Britain’s withdrawal from the gold standard: the end of an epoch
Introduction Britain’s withdrawal from the interwar gold exchange standard (henceforth “the gold standard”, not to be confused with “the classical gold standard” of an earlier period – on which, see Chapter 9) in September 1931 was the end of an epoch and the start of a new one. The gold standard was a fixed exchange rate regime which provided the framework for the global monetary system during much of the interwar period. When Britain withdrew, the whole system was undermined and began to fall apart. By the mid-1930s the system had been replaced by a world order where countries adopted independent and uncoordinated policies. But this lack of coordination and collaboration was preferable to the previous system, as the gold standard was a flawed construction which led to slow growth of the world economy and provided little flexibility for individual nations to deal with economic problems and international economic disturbances. This rigidity became particularly manifest in the Great Depression during the late 1920s and early 1930s where the gold standard led to countries adopting deflationary policies when they should have being doing the opposite. Following the end of the First World War, Britain decided to join the United States, Germany and other nations and returned to the gold standard in May 1925. This decision was a mistake which led to slow growth of the British economy in the 1920s and deepened the extent of the Great Depression. When Britain left the gold standard in September 1931 it provided the flexibility needed to introduce policies that increased aggregate demand which promoted recovery and stimulated growth for much of the rest of the decade.