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Why the Blood, Toil, Tears, and Austerity? Britain's Interwar Return to Gold

Morrison James, London School of Economics & Political Science

In April 1925, Chancellor of the Exchequer Winston Churchill decided to resume convertibility of the pound sterling at the prewar parity, essentially taking Britain back onto the gold standard. Churchill did this despite JM Keynes’s dire predictions that deflation, unemployment, and domestic unrest would follow. In the event, Keynes was right. 1926 saw one of the greatest economic crises of the century; and Churchill later characterized the decision as the biggest mistake of his career. This paper--a chapter in my book manuscript--draws on a wealth of archival material to reconstruct the intellectual and political context in which this decision was made. It argues that Churchill was intimately familiar with Keynes's argument that the return to gold would create transitional unemployment. Churchill, however, was principally concerned with the structural unemployment endemic to Britain's postwar economy—which Keynes failed to address. Churchill gambled that the drastic policy would force through fundamental adjustments and resolve the employment crisis by restoring Britain's position as a leading trading power. For Keynes, this failure highlighted the limitations of his (pre-Keynesian) assumptions and drove his subsequent focus on unemployment in equilibrium. These developments--political and intellectual--were the prerequisites for the ascent of Keynes and his new economics in the decades that followed.


Keywords: gold standard, Keynes, Keynesian economic, austerity, monetary theory, unemployment

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