The Establishment of the New Gold Standard of the 1920s
Bullion Not Coin
One of the reasons the British were optimistic that they could succeed in their basic maneuver in the 1920s
is that they were not really going back to the gold standard at all.
They were attempting to clothe themselves in the prestige of gold while trying to avoid its anti-inflationary discipline.
They went back, not to the classical gold standard, but to a bowdlerized and essentially sham version of that venerable standard.
In the first place, under the gold standard, the nominal currency, whether issued by governments or bank, was redeemable in gold coin at the defined weight.
The fact that people were able to redeem in and use gold for their daily transactions kept a strict check on the overissue of paper.
But in the new gold standard, British pounds would not be redeemable in gold coin at all,
only in quote bullion in the form of bars worth many thousands of pounds.
Such a gold standard meant that gold could not be redeemed domestically at all.
Bars could hardly circulate for daily transactions, so they could only be used by wealthy international traders.
The decision of the British Cabinet on March 20, 1925 to go back to gold was explicitly predicated on three conditions.
First was the attainment of a $300 million credit line from the United States.
Second was that the bank rate would not increase upon announcement of the decision,
so that there would be no contractionary or anti-inflationary pressure exercised by the Bank of England.
And third, and perhaps most important, was that the new standard would be gold bullion and not gold coin.
The Chancellor of the Exchequer would persuade the large, quote, clearing banks to, quote,
use every effort to discourage the use of gold for internal circulation in this country, end quote.
The bankers were warned that if they could not provide satisfactory assurances that they would not redeem in gold coin,
It would be necessary to introduce legislation on this point.
The Treasury, in short, wanted to avoid psychologically unfortunate and controversial legislation,
barring gold redemption within the country, but at the same time wanted to guard against
the risk of internal drain, that is, redemption in the property to which they were entitled
from foreign agents, the irresponsible public, or quote, sound currency fanatics.
The bankers, headed by Reginald McKenna, were of course delighted not to have to redeem in gold,
but wanted legislation to formalize this desired condition.
Finally, the government and the bankers agreed happily on the following.
The bankers would not hold gold, or acquire gold coins or bullion for themselves,
or for any customers residing in the United Kingdom.
The Treasury, for its part, redrafted its banking report to allow for legislation to
prevent any internal redemption if necessary and, quote, enforce such a ban on the all-too-willing
bankers.
Under the Gold Standard Act of 1925, then, pounds were convertible into gold, not in
The New Gold Standard was not even a full gold bullion standard, since there was to be no redemption at all in gold to British residents.
Gold bullion was only due to poundholders outside Great Britain. Britain was now only on a, quote, international gold bullion standard.
The purpose of redemption in gold bullion only, and only to foreigners, was to take control of the money supply away from the public, and place it in the hands of the governments and central bankers, permitting them to pyramid monetary inflation upon gold centralized in their hands.
Thus, Norman, when asked by the Governor of the Bank of Norway for his advice about returning
to gold, urged Norway to return only in gold bars and only for international payments.
Norman's reasoning is revealing,
In Norway, the convenience of paper currency is appreciated and confidence in the value
of money does not depend upon the existence of gold coin.
is rendered more inelastic wherever the principle of gold circulation for currency or for hoarding
is accepted, and any inelasticity may be dangerous.
I do not believe that gold in circulation can safely be regarded as a reserve that can
be made available in case of need, and I think that even in times of abundance hoarding is
bad because it weakens the command of the central bank over the monetary circulation
and hence over the purchasing power of the monetary unit.
For these reasons, I suggest that your best course would be to establish convertibility
of notes into gold bars only and in amounts which will ensure that the use of monetary
gold can be limited, in case of need, to the settlement of international balances."
Norway, and indeed all the countries returning to gold, heeded Norman's advice.
The way was paved for this development by the fact that, during World War I, the European
countries had systematically taken gold coins out of circulation and replaced them with
paper notes and deposits.
During the 1920s, virtually the only country still on the classical gold coin standard
was the United States.
Despite this tradition, it was still necessary for Monty Norman and the Bank of England to
to exert considerable pressure to force many European nations to return to gold bullion
rather than gold coin.
Thus, Dr. William Adams Brown Jr. writes,
quote,
In some countries, the reluctance to adopt the gold bullion standard was so great that
some outside pressure was needed to overcome it.
That is, strong representations on the part of the Bank of England that such action would
would be a contribution to the general success of the stabilization efforts as a whole.
Without the informal pressure, several efforts to return in one step to the full gold standard
would undoubtedly have been made.