly good shape in 1924.
Setting 1913 as equal to 100, real gross domestic product was 92 in 1924, consumer expenditure
was 100, construction was 114, and gross fixed investment was a robust 132.
But while real imports were 100 in 1924, real exports were in sickly shape at only 72.
For in monetary terms, British imports were 111 in 1924, whereas British exports were
only 80.
In contrast, world exports were 107 as compared to 1913.
The sickness of British exports may be seen in the fate of the traditional major export
industries during the 1920s.
Prior to 1913, iron and steel exports in 1924 were 77.5, cotton textile exports were 65,
coal exports were 80, and shipbuilding exports a disastrous 35.
Consequently, Britain was now in debt to such strong countries as the United States, while
a creditor to such financially weak countries as France, Russia, and Italy.
It should be clear that the export industry suffered particularly from depression because
of the impact of the overvalued pound, and that, furthermore, the depression took the
form of permanently high unemployment, even in the midst of a general recovery because
wage rates were kept rigidly downward by trade unions, and especially by the massive system
of unemployment insurance.
There were several anomalies and paradoxes in the conflicts and discussions over the
CUNLIF committee recommendations from 1918 until the actual return to gold in 1925.
The critics of the committee were generally discredited for being ardent inflationists
as well as opponents of the old par.
These forces included J.M.
Keynes, the Federation of British Industries, the Powerful Trade Association, and Sir Reginald
Richard McKenna, a wartime chancellor of the Exchequer and after the war head of the
huge Midland Bank.
And yet, most of these inflationists and anti-deflationists, with the exception of Keynes and of W. Peter
Rylands, Federation of British Industries president in 1921, were willing to go along
with return at the free war par.
This put the critics of deflation and proponents of cheap money in the curiously anomalous
position of being willing to accept return to an overvalued pound, while combating the
logic of that pound, namely deflation, in order to attain English exports competitive
in world markets.
Thus McKenna, who positively desired a policy of domestic inflation and cheap money and
and cared little for exchange rate stability or gold, was willing to go along with the
return to gold at $4.86.
The Federation of British Industries, which recognized the increasing rigidity of wage
costs, was fearful of deflation, and its 1921 President Peter Rylands argued forcefully
that stability of exchange, quote, is of far greater importance than the reestablishment
of Any Pre-War Ratio, and went so far as to advocate a return at the far more sensible
rate of $4 to the pound.
We have got accustomed to a relationship of about $4 to the pound, and I feel that the
interests of the manufacturers would be best served if it could by some means be fixed
But apart from Rylans, the other anti-deflationists were willing to go along with the pre-war
par.
Why?
The influential journal, The Roundtable, one of their number, noted the anomaly,
While there is a very large body of opinion which wants to see the pound sterling again
at par with gold, there are very few, so far as we know, who publicly advocates in order
to secure such a result an actively deflationary policy at this particular moment, leading
to a further fall in prices.
There are several solutions to this puzzle, all centering around the view that deflationary
adjustments from a return to the pre-war par would be insignificant.
In the first place, there was a confident expectation, echoing the original view of
Pigou, that price inflation in the United States would set things right and validate
the $4.86 a pound.
This was the argument used on behalf of $4.86 by the round table, by McKenna and by his
A second reason we have already alluded to, the inevitable rise in sterling to par as
the return date approached misled many people into believing that the market action was
justifying the choice of rate.
But a third reason for optimism particularly needs exploring, that the British were subtly
but crucially changing the rules of the game and returning to a very different and far weaker
quote gold standard than had existed before the war. When the British government made its final
decision to return to gold at $4.86 in the spring of 1925, Colonel F. V. Willey, head of the
Federation of British Industries, was one of the few to register a perceptive warning note.
The announcement made today will rapidly bring the pound to parity with the dollar and will
increase the present difficulties of our export trade, which is already suffering from a greater
rise in the value of the pound than is justified by the relative level of sterling in gold
prices.
The way was paved for the final decision to return to gold by the Committee on Currency
and Bank of England Note Issues, appointed by Chancellor of the Exchequer, Philip Snowden,
on May 5th, 1924, at the suggestion of influential British Treasury official, Sorato Niemeyer.
The committee, known as the Chamberlain-Bradbury Committee, was co-chaired by former Chancellor
Sir Austin Chamberlain and by Sir John Bradbury, a former member of the old Cunliffe Committee.
Also on the new committee were Niemeyer and Professor Pagu of the Cunliffe Group.
We have a full account of the testimony before the Chamberlain-Bradbury committee and of the
arguments used to induce Chancellor of the Exchequer Churchill to go back to gold the
following year.
It is clear from those accounts that the dominant theme was that deflation and export depression
could be avoided because of expected rising prices in the United States, which would restore
for the British export position and avoid an outflow of gold from Britain to the United
States.
Thus, Sir Charles Addis, a member of the old Cunliffe committee, a director of the Bank
of England and the director upon whom Bank Governor Montague Norman relied most for advice,
called for a return to gold during 1925.
Addis welcomed any deflation as a necessary sacrifice in order to restore London as the
The World's Financial Center, but he expected a rise in prices in the United States.
After listening to a great deal of testimony, the committee leaned toward recommending not
a return to gold, but waiting until 1925 so as to allow American prices to rise.
Bradbury wrote to Gaspard Farrer, a director of Barclays and a member of the Cunliffe committee,
that waiting a bit would be preferred.
Odds are that within the comparatively near future, America will allow gold to depreciate
to the value of sterling.
In early September 1924, Pagu stepped in again, reworking an early draft by the committee
secretary to make his economist's report.
Pagu once more asserted that an increase in U.S. prices was likely, thereby easing the
Acting on Pagu's recommendation, the Chamberlain-Bradbury Committee, in its draft report in October,
urged a return to $4.86 at the end of 1925, expecting that the alleged gap of 10-12% in
American and British price levels would be made up in the interim by a rise in American
and Prices.
Even influential Treasury official Ralph Hawtry, a friend and fellow Cambridge apostle of Keynes,
an equally ardent inflationist and critic of gold, and chief architect of the European
Gold Exchange Standard of the 1920s, favored a return to gold at $4.86 in 1925.
He differed in this conclusion from Keynes because he confidently expected a rise in
and American Prices to bear the brunt of the adjustment.
The British Labour government fell in early October 1924 and the general election in late
October swept a conservative government into power.
After carefully listening to Keynes, McKenna and other critics, and after holding a now
famous dinner party of the major advocates on March 17th, the new Chancellor of the Exchequer,
Winston Churchill made the final decision to go back to gold on March 20th, announcing
and passing a gold standard act, returning to gold at $4.86 on April 28th and putting
the new gold standard into effect immediately.
It cannot be stressed too strongly that the British decision to return to gold at $4.86
is not made in ignorance of deflationary problems or export depression, but rather in the strong
and confident expectation of imminent American inflation.
This dominant expectation was clear from the assurances of Sir John Bradbury to Churchill,
from the anticipation of even such cautious men as Sir Otto Niemeyer and Montague Norman,
from the optimism of Ralph Hawtry, and above all, in the official Treasury memorandum attached
to the Gold Standard Act of 1925.