The True Gold Standard (Second Edition)
President Obama, take note: how to cause a Depression! According to Keynes, the recipe is to allow yourself to be "gravely misled by the experts."
In 1925 Winston Churchill, Chancellor of the Exchequer, resumed the pound sterling's convertibility into gold. He resumed convertibility at the conversion price prevailing before the war ... even though, due to wartime depreciation, price levels had doubled. It caused, as Keynes and very few others anticipated it would, the loss of millions of jobs, an ensuing general strike, and Churchill ending up in the political wilderness for almost ten years.
Churchill's blunder also helped to tarnish the reputation of the gold standard, a blackening from which it is only now is beginning fully to emerge.
William Manchester, The Last Lion: Winston Spencer Churchill, Visions of Glory 1874-1932:
The most sensational moment in Churchill's first budget was his dramatic disclosure that Britain, which had left the gold standard during the war, was back on it. The Times reported that this announcement was greeted with "tremendous cheers." After the applause had died down he said, "No responsible authority has advocated any other policy. It has always been a matter of course that we should return to it." This was simply untrue. Beaverbrook had been against it; on the evening of Budget Day he wrote Bracken: "My opinion of Winston has not altered. I knew from the beginning that he would give in to the bankers on the Gold Standard, which I think, is the biggest sin in this budget." ...
Beaverbrook and Boothby were among the few Jeremiahs on the issue then; others, and they were almost the only others, were Winston's old colleague Reginald McKenna, a former chancellor; John Maynard Keynes, and Vincent Vickers, who protested the move by resigning from the board of the Bank of England. Churchill has been blamed for it, and rightly so, because as chancellor he made the decision. The step was not taken lightly, however, or without learned advice. Responsibility was collective and bipartisan." ... Why did they do it, and what did it mean? British financiers, in the Treasury and in the City, were convinced that England's future prosperity could be assured only if London were reestablished as the financial center of the globe. This, they held, would be impossible until "the pound can look the dollar in the face." ... They assumed that the restoration of the pound's parity with the American dollar would reestablish Britain's prewar prosperity. None seemed to realize that England had squandered its wealth between Sarajevo and Versailles, or that the country's shrunken export trade could no longer provide the surplus needed to reestablish London's fiscal ascendancy over the rest of the world."
Keynes now emerged. In the Nation, the Evening Standard, and finally in a pamphlet, "The Economic Consequences of Mr Churchill," he went for Winston's jugular, declaring that the chancellor had acted "partly, perhaps, because he has no instinctive judgment to prevent him from making mistakes; partly, because, lacking this instinctive judgment, he was defeated by the clamorous voice of conventional finance; and most of all, because he was gravely misled by the experts." (Little, Brown and Company, 1983, pp. 791-793)
From Peter L. Bernstein's The Power of Gold: The History of an Obsession...
Between the end of December and the deadline at the end of April, Churchill would spend a miserable four months trying to come to grips with the matter. 'When I held other offices under the Crown, he complained to a friend, 'I could always find out where I was. Here I'm lost and reduced to groping.' He also grumbled that "The governor [Norman] shows himself perfectly happy in the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed.' A senior advisor, Otto Niemeyer of the Treasury, observed that "None of the witch doctors see eye to eye and Winston cannot make up his mind from day to day whether he is a gold bug or a pure inflationist." p. 246
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Why the Gold Standard?