WEBVTT NOTE 55. The Establishment of the New Gold Standard of the 1920s: Bullion, Not Coin 1 00:00:00.000 --> 00:00:05.000 The Establishment of the New Gold Standard of the 1920s 2 00:00:05.000 --> 00:00:08.000 Bullion Not Coin 3 00:00:08.000 --> 00:00:14.000 One of the reasons the British were optimistic that they could succeed in their basic maneuver in the 1920s 4 00:00:14.000 --> 00:00:18.000 is that they were not really going back to the gold standard at all. 5 00:00:18.000 --> 00:00:26.000 They were attempting to clothe themselves in the prestige of gold while trying to avoid its anti-inflationary discipline. 6 00:00:26.000 --> 00:00:35.000 They went back, not to the classical gold standard, but to a bowdlerized and essentially sham version of that venerable standard. 7 00:00:35.000 --> 00:00:46.000 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. 8 00:00:46.000 --> 00:00:55.000 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. 9 00:00:55.000 --> 00:01:01.000 But in the new gold standard, British pounds would not be redeemable in gold coin at all, 10 00:01:01.000 --> 00:01:07.000 only in quote bullion in the form of bars worth many thousands of pounds. 11 00:01:07.000 --> 00:01:11.000 Such a gold standard meant that gold could not be redeemed domestically at all. 12 00:01:11.000 --> 00:01:19.000 Bars could hardly circulate for daily transactions, so they could only be used by wealthy international traders. 13 00:01:19.000 --> 00:01:28.000 The decision of the British Cabinet on March 20, 1925 to go back to gold was explicitly predicated on three conditions. 14 00:01:28.000 --> 00:01:33.000 First was the attainment of a $300 million credit line from the United States. 15 00:01:33.000 --> 00:01:38.000 Second was that the bank rate would not increase upon announcement of the decision, 16 00:01:38.000 --> 00:01:44.000 so that there would be no contractionary or anti-inflationary pressure exercised by the Bank of England. 17 00:01:44.000 --> 00:01:51.000 And third, and perhaps most important, was that the new standard would be gold bullion and not gold coin. 18 00:01:51.000 --> 00:01:57.000 The Chancellor of the Exchequer would persuade the large, quote, clearing banks to, quote, 19 00:01:57.000 --> 00:02:04.000 use every effort to discourage the use of gold for internal circulation in this country, end quote. 20 00:02:04.000 --> 00:02:11.000 The bankers were warned that if they could not provide satisfactory assurances that they would not redeem in gold coin, 21 00:02:11.000 --> 00:02:17.720 It would be necessary to introduce legislation on this point. 22 00:02:17.720 --> 00:02:27.000 The Treasury, in short, wanted to avoid psychologically unfortunate and controversial legislation, 23 00:02:27.000 --> 00:02:31.760 barring gold redemption within the country, but at the same time wanted to guard against 24 00:02:31.760 --> 00:02:38.600 the risk of internal drain, that is, redemption in the property to which they were entitled 25 00:02:38.600 --> 00:02:44.600 from foreign agents, the irresponsible public, or quote, sound currency fanatics. 26 00:02:45.400 --> 00:02:51.160 The bankers, headed by Reginald McKenna, were of course delighted not to have to redeem in gold, 27 00:02:51.160 --> 00:02:54.680 but wanted legislation to formalize this desired condition. 28 00:02:55.640 --> 00:02:59.480 Finally, the government and the bankers agreed happily on the following. 29 00:03:00.120 --> 00:03:05.480 The bankers would not hold gold, or acquire gold coins or bullion for themselves, 30 00:03:05.480 --> 00:03:09.360 or for any customers residing in the United Kingdom. 31 00:03:09.360 --> 00:03:14.840 The Treasury, for its part, redrafted its banking report to allow for legislation to 32 00:03:14.840 --> 00:03:22.280 prevent any internal redemption if necessary and, quote, enforce such a ban on the all-too-willing 33 00:03:22.280 --> 00:03:23.680 bankers. 34 00:03:23.680 --> 00:03:29.680 Under the Gold Standard Act of 1925, then, pounds were convertible into gold, not in 35 00:03:29.680 --> 00:03:46.680 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. 36 00:03:46.680 --> 00:03:56.680 Gold bullion was only due to poundholders outside Great Britain. Britain was now only on a, quote, international gold bullion standard. 37 00:03:56.680 --> 00:04:15.680 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. 38 00:04:15.680 --> 00:04:21.460 Thus, Norman, when asked by the Governor of the Bank of Norway for his advice about returning 39 00:04:21.460 --> 00:04:29.440 to gold, urged Norway to return only in gold bars and only for international payments. 40 00:04:29.440 --> 00:04:31.480 Norman's reasoning is revealing, 41 00:04:31.480 --> 00:04:37.800 In Norway, the convenience of paper currency is appreciated and confidence in the value 42 00:04:37.800 --> 00:04:42.660 of money does not depend upon the existence of gold coin. 43 00:04:42.660 --> 00:04:48.620 is rendered more inelastic wherever the principle of gold circulation for currency or for hoarding 44 00:04:48.620 --> 00:04:53.180 is accepted, and any inelasticity may be dangerous. 45 00:04:53.180 --> 00:04:58.420 I do not believe that gold in circulation can safely be regarded as a reserve that can 46 00:04:58.420 --> 00:05:03.660 be made available in case of need, and I think that even in times of abundance hoarding is 47 00:05:03.660 --> 00:05:09.180 bad because it weakens the command of the central bank over the monetary circulation 48 00:05:09.180 --> 00:05:13.540 and hence over the purchasing power of the monetary unit. 49 00:05:13.540 --> 00:05:18.160 For these reasons, I suggest that your best course would be to establish convertibility 50 00:05:18.160 --> 00:05:23.500 of notes into gold bars only and in amounts which will ensure that the use of monetary 51 00:05:23.500 --> 00:05:31.300 gold can be limited, in case of need, to the settlement of international balances." 52 00:05:31.300 --> 00:05:36.980 Norway, and indeed all the countries returning to gold, heeded Norman's advice. 53 00:05:36.980 --> 00:05:42.420 The way was paved for this development by the fact that, during World War I, the European 54 00:05:42.420 --> 00:05:47.440 countries had systematically taken gold coins out of circulation and replaced them with 55 00:05:47.440 --> 00:05:50.260 paper notes and deposits. 56 00:05:50.260 --> 00:05:55.260 During the 1920s, virtually the only country still on the classical gold coin standard 57 00:05:55.260 --> 00:05:57.700 was the United States. 58 00:05:57.700 --> 00:06:02.740 Despite this tradition, it was still necessary for Monty Norman and the Bank of England to 59 00:06:02.740 --> 00:06:08.140 to exert considerable pressure to force many European nations to return to gold bullion 60 00:06:08.140 --> 00:06:09.940 rather than gold coin. 61 00:06:09.940 --> 00:06:14.140 Thus, Dr. William Adams Brown Jr. writes, 62 00:06:14.140 --> 00:06:15.140 quote, 63 00:06:15.140 --> 00:06:19.860 In some countries, the reluctance to adopt the gold bullion standard was so great that 64 00:06:19.860 --> 00:06:23.220 some outside pressure was needed to overcome it. 65 00:06:23.220 --> 00:06:28.220 That is, strong representations on the part of the Bank of England that such action would 66 00:06:28.220 --> 00:06:34.260 would be a contribution to the general success of the stabilization efforts as a whole. 67 00:06:34.260 --> 00:06:40.460 Without the informal pressure, several efforts to return in one step to the full gold standard 68 00:06:40.460 --> 00:06:43.860 would undoubtedly have been made.