The Gold Standard Act of 1925 returned England to the gold standard after the disruption of World War I, signaling the beginning of a new gold standard era that lasted until 1931.
England’s commercial supremacy and financial leadership had secured the gold standard as the international monetary standard between the 1870s and 1914, the years of the classic gold standard. If there was a headquarters for the international gold standard, it was England, and the return of England to gold after World War I was anxiously awaited.
England had not officially gone off the gold standard during World War I, but the risk of transporting gold under wartime conditions effectively put an end to the convertibility of pounds into gold. After April 1919 the export of gold was strictly prohibited except for freshly mined gold imported from other parts of the empire.
To study the financial aspects of postwar reconstruction the British government in 1918 had appointed a committee, soon called the Cunliffe Committee after its chairman, Lord Cunliffe, governor of the Bank of England. Nine of the 12 members of the committee were traditional bankers, perhaps accounting for the deflationary recommendations of the committee. From the outset the Cunliffe Committee assumed that England should return to the gold standard, and that the value of the pound should be fixed at its prewar value. The recommendations of the committee were phased in over a 10-year period, including the return to the gold standard in 1925.
Wartime inflation had continued at the war’s end, lifting the 1920 price level threefold higher than the 1913 price level. In 1920, however, the postwar boom hit the skids, and by 1922 prices were less than twice the 1913 price level. The bout of deflation was temporary but prophetic, and the Cunliffe Committee would have done well to heed the warning.
With the help of loans from the Federal Reserve Bank of New York and a United States banking syndicate, England returned to the gold standard. The ban on the export of gold was lifted and the Gold Standard Act of 1925 made the pound convertible into gold at prewar parity. Unlike the classic gold standard of the prewar years, gold coins no longer circulated domestically, and the public could only convert Bank of England bank notes into gold bars. To meet the needs of international finance the Bank of England could have gold minted into gold coins, but the English public could not demand the convertibility of bank notes into gold coins.
Perhaps the fateful mistake of the act was the return of the pound to its prewar value. The pound needed to depreciate to enhance the competitiveness of English exports in foreign markets, and to diminish the competitiveness of imported goods in English markets. England’s industry could not compete with German industry and industry from other parts of the world. England’s economy settled into a sluggish recession, marked by militant labor-management clashes, struggling along until the more devastating collapse occurred in the 1930s.
The Bank of England had to keep domestic interest rates up to make the pound valuable in foreign markets, restricting the desire to convert pounds into gold, and keeping England in possession of its gold reserves. But domestic economic problems limited the ability of the Bank of England to raise domestic interest rates to protect its gold reserves. A conflict between the need to improve domestic economic conditions and the need to support the pound put the Bank of England in a difficult position. In 1931 the conversion of pounds accelerated, causing a drain on England’s gold reserves. The English government suspended its gold standard with the Gold Standard Amendment Act of 1931. England, and the world’s trading partners, never returned to domestic gold standards after the debacle of the 1930s. Later in the 1930s a gold standard for international transactions was established, lasting until 1971.