On the 21st September 1931 Britain abandoned the gold standard she had re-established after World War One. This is arguably more significant than the Wall Street Crash of 1929 which tends to get all the attention. Following Britain’s suspension of the pounds convertibility to gold an historical period of breakdown was entered into in which beggar-thy-neighbour economic policies came to the forefront. Less than a decade following this major default the world would be at war again.
The British Pound, or Sterling as its often referred to, was pegged to the pre-war pound/dollar at £1/$4.86. This artificially high peg encouraged sales of Sterling. However, it made exports very expensive and the British worker was forced to suffer unemployment at high rates and persistent austerity. British unemployment was concentrated in the "unsheltered" staple export trades: coal, iron, and steel, engineering, shipbuilding, and cotton and wool textiles.
The 1929 Crash had a substantial impact on mainland Europe due to the American loans market drying up. The ensuing crisis was expressed by the bankruptcy of the prominent Austrian bank Kreditanstalt in May 1931 which nearly brought down the entire German banking system. This was despite desperate attempts to bail it out by the Bank of England, the Bank for International Settlements (established in 1930 by the Western world’s central banks), and the Rothschilds themselves.
Standstill Agreements and Hoover’s Moratorium
| President Herbert Hoover (Wikipedia)
Germany was particularly hard hit because of the extensive war reparations she was already burdened with. A run on the Berlin banks occurred in the summer of 1931 which was very costly on her gold reserves. This of course had a knock-on effect. All the countries who had invested in or more commonly who were owed money by Germany stood to lose.
Herbert Hoover, the US President at the time, recognised that Germany (and others) would be unable to pay back their war debts. The Hoover Moratorium was introduced in June 1931 (passed in December) which froze all reparations and war debt payments for a year. When the year was up the countries involved basically defaulted on their debts anyway.
British and American fears about German collapse can be seen expressed at the London Conference of July 1931. Hoover’s secretary of state, Henry Stimson, proposed the Standstill Agreements, similar to Hoover’s Moratorium. This stated that German creditors would be obliged to refrain (such politeness!) from demanding payment. As a major creditor this infuriated the French.
Another conference was called for August 8 1931 to further negotiate the crisis. This was held in Basel at the headquarters of the new Bank for International Settlements. It reported that Germany had suffered particular severity because of her war debts which had been structured as short-term maturities. The matching short term relief was wholly inadequate to deal with the crisis. A short term deception to hide the depths of the crisis that all Europe was experiencing – Germany was simply the most acute victim.
The effect of the debt suspension on the German people was to seriously curtail their ability to buy and spend abroad. Who wanted German Marks? Trade became so restricted it resulted in many frozen and blocked accounts. The Reichsbank interest rate rose to a hefty 10%, whilst the rate on collateral loans soared to 15%. Meanwhile domestically, the policy of austerity was the programme of the day.
When did the British decide that they were going to default?
The Standstill Agreements and Hoover’s Moratorium only bought time. Montagu Norman, Chair of the Bank of England, must have been aware that these were temporary matters and that the Stirling crisis would only worsen. Norman’s advice to the German governement (July 1931), was that it should seek stand-still agreements with her creditors, declare a debt moratorium and suspend all gold payments. Perhaps in anticipation of where Norman’s thinking was in relation to Britain’s upcoming devaluation?
Some historians have argued that;
Inaccessible to view at the time, however, was the extent to which the Bank of England had escaped from its recent status as a virtual appendage of H.M. Treasury only to become the prisoner of the capital markets that it had once dominated.
Bill Janeway
Prisoner or Jailer?
Norman had a strong working relationship both with Benjamin Strong at the New York Fed and Hjalmar Schacht of the Reichsbank. By 1930 Schacht had been converted to fascism and only a year later was to be introduced to Hitler via Hermann Goering. Strong, following his death, was replaced by George L Harrison at the New York Fed, who was critical that the British austerity programme was inadequate.
Montagu Norman meets Hjalmar Schacht
The domestic political situation in Britain was in crisis mode. The Minority Labour Government in power was unable to formulate a “balanced” budget. Unemployment was soaring in Britain and the Chancellor of the Exchequer, Philip Snowden, told the Commons in February 1931 that
...the national position is so grave that drastic action and disagreeable measures will have to be taken…
Proposals to cut unemployment benefits, increase the unemployment insurance, cuts to teachers’, service personnel and police salaries, cuts to road repairs and other miscellaneous where proposed by the Economy Committee (which included Keynes among others) in August 1931. However, the Labour government was deeply divided over the issue.
Norman at the Bank of England was consulted as to whether the budget proposals would be sufficient to secure the US loans. As it was, the Labour leader, Ramsay MacDonald, went to see the King on 23 August and a National Government was swiftly formed.
Montagu Norman’s constant refrain was that the crisis of the British Pound could be solved by a balanced budget. He put the crisis at the door of the government and excused all role of the Bank of England. Indeed, the ideology was that the lazy and indolent worker must pay.
JP Morgan himself had concerns over Britain’s growing balance of payments crisis and he cabled the British office (Morgan Grenfell) on September 7;
Are the British Treasury and the Bank of England satisfied that the present method of dealing with the sterling exchange crisis is the best that can be devised? In this connection the question naturally arises as to why the Bank of England does not use the classic remedy of Bank Rate rises instead of apparently pegging the exchange. Tarpley
The monetarist orthodoxy of the time was that if a country got into trouble it needed to raise their bank rate and limit unbacked paper money (fiat). Yet, the British did neither of these things. In the summer of 1931 in the lead up to Britain’s devaluation, the Bank of England actually started printing money. Furthermore, although they raised interest rates (up from a then historic low of 2.5%), it was gradually done with roughly half a base point per month from May 1931. On July 31st the rate stood at 4.5% which may sound high to us now, but was not a high rate in this time period and did nothing to stem the drain of gold from the British coffers.
During the summer of ‘31 whilst attempting austerity and budgeting to resolve the crisis, the British were also organising loans from the US and France. JP Morgan itself felt reluctance to lend the British money. A large number of US banks refused to join the loan syndicate, revealing the weakness present in the US banking system. Again from Morgan to Philip Snowden (Chancellor of the Exchequer);
...we may emphasize that there is not a single institution in our whole banking community which actually desires the British Treasury Note on any terms...Every institution is probably making strenuous endeavours to get its position more liquid. Tarpley
J P Morgan (Pinterest.com)
However, the British still managed to procure loans from the US to the tune of $650 million in August. The biggest loan made by Morgan between the wars. However, by the end of August Morgan was commenting on the loss of confidence in the British government.
Going into September matters only worsened.
Whilst support was offered to keep the peg to the Dollar and Franc (the UKs biggest creditors), it failed to support against, for example the Dutch Guilder. This resulted in significant gold reserves being shipped to Amsterdam. In mid September Lord Reading (Foreign Secretary) advocated that the Treasury mobilise the large amounts of foreign securities held in Britain to defend the pound. It was also Lord Reading that asked the government to have a detailed financial report prepared.
Lord Reading’s concern was with those dumping pounds on the international markets and whether the government could crack down on such transactions, also known as internal capital flight. Or as the London Daily Star wrote “the traitors who are sending their gold abroad”. (September 18, 1931)
The British Empire had survived and thrived from being in control of international finance. The country had been on a gold-backed system for over two hundred years. Now, in September 1931 for the first time in peace time, gold payments were suspended. The interest rate was also raised sharply from 4.5% to 6%. It then stood at this rate for the next six months. Meanwhile Britain’s creditors lost out big time as British foreign obligations were naturally denominated in Sterling.
The default came as a shock to Harrison who had been prepared (along with the French) to extend loans to defend the pound. The British naturally moaned that they had no alternative. They also pointed the blame at withdrawals made by foreign account holders. All the London tabloids ran the same propaganda line – the fall of the mighty pound was blamed on a bankers ramp led by those foreign bankers! Their favourite scapegoat was none other than George Harrison.
Another easy target was the Bank of France. Jacques Rueff, Financial Attaché in London charged the Bank of England with defaulting intentionally to damage its creditors. Especially the French. He accused the Bank of England as being slow to raise rates and had used open market operations to augment the money supply. They were guilty of violating their own rules as the British tried to maintain their liquidity in the face of massive gold outflow. At core the British had exported their crisis.
The old saying safe as the Bank of England was now defunct.
The impact of the British default was to be far and wide ranging.
The entire edifice of world trade and world banking had imploded. In the autumn of 1931 there was a flurry of international bank failures. The central banks were so strapped for cash that there was even a run on the Bank for International Settlements. The effect on the US banking system was nothing short of catastrophic.
The rise of fascism in Europe, especially Hitler and the Nazi party, was directly related to the penury caused by the depression of world trade. Throughout Europe and America the rest of the 1930s were blighted by mass unemployment, poverty and social unrest.
As a side note it is worth recalling Lord Montagu Norman, among other British nobles, was a supporter of Hitler. When the Nazis invaded Czechoslovakia in 1938 they discovered the Czech gold was held in London. Norman arranged for its transfer to the Nazi party who used it to further augment their war machine.
The consequences of an unstable currency exchange was the atrophy of world trade and the division into currency blocs. Currency wars turned into trade wars which in turn led on the path directly to World War Two. No wonder Mark Carney ordered the removal of Baron Norman’s portrait when he became Governor of the Bank of England.
Sources
Surviving the Cataclysm, Webster Tarpley.
Parliamentary Socialism, Ralph Milliband
The 1931 Sterling Crisi and the Independence of the Bank of England, William Janeway