Keynessandra No More: JM Keynes, the 1931 Financial Crisis, and the Death of the Gold Standard in Britain

Abstract

Britain's suspension of gold convertibility in September 1931 was one of the most surprising and significant events in the history of the global financial system. Whereas London had traditionally been the center of the international gold standard, in the 1930s Britain led the world into the era of adjustable exchange rates. Previous explanations have maintained that the configuration of domestic institutions and interest groups determined Britain's response to changing international conditions. There was, however, ample domestic political will and international support to save the gold standard. Britain was actually forced to suspend convertibility because key policymakers possessed the wrong ideas about how to save the gold standard. Even after the National Government balanced the budget on the terms dictated by international financiers, the attack on sterling continued. Fixated on the budget deficit, the Bank of England overlooked sterling's 30% overvaluation and failed to make the necessary interest rate increases. When Prime Minister MacDonald consulted JM Keynes at the height of the crisis, Keynes deliberately avoided exposing the Bank’s mistake precisely because he hoped to force a suspension. The collapse of the gold standard in Britain was thus the product of the Bank's mistaken monetary policy and Keynes’s deliberate political strategy.

Keywords: Gold Standard, John Maynard Keynes, Great Depression, Monetary Policy

JEL Classification: A11, B31, F31, F33