EMU and the gold standard

Defecting from EMU is being described as a horrible outcome — whether for Europe or for the benighted Greece et al is not always made clear. But the general tenor is that defection from EMU would constitute a shock which the world is in no condition to bear. We have been here before. In the waning days of the gold standard during the Great Depression, countries were urged not to abandon the standard lest they unleash a calamity on the global economic and financial system. This note by an undisclosed but “well known outside source” was circulated by the British Prime Minister to his cabinet on 3 September 1931:

More than anything, trust in sterling and in London will be fatally undermined:

Cabinet Papers 219(31): Memoranda distributed by the Prime Minister to the cabinet: Sterling and the Gold Standard

Today, it is *widely* accepted that leaving the gold standard was exactly the right thing to do in the teeth of Great Depression. Britain did so less than three weeks after the circulation of this memo. That decision was by no means lauded in the financial press. The Economist warned of a replay of the hyper-inflationary chaos of the immediate post-WW1 years (in fact, deflation was a permanent feature of the remainder of the interwar period).

The facts must be faced that the disappearance of the pound from the ranks of the world’s stable currencies threatens to undermine the exchange stability of nearly every nation on earth; that even though London’s prestige as an international centre may gradually recover from the severe blow which the sterling bill has received, banking liquidity throughout the world has been seriously impaired, much more so in other countries than this; that international trade must be temporarily paralysed so long as the future value of many currencies is open to grave uncertainty; and that, though the memory of the disastrous effects of post-war inflations should be a useful deterrent, there is an obvious risk lest we may have started an international competition in devaluation of currencies motivated by the hope of stimulating exports and leading to a tragic reversion to the chaotic conditions which existed five or six years ago.

“The End of an Epoch”, Economist, September 26, 1931, page 547. 

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