The Gold Exchange Standard in Operation, 1926-1929
By the end of 1925, Montague Norman and the British establishment were seemingly monarch
of all they surveyed.
Backed by Strong and the Morgans, the British had had everything their way.
They had saddled the world with a new form of pseudo-gold standard, with other nations
was pyramiding money and credits on top of British sterling, while the United States,
though still on a gold coin standard, was ready to help Britain avoid suffering the
consequences of abandoning the discipline of the classical gold standard.
But it took little time for things to go very wrong.
The crucial British export industries chronically whipsawed between an overvalued pound and
The rigidly high wage rates kept up by strong, militant unions and widespread unemployment
insurance kept slumping during an era when worldwide trade and exports were prospering.
Unemployment remained chronically high.
The unemployment rate had hovered around 3% from 1851 to 1914.
From 1921 through 1926, it had averaged 12% and unemployment did little better after the
The Return to Gold In April 1925, when Britain returned to gold,
the unemployment rate stood at 10.9%.
After the return, it fluctuated sharply, but always at historically very high levels.
Thus, in the year after return, unemployment climbed above 12%, fell back to 9% and jumped
to over 14% during most of 1926.
Unemployment fell back to 9% by the summer of 1927, but hovered around 10-11% for the
next two years.
In other words, unemployment in Britain during the entire 1920s lingered around severe recession
levels.
The unemployment was concentrated in the older, previously dominant and heavily unionized
industries in the north of England.
The pattern of the slump in British exports may be seen by some comparative data.
If 1924 is set equal to 100, world exports had risen to 132 by 1929, while Western European
exports had similarly risen to 134.
United States exports had also risen to 130.
Yet, amid this worldwide prosperity, Great Britain lagged far behind, exports rising
only to 109.
On the other hand, British imports rose to 113 in the same period.
After the 1929 crash until 1931, all exports fell considerably, world exports to 113, Western
European to 107, and the United States, which had taken the brunt of the 1929 crash to 91.
And yet, while British imports rose slightly from 1929 to 1931 to 114, its exports drastically
fell to 68.
In this way, the overvalued pounds combined with rigid downward wage rates to work their
dire effects in both boom and recession.
Overall, whereas in 1931, Western European and world exports were considerably higher
Within categories of British exports, there was a sharp and illuminating separation between
two sets of industries, the old unionized export staples in the north of England and
the newer, relatively non-union, lower wage industries in the south.
These newer industries were able to flourish and provide plentiful employment because they
Some of these industries, such as public utilities, flourished because they were not dependent on exports.
But even the exports from these new, relatively non-unionized industries did very well during this period.
Thus, from 1924 to 1928-29, the volume of automobile exports rose by 95%.
During the 1929 to 1931 recession, exports of these new industries did relatively better
than the old, machinery and electrical exports falling to 28% and 22% respectively below
In 1931, at fully 26% above 1924, the traditional mainstays of British prosperity fared very
badly in both these periods of boom and recession.
The non-ferrous metal industry rose only slightly by 14% by 1928–29 and then fell to 55%
of 1924 in the next two years.
In even worse shape were the once mighty cotton and woolen textile industries, the bellwethers
of the Industrial Revolution in England.
From 1924 to 1929, cotton exports fell by 10% and woolens by 20% and then, in the two
years to 1931, they plummeted phenomenally, cottons to 50% of 1924 and woolens to 46%.
Remarkably, cotton and woolen exports were at this point their lowest in volume since
the 1870s.
Perhaps the worst problem was in the traditionally prominent exports, coal.
Coal exports had declined to 69% of 1924 volume in 1931, but perhaps more ominously they had
fallen to 88% in 1928-29, slumping, like textiles, in the midst of worldwide prosperity.
So high were British price levels compared to other countries in both of these periods
that Britain's imports, remarkably, rose in every category during boom and recession.
Thus, imports of manufactured goods into Britain rose by 32.5% from 1924 to 1928-29 and then
rose another 5% until 1931.
So costly, too, was the once proud British iron and steel industry that, after 1925,
The British, for the first time in their history, became net importers of iron and steel.
The relative rigidity of wage costs in Britain may be seen by comparing their unit wage costs
with the US, setting 1925 in each country equal to 100.
In the United States, as prices fell about 10% in response to increased productivity
Wage rates also declined, falling to 93 in 1928 and to 90 in 1929.
Swedish wages were even more flexible in those years, enabling Sweden to surmount without
export depression and return to gold at the pre-war par.
Swedish wage rates fell to 88 in 1928, 80 in 1929, and 70 in 1931.
In Great Britain, on the other hand, wage rates remain stubbornly high in the face of
of Fallen Prices, being 97 in 1928, 95 the following year, and down to only $1.5 million.