There was the Treasury View of the desirability of the gold standard back then.

Now, just about everyone except probably Richard Wellings of the IEA accepts that Britain going back on the gold standard under Churchill was one of the worst economic decisions ever. He should read Lords of Finance to learn that even Churchill realised this, and wandered around afterwards gnashing his teeth about the decision.  Whatever out of context quote Churchill may have given spouting Treasury view (see IEA blog), the truth is he learned to distrust them, terribly.

The idea of quoting Churchill to prove Keynes wrong is quite bizarre. Even more biizarre, Richard has recently been quoting Keynes to prove that the liquidity trap is wrong.  Which argument from authority are we likely to take next? Perhaps Chamberlain proving that Churchill was wrong.

Being on the gold standard at too high a level forced deflation upon the UK.  They put pressure on the US to keep rates low, therefore exacerbating the boom of US stocks.  It was a giant mistake.  And fiscal policy and the abandoment of monetary orthodoxy were what ultimately pulled us from recession.

The other different thing about pre WWII is the extremes of wealth inequality.  Chris Dillow has a simply brilliant post explaining how it all disappeared in the last 80 years.  I had always thought wartime expropriation, but had been waiting for a post like this to explain further.


3 thoughts on “Pre WWII things were different

  1. Just to clear up any misunderstanding, it was another Richard who wrote about the liquidity trap in the IEA blog comments. I always use my surname when I comment as there are so many Richards about.

  2. Apologies for the confusion! this is a hastily written blog.

    If I had had time, I would have also dredged up the Churchill quote I mean, rather than lazily referring to it.

  3. Would things have been different had countries adjusted their gold parities to purchasing power parity after WW1 as Gustav Cassel argued at the time? This would have avoided the need for deflation in Britain to return to the old parity.

    When reading about the current financial crisis I was struck by the similarity in monetary imbalances (between USA and Europe in the interwar years; between China plus oil-rich countries and the USA and the UK this time around). Back then, the USA went very quickly from being an importer of capital to being a surplus country thanks to their lending to the Allies in WW1. In turn, France and Britain tried to get the gold needed to repay the American war loans from reparation payments from the defeated central powers. The whole thing was made more difficult by the USA’s high tariffs, which made it difficult for the country’s debtors to earn the dollars/gold needed to repay.

    I suppose the problem with any fixed exchange rate regime is that it is always arbitrary, and prevents the flexibility needed to adjust to changing economic circumstances. Or was the big problem not so much fixed exchange rates, but tying the money supply to the supply of gold (preventing an expansionary monetary policy)?

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