ABSTRACT
WHEN once the war was over, it was obviously impracticable to continue for long pegging the American exchange by means of dollars borrowed from the United States Government. On 20th March 1919, therefore, it was announced that the exchange would no longer be officially supported - that the peg at 4·76 dollars to the pound would be removed. During the war the export of gold by private persons had been stopped by the fear of enemy action at sea and the refusal of the Government to insure gold cargoes. After the Armistice, for the first few months export was still "practically prohibited by the power of the Bank of England working through the patriotism of those through whom the export would be carried out ".1 With the prospect of very high profits from exporting gold, which would appear should the exchange, once unpegged, fall seriously, it would not have been feasible by indirect methods to prevent a large gold outflow. But, if such an outflow took place then, in spite of the fact that as yet no limit was imposed on the issue of fiduciary notes,2 the Bank could hardly have refrained from protecting its gold reserve by imposing a high discount rate, and so bringing about a severe restriction of credit. To allow such a state of things to develop in the dawn of peace, with
a substantial part of the army still being demobilised, would have been very dangerous. On 31st March, therefore, an Order in Council (valid till the ratification of the Peace Treaty, but thereafter needing renewal by Parliamentary action) was promulgated, prohibiting the export of gold coin and bullion. The Gold Standard was thus formally abandoned, and the sharp rein which its maintenance might, indeed must, have imposed on a liberal credit policy was cut. Nobody has questioned that, in the circumstances, the Government was bound to take this step. Mr. Hawtrey has put the case conclusively: "If notes remained convertible into gold and all obstacles to the export of gold were removed, the exchange would be supPJrted by a limited gold reserve instead of by an unlimited supply of dollars. It looked as if, in that case, only a very severe restriction of credit would save the gold reserve from early exhaustion. To start peace with a trade depression seemed an appalling prospect." 1 Though, however, the Government decision was, on the facts, undoubtedly a wise one, it was responsible for some unfortunate consequences, the nature of which and the way of their happening we shall have presently to describe. The dilemma in which the Government was placed is not, as will be realised, one that could recur. Since Great Britain had been off the Gold Standard since 1931 and the Bank of England was no longer under obligation to give gold in exchange for notes, the Government could not at the end of the second war be confronted with the situation which obtained in March 1919. Should, however, a strong opinion have grown up that the rate of 4·03 dollars to the pound, which was maintained throughout the course of this war, had somehow become sacrosanct, a new very similar dilemma might have to be faced.
