Gold Standard Amendment Act of 1931 (England)

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The Gold Standard Amendment Act of 1931 is a rather euphemistic title for an act that marked the end of the international gold standard. The gold standard had provided the world with a stable monetary system from the 1870s until 1914, and was regarded as the ideal monetary system in the aftermath of World War I. In the pre–World War I era, Britain had been the major proponent and custodian of the gold standard, and the departure of Britain from the gold standard permanently removed the world from the gold standard.

Despite the interruption of World War I the world had by the mid-1920s returned to a gold standard that combined elements of a gold bullion and gold exchange. Countries held international reserves to redeem national currencies at official rates, and these reserves took the form of gold or leading foreign currencies, mainly British pounds and American dollars, which were “as good as gold.” The United States held gold reserves well in excess of what was needed to satisfy foreign claims, but in Britain foreign claims exceeded domestic gold reserves, making Britain vulnerable to an international liquidity crisis.

After World War I Britain not only committed itself to returning to the gold standard, but also sought to fix the pound at its pre–World War I value, which was equivalent to $4.86 in the United States. In 1925 Britain returned to the gold standard with the pound at pre–World War I parity in terms of gold and foreign currencies, leaving the pound overvalued in the new international order. The overvaluation of the pound made British exports more expensive in foreign markets and foreign imported goods less expensive in British markets, increasing the supply of goods in Britain relative to demand. Deflationary effects of overvaluation in Britain caused strikes, unemployment, and recession, and forced on the British government added social spending, leading to larger budget deficits. The Bank of England kept interest rates high to attract foreign capital, and discourage withdrawal of foreign funds, together minimizing pressure to redeem pounds into gold. High interest rates also helped keep the British economy depressed.

With the onset of the Great Depression of the 1930s many smaller countries lost export markets and began to draw on reserves of foreign currencies to pay for imports. Bank failures in Austria and Germany weakened confidence in foreign currencies, encouraging redemption of foreign currencies into gold. France, perhaps sensitive to the feeling that the leading powers held reserves in gold and that secondary powers held reserves in foreign currency, took every opportunity to convert its holding of pounds and dollars into gold.

Britain first negotiated loans with the central banks of France and the United States, seeking to bolster its reserves and weather a mounting crisis of confidence in the pound. Later the British government arranged another loan from private sources, but only after restricting government deficit spending, and curbing expenditures on unemployment compensation and wages of government workers. The loans, however, were only stopgap measures, and the drain on Britain’s gold reserves continued.

On Saturday, 19 September 1931, the British government decided to suspend gold payments, effective the following Monday, 21 September. The act was rushed through Parliament on 21 September and read, “Until His Majesty by Proclamation otherwise directs subsection 2 of section one of the Gold Standard Act of 1925 shall cease to have effect.” The Gold Standard Act of 1925 had returned Britain to the gold standard.

Australia, New Zealand, Brazil, Chile, Paraguay, Uruguay, Venezuela, and Peru had already suspended gold payments. Within a few weeks most of the world’s trading partners abandoned the gold standard or restricted foreign currency transactions. By the end of 1932 only the United States, France, Belgium, Switzerland, and the Netherlands remained on the gold standard and maintained freedom of transaction in foreign currencies. The United States abandoned the gold standard in 1933, followed by the remaining European countries in 1936.