The confusions of 1931

When Britain left gold, South Africa did not follow at once. Its government said it would never follow. Unlike R. B. Bennett, Prime Minister J. B. M. Hertzog and Nicholaas Havenga, his finance minister, were serious in their determination to retain the gold standard. Their policies were controversial both in London and in South Africa. In October 1931 Charles te Water, the South African high commissioner in London, told his diary:

For fifteen months the controversy ebbed and flowed. What was best for South Africa? What, if anything, did the United Kingdom want or expect of the South African government? What pressures were applied? What arguments were marshaled by the government, and by the opposition in Parliament and outside? How was the gold standard finally abandoned, and what followed from that abandonment? Finally, why did South Africa adhere to sterling at all? These are the questions with which this chapter is concerned.

The South African debate was very public, and highly politicized. It therefore claimed the attention of the South African public in a way that the Canadian debate never managed to do.

After the World Economic Conference had collapsed, the question of exchange stabilization did not stay dead. Professor Sayers has explained that Governor Harrison of the New York Federal Reserve Bank pressed for some Anglo-American agreement in summer 1933 and then again in November. Unable to buy gold freely with dollars, the Exchange Equalisation Account operated chiefly in French francs, and from time to time it was able to peg the sterling-franc rate. Between the Bank of England and the Bank of France, understanding and cooperation steadily increased. But the French continued to press for some more formal arrangement, and after the United States had returned the dollar to gold American pressure was not unknown. Though it was interested in the management of sterling, and increasingly willing to envisage some sort of international cooperation in exchange management, the Treasury consistently resisted this pressure. The chancellor of the exchequer was if anything even more determined than his officials. The principal purpose of this chapter is to chronicle the Franco-American initiatives and Whitehall's responses.

Franco-American importunities

In the Treasury, the Bank, and the mind of the chancellor, the events of spring and summer 1933 had left a definite deposit of suspicion. As we have seen, Chamberlain was already inclined to distrust the Americans, and, in particular, the president. “Master Roosevelt,” as Chamberlain called him, would tack and change course in response to every political breeze.

In Chapter 2 we saw how India moved from gold bullion to sterling standard at Whitehall's behest, over the protests of its expatriate administrators. We also saw that with Britain's departure from gold India's payments moved almost at once from extreme difficulty to extreme ease. The Indian authorities were not free to choose exchange regime or exchange rate. They would manage the composition of their external assets and indirectly they could affect the size of these assets, but they could not have kept their assets anywhere but in London.

The Canadian situation was very different. The “senior Dominion” had complete control over its monetary and financial affairs. The commercial banks – “chartered banks” in Canadian usage – were locally owned and managed. As an external asset the government held only gold, and the chartered banks held their external assets as claims on New York, not on London. Lacking a central bank until 1935 and served in London by an unimpressive high commissioner, between 1930 and 1935 Canada was not exposed to informal influences from the Bank of England, nor was there anything to parallel the close connection between Treasury and India Office. Canada and its provinces had borrowed heavily in London, but because the United Kingdom could not be held responsible for these debts the Dominion's financial problems did not worry the Treasury very much. Already by 1930 Canadian trade and finance looked as much to “the States” as to the United Kingdom.

In the historiography of Indian nationalism, the “question of rupee ratio” regularly obtrudes itself. By the “ratio” is meant the exchange rate between the rupee and sterling. Should the rupee have been worth one shilling and fourpence, as before 1914; two shillings, as briefly in 1920; or one shilling and sixpence, as from October 1924 until long after 1939? Should it have been pegged to gold, to sterling, or to nothing in particular? Because a cheaper rupee implied a more protected domestic market for Indian producers, neither industrial opinion nor the Congress Party was prepared to ignore the question. In the 1920s Congress pressed for devaluation at least to the prewar level of 1/4. London was adamant in its determination to keep the rupee at one shilling and sixpence. Expatriate officials, as we shall see, often disagreed with Whitehall policy. But as B. R. Tomlinson has recently shown, Whitehall prevailed.

In this chapter we first trace the arguments that lay behind the Whitehall position and the expatriate officials' efforts to change that position in 1931. Our discussion parallels Tomlinson's work and relies on most of the same materials, but the emphasis is perhaps somewhat different. We then turn to some later developments, where we shall see that the rupee exchange rate and the management of the sterling-rupee exchange were closely intertwined with the movement of India toward responsible self-government.

This chapter, like the preceding one, concentrates upon the monetary side of the World Conference that gathered in June 1933. We are chiefly interested in the relations between Britain and the overseas sterling area, especially India and the Dominions. To make sense of these interimperial interactions we need to follow certain developments at the conference itself. The first section of the chapter therefore traces the increasingly odd behavior of the Americans and the increasingly vigorous importunities of the French. In the second section we shall see how Empire delegates, ill informed but concerned about Britain's policy, demanded a change of direction and how Chamberlain devised a verbal response for the sake of Empire solidarity.

Problems with the French and the Americans

The conference assembled on 12 June 1933. There was the usual mixture of plenary sessions, committee and subcommittee work, and informal discussion behind the scenes. Outside the conference proper were the conversations on currency stabilization. These conversations were conducted between treasuries and central banks. Only Britain, France, and the United States were involved. The purpose was not to peg the three moneys permanently to one another, or to gold, but rather to devise a formula for their temporary alignment during the term of the conference only.

The interbank conversations were conducted against a background of gathering gloom. The dollar was depreciating steadily against gold, and speculators were moving funds from the smaller gold-standard countries of Europe.

In June 1933 a World Monetary and Economic Conference was assembled in London. In July the conference collapsed in disorder and failure. At the time the world believed correctly that President Roosevelt had been responsible. Therefore the conference has often been examined in American historical writings, in the memoirs of American participants, and, to a lesser extent, in the memoirs of delegates from France and from other lands. It was widely believed that the conference had broken up over a dispute about exchange rates. France and its Continental associates wanted to fix a relationship between their currencies and the pound and the dollar, both of which were then floating vis-à-vis gold; when the American president refused to tolerate any such linkage, the conference collapsed in disorder and was soon adjourned, its work largely undone.

We shall not try to offer a full account of this remarkable and almost certainly foredoomed effort of world economic diplomacy. We are interested in the conference because of its relationship to the management of sterling and because in the end it provided an unexpected opportunity for a display of Empire monetary solidarity. Our principal purpose, therefore, is to explore the process by which Chamberlain and the Treasury defined and defended their policies with respect to cheap credit and the floating pound. We shall also see how the U.K. authorities tried to define and to propagate schemes for world monetary reconstruction that would help the United Kingdom while avoiding almost all commitments to other powers.

This final chapter is not a summary of material from the preceding ten chapters. Rather, it offers some reflections on the place of sterling and the sterling area in the world monetary system of the 1930s. Sterling mattered because the sterling area was a vast zone of fixed exchange rates, because sterling was one of the two great reserve currencies, and because the world suspected that the clever British were manipulating sterling and the sterling area for their own advantage.

To the suspicious Americans and the nervous French, the sterling area resembled Gulliver's Laputa:

In reality things were by no means so simple. The “island” was not nearly so solid as it seemed, nor were its monetary affairs under a single management, however diligently Montagu Norman cultivated his ties with the central banks inside the Empire and outside it.

This opening chapter sketches the structure of the sterling area from the collapse of the gold standard in 1931 to the outbreak of war in 1939. It describes the chief institutions and their interactions and presents some archival evidence about attitudes and policies in the United Kingdom during the critical months of 1931–2 and at the Ottawa Conference in the summer of 1932. The material serves as an introduction to the more detailed discussion in Chapters 2 through 10.

Chapters 2 through 5 examine the routes by which India, South Africa, and Canada did or did not adhere to sterling after September 1931 and trace some aspects of the relationship between sterling and the economies of Australia and New Zealand. These chapters are meant to provide a survey of the relationship between sterling and the more important Empire currencies. In Chapters 6 and 7 we turn to the World Monetary and Economic Conference of 1933 – the London Conference that was called by the League of Nations in response to Anglo-American initiatives. Concentrating on the monetary side of the meeting, we first survey the formulation of policy in London and the defense of that policy in various international arenas, then treat the discussions with France and America before and during the conference, and finally examine the role of the Empire governments with respect to Britain's private initiatives and her public stance.

In the last chapter, we saw that the years 1933–6 were littered with Franco-American initiatives in the matter of exchange rates. Throughout these years, Chamberlain's position was consistent: The pound would not be artificially devalued, but neither would it be pegged to gold or to the dollar until the world had been freed of the trading and financial barriers that had made the old gold standard unworkable. In public and in private he and his officials put forward this view. Behind the scenes British policy makers were more divided. Leith-Ross and the Bank continued to hanker after a fixed exchange rate, whereas Phillips and the chancellor were persuaded that it was unsafe to imperil the domestic cheap-money policy by committing the country to a fixed rate. Further, it is possible to assert that through the Exchange Equalisation Account the pound was being kept below its market value. Certainly the Account and the Bank were accumulating gold. On the other hand, the authorities knew that sterling balances were also accumulating, and they were aware that hot money was flowing into the London market. In these conditions, it may be argued, they were right to strengthen their gold reserves. If this claim is granted, Chamberlain and his officials were correct in stating that the pound was not being depreciated artificially. As for the internal disputes about a fixed rate, neither the French officials nor the Americans were made aware of these differences, though perhaps they were known to American and French central bankers.

In 1971, when working on Empire trade and migration between 1917 and 1939, I collected the first of the archival materials that I later worked into the fabric of this book. Other materials were added as time permitted. My researches were assisted by two Canada Council travel grants, a Canada Council Leave Fellowship, a visiting professorship in the University of Edinburgh, and a year's association with the Institute of Commonwealth Studies, University of London. All this assistance is most gratefully acknowledged. I must also thank archivists and librarians in the Public Record Office (London), the Public Archives of Canada (Ottawa), the Roosevelt Library (Hyde Park), and the South African State Archives (Pretoria), as well as university librarians at Toronto, London, Cambridge, Edinburgh, Birmingham, Cape Town, and the Witwatersrand. Among those who have helped by commenting or discussing, or who have read sections of the manuscript, I must mention in particular Robert Boyce, David Dilks, Malcolm Knight, Donald Moggridge, Susan Howson, Leslie Pressnell, Brian Tomlinson, and G. H. de Kock. Sections of the book have been presented, usually in draft or preliminary form, to the Economic History Workshop in the University of Toronto, to the Monetary History Group in London, and to university seminars in Edinburgh, Hull, Exeter, Swansea, Leeds, Cape Town, and the Witwatersrand. I have learned a great deal from the comments, questions, and suggestions of the participants in these gatherings.

In Australia and New Zealand a few great banks provided local banking services, and in September 1931 they were still managing the exchanges as they had done for decades past. In New Zealand, until 1934 the banks also provided the paper currency. Gold could freely enter the country, but without official permission it could not leave. Hence the New Zealand pound could never rise above gold import point though in principle it might fall indefinitely. In Australia the banks had lost the right to issue their own paper money in 1910, when the government introduced its own treasury notes. In 1920 control was transferred to a local Notes Board and in 1924 to the Commonwealth Bank, a government owned institution that had also been set up as a trading bank in 1910. Although the legislation of 1924 was meant to encourage the evolution of the Commonwealth Bank into a central bank, neither then nor for several years thereafter was it more than a trading and savings bank that happened to have a monopoly of the note issue. In 1934, when New Zealand established its Reserve Bank, the New Zealand note issue was transferred from the trading banks to the Reserve Bank.

To a large extent the same trading banks operated in Australia and in New Zealand. Their London funds, therefore, were originally a support for all their Australasian business, and in 1930 they were still unable or unwilling to segregate their Australian business from their New Zealand affairs.

The Tripartite Agreement brought a shadow of international monetary cooperation but not its substance. Admittedly, in the day-to-day management of the exchanges there was regular contact between the central banks of Britain, France, and the United States. Admittedly, too, in principle the British and American treasuries now stood rather nearer to one another and to the French than they had done before. From Washington, Morgenthau loved to send cables, and he rejoiced in the transatlantic telephone, a device that London still treated with suspicion. Emmanuel Monick still perambulated the English-speaking world to interpret the most recent developments in Paris – usually some what after they had occurred. T. K. Bewley in Washington, Ernest Rowe-Dutton in Paris, and W. W. Butterworth in London all had more work than before. Although the Bank for International Settlements has not left many traces in the Treasury records of the late thirties, perhaps in addition there were new sorts of contact at Basel. But none of this made any fundamental difference. I have argued elsewhere that with respect to the management of the franc after September 1936 there was little tripartite consultation and less cooperation, although London certainly gave advice and help to Paris while Washington agonized. Most of the time Paris simply did what it wanted, telling London and Washington after the fact. As far as France was concerned the tripartite understanding remained in existence only because Britain and the United States were prepared to ignore the way in which France ignored it.