Wednesday, 26 December 2012

Churchill, Keynes, Gold & Empire – A Historical Vignette




Britain’s return to the gold standard in 1925 was a policy decision condemned famously in J M Keynes’s pamphlet of that year: ‘The economic consequences of Mr Churchill’. However, it is interesting to note that Keynes only argued against the particular rate chosen for sterling – one that was the same as in 1914 at the start of World War 1, when the gold standard had been suspended – not the decision itself. Furthermore, the rate was only claimed by Keynes to be about 10% too high, although this was significant for some of Britain’s industries, such as coal mining. But what is striking about Keynes’s pamphlet is that it completely ignores the actual reasons the government, with Winston Churchill as finance minister, took the decision. Instead, it presents a deceitful story about Churchill being ‘gravely misled by his experts’,[1] before discussing the national economic problems that would result.[2]

By contrast, the historian R S Sayers documents how the decision to go back on gold in 1925 had been very widely discussed. One of the last discussions, chaired by Churchill at 11 Downing Street, gave a platform for Keynes as a  key opponent.* Far from potential economic problems with the new gold parity being ignored, these were anticipated, but were thought to be worth paying in order to get the benefits of the decision to return to gold at the pre-war level.[3] The prevailing view, even of many industrialists, was that a return to gold in 1925 would have stabilised business conditions after the previous period of turmoil post-1918, and this would help to boost international trade and investment. However, my focus here is on the imperial rationale for Britain’s policy.

Keynes’s own biographer, Skidelsky, notes the imperial dimension, even though his subject does not. Skidelsky quotes from Churchill’s budget speech on 28 April 1925 when the decision to return to the gold standard at the pre-war rate was announced:

“If we had not taken this action, the whole of the rest of the British Empire would have taken it without us, and it would have come to a gold standard, not on the basis of the pound sterling, but a gold standard of the dollar.”[4]

What had happened was that the first imperialist war, usually called World War 1, was a major blow to Britain’s economic power. Wars are expensive, and Britain’s armed forces had previously been deployed mainly to put down small-scale threats from troublesome colonies and countries not making their coupon payments, not from rival powers that would take far more resources to subdue. (This is why the BBC Blackadder series showed that it was so difficult in trench warfare to move Field Marshall Haig’s drinks cabinet any further towards Berlin)[5] The commercial and financial orientation of the British economy was also severely damaged by war as trading and financial relations were disrupted. Hence, it was clear that Britain was in a weaker position after 1918, and its previous hegemony was endangered.

So, what could the British ruling class do? Could Britain’s previous power be restored? Despite the setbacks, there was reason to think so, given the desolation elsewhere in Europe, and despite the new worry about Soviet Russia that Britain had organised a multi-country invasion against. But the problem was that WW1 was largely a European war, and the US had emerged as a major world economic power. So, there was a debate in British policy circles. To restore sterling as the currency underpinning global financial relationships – at the old rate against gold, in order to stress both that nothing had really changed and that holders of sterling would not be damaged – my word is my bond. Or to recognise that the status quo ante was no longer attainable? In 1925, the former path was risky, but it looked far less of a threat to Britain’s imperial position and privileges than the latter.

This is what Churchill had to say that is relevant to my argument here when he made his April 1925 budget speech announcing the return to gold:[6]

“We are convinced that our financial position warrants a return to the gold standard under the conditions that I have described. We have accumulated a gold reserve of £153,000,000. That is the amount considered necessary by the Cunliffe Committee, and that gold reserve we shall use without hesitation, if necessary with the Bank Rate, in order to defend and sustain our new position.”
“I have only one observation to make on the merits. In our policy of returning to the gold standard we do not move alone. Indeed, I think we could not have afforded to remain stationary while so many others moved. The two greatest manufacturing countries in the world on either side of us, the United States and Germany, are in different ways either on or related to an international gold exchange. Sweden is on the gold exchange. Austria and Hungary are already based on gold, or on sterling, which is now the equivalent of gold. I have reason to know that Holland and the Dutch East Indies – very important factors in world finance – will act simultaneously with us today. As far as the British Empire is concerned – the self-governing Dominions – there will be complete unity of action. The Dominion of Canada is already on the gold standard. The Dominion of South Africa has given notice of her intention to revert to the old standard as from 1st July. I am authorised to inform the Committee that the Commonwealth of Australia, synchronising its action with ours, proposes from today to abolish the existing restrictions on the free export of gold, and that the Dominion of New Zealand will from today adopt the same course as ourselves in freely licensing the export of gold.”
“Thus over the wide area of the British Empire and over a very wide and important area of the world there, has been established at once one uniform standard of value to which all international transactions are related and can be referred. That standard may, of course, vary in itself from time to time, but the position of all the countries related to it will vary together, like ships in a harbour whose gangways are joined and who rise and fall together with the tide. I believe that the establishment of this great area of common arrangement will facilitate the revival of international trade and of inter-Imperial trade. Such a revival and such a foundation is important to all countries and to no country is it more important than to this island, whose population is larger than its agriculture or its industry can sustain, which is the centre of a wide Empire, and which, in spite of all its burdens, has still retained, if not the primacy, at any rate the central position, in the financial systems of the world.”

Not for first time, nor the last, Churchill’s priority was the promotion of Britain’s imperialist interests. However, his was not the view of a politician who did not care about the national economy. Instead he saw what made the national economy tick when it so clearly depended upon having a ‘central position’ in global finance.

Keynes was hardly blind to British imperialism’s interests; among other things he had previously spent time as one of its civil servants in India. However, his ‘national economy’ focus on the question of returning to gold completely misconstrued how the world economy worked. This remains all too true for Keynes’s followers today.

The lesson for us all from this historical vignette is that big events cannot be understood if we do not take into account the reality of an imperialist world economy. The importance of a concept can be shown by how the analysis of events fails in its absence. This is particularly true for the concept of imperialism today. Major events can only properly be understood by examining these relationships and dynamics. Any analysis that fails to take these into account will have at best a partial perspective, but, more likely, a completely mistaken one.


Tony Norfield

26 December 2012

Amendment note, 21 May 2014: The sentence preceding the asterisk (*) in the original article mistakenly said that a key policy discussion had taken place at Keynes's home in London. This has now been corrected.



[1] See The Collected Writings of J M Keynes, Volume IX, Essays in Persuasion, Cambridge University Press, 1984, p212.
[2] See the Sayers article noted next for the many contingencies of the time. These question how far a different rate for sterling would have made any significant difference to the later 1931 UK exit from, and general break up of, the gold standard system.
[3] R S Sayers, ‘The Return to Gold’ in Sidney Pollard (ed), The Gold Standard and Employment Policies Between the Wars, Methuen 1970.
[4] Robert Skidelsky, John Maynard Keynes: The Economist As Saviour, 1920-1937, Macmillan, London, 1992, p200.
[5] The TV series joke was that many tens of thousands died going ‘over the top’ from the trenches to bring about an advance of six inches. The fact that many trenches were dug by Chinese workers – acting as labourers, with no military protection - was never mentioned in the Blackadder series.