In 1925 Britain reintroduced the gold standard, as it seemed like the solution to these economic problems. Japan who now felt an allegiance to Britain followed suit in 1929. In the 20s the gold standard was seen as an ideal when Britain led the world, however evolution of the world economy was ignored, as Britain could no longer lead the trends. The pound was fixed at 4.86 dollars, which was a return too the 1914 pre war parity. Keynes and Moggridge have both described this as the “Norman Conquest of $4.86”
showing how this had little benefit for Britain. However the pound was over valued by the government, which caused internal unbalances. This new value made imports cheap for Britain, however it also made exports more expensive, causing Britain to loose trade. British goods were now 50% more expensive than American making the price competitiveness weaker. This was at a time when international prices were falling so Britain was perpetually chasing a lower price. People in Britain suffered, Keynes described that, “the miners are to be offered the choice between starvation and submission”. Whilst other historians like H.G. Johnson believed “ overvaluation was responsible for the whole of the unemployment”
, although this was unlikely due to frictional unemployment. However this shows how the value of money was of such importance. It has been calculated that the pound was overvalued by about 10%. This meant that if in 1928 its value had been 10% lower the balance of payments problem could have been improved by about 70million, which could have provided about 729,000 jobs, whilst still leaving a margin of about 25million. However it must also be understood that some British goods were not wanted at any prices, and also many parts of the empire were closely tied to the pound, so it would have had to be a larger than 10% fall
.
Between 1929 and 31 the world was beginning to move towards a depression. Roderick Floud identifies that “Britain’s invisible earnings were no longer great enough to cover the larger deficit of visible trade”
. Britain had been ‘Borrowing short – lending long ’. Short term money or ‘hot money’
was moving from one country to another as investors tried to get the best interest rates and make capital gains from currency re-evaluations. Britain soon had a noticeable balance of payments problem; European countries worried for their British assets quickly started selling them off, leading Europe in to chaos. Other countries suffering were paying London in either gold, or just letting their reserves of sterling run down. Private investors who also had doubts moved from sterling to dollars and francs, in total holdings of sterling fell by 293 million. The government had to do some emergency borrowing from other central banks, yet the gold standard kept the value of the pound high. In 1931 the British system could no longer hold out at such a high price, the gold standard had to be abandoned and the pound revalued. A wave of protectionism took hold around the world, Japan also felt the strain, and so like Britain soon left the standard. Both countries put protective tariffs on imports and operated in this fashion onwards. By 1932 the pound reached as level of 3 dollars 24 cents, making exports more competitive and showing the extent of the overvaluation.
War marked an end to British dominance that could not be returned to and as Alford points out, the world market had changed and “ The most obvious was the emergence of the USA”
. As well as this there was the belief that Germany could no longer pose a threat to Britain. Whilst war had given Japan its ‘launching pad’ in to the World Economy. The Gold Standard that both countries reintroduced in the 1920s was an out dated sytem that depended on them being central to world change. However the situation had changed. More importantly Britain was no longer leading the way. The entry level of British currency in 1925 was also another very important factor, because it was far too high. Whilst Japan saw competition in its stable industries like silk a shock due to the competition vacuum it have been functioning in previously. In conclusion the 1920s brought a world slump which neither country knew how to handle. The wave of protectionism, which quickly went up, made the gold standard to rigid and a burden to both economies. Britain and Japan became to uncompetitive at a time when they needed to be cheap to impregnate foreign markets. With the 1929 Wall Street crash countries became increasingly nervous with stocks of British sterling potentially at risk, a domino effect in sued as countries quickly moved for safer currencies. Invisible incomes from their empires were not strong enough to hold the economies of Britain and Japan up. Both relied very heavily on exports for national income, when this income was lost, money needed to be made from imports. 1931 signaled the end of the gold standard, and a change in government policy, free trade was lost and tariffs reintroduced. Therefore in looking back, the gold standard was never the solution that it was believed it could be, in fact as times grew harder it was more of a burden. It was an old system that had become outdated. The system primarily failed because it was being used in a time when the world economy had significantly changed to that of 1914 and so was very unlikely to have ever been a success.
