Exchange Rates and the Financial Press September 1931 – April 1932 Christopher Godden

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Exchange Rates and the Financial Press

September 1931 – April 1932
Christopher Godden

Many apparently baffling fluctuations in the exchange must be expected in the next few weeks. 1

In late September 1931, following intense pressure on sterling, the Bank of England announced that it would relieve itself of its obligation to sell gold at a fixed rate. From that moment, sterling was required to take its chance on the foreign exchange market, and no one could predict the level at which the market would eventually settle. The vicissitudes of the sterling-dollar exchange movements between September 1931 and April 1932 are well documented. Sterling fell from par ($4.86) by 18% within ten days of abandoning the gold standard, before touching $3.24 by early December (although the main fall came after the beginning of November). The exchange remained steady at around $3.40 – $3.45 during January and February 1932, before recovering to around $3.80 by late March.2

The downward trajectory of sterling between September and December 1931 has been interpreted by Eichengreen as the consequence of market fears regarding a post-devaluation inflationary spiral associated with a regime of unbalanced budgets. Similarly, the gradual revival of the exchange during the spring of 1932 is attributed to improving market confidence regarding the non-appearance of inflation, followed by the repayment of French and American credits used up during the defence of sterling the previous September.3 While it may be argued that Eichengreen’s overall interpretation is correct, its presentation in this manner imposes a simple structure on the complex character of financial markets. In other words, Einchengreen’s “inflation/non-inflation” story is presented in such bold terms that the subtle character of the forces influencing the foreign exchange market is inevitably lost.

The purpose of this paper is to offer some account of contemporary interpretations regarding the forces influencing the movement of the sterling-dollar exchange between September 1931 and the early spring of 1932. It is perfectly clear that the limitations of the source material makes it impossible to fully re-capture and re-construct market conditions, and so prevents us from creating a complete understand of the cross-current events and expectations influencing the movement of the exchanges. The Economist, for example, recognised that, with the rapid development of events following the abandonment of the gold standard, the nature of its publication meant that it was discussing attitudes and tendencies within the financial markets that could have been altered or vanished completely by the time the column was eventually read.4 Even of it were possible to identify all the factors influencing the value of sterling, it would be difficult to indicate the relative strength of the forces moving in different directions. Nonetheless, this paper takes as its central premise the view that such contemporary interpretations, with their immediate proximity to the events, have the potential to highlight subtleties that have otherwise been lost through the approach of much of the historiography to impose a simple “inflation/non-inflation” story on the movement of the exchanges.

This paper is divided into six sections. The first section will concentrate on market fears regarding the emergence of a post-devaluation inflationary spiral. This will be followed by an examination of contemporary attitudes towards the downward trend of sterling following the victory of the National Government in October 1931. The evidence of the press from this period suggests that while there may have been an underlying fear of inflation, this had been smothered by a combination of short-term forces that pressed the exchange downward. The re-emergence of inflationary fears in the early weeks of December 1931 is considered in the third section. The central theme developed here is that market concerns about inflation developed rapidly, but ultimately sprang from a misconception by foreign investors regarding British banking legislation. The next section will offer a brief account of the movement of sterling in the early months of 1931, with particular attention paid to the dramatic increase in income-tax payments over these months, and there affect in reassuring foreign investors. The fifth section will consider another contemporary interpretation of events between September and February 1932. The focus here is on the work of the financial journalist, Paul Einzig, who suggested that the movement of the exchanges reflected evolving market expectations regarding the position of the City of London as an international financial centre. Section six concludes the paper with some suggestions for further research.

Fears of Inflation (September – October 1931)

Given that from April 1925 until September 1931, the sterling-dollar exchange had remained at approximately $4.86, what caused the exchange to move so dramatically from its par value following the suspension of gold? On one level, the explanation lay with foreign holders of sterling who, having been unable to liquidate substantial investments prior to 21 September, where now anxious to transfer their capital. This generated an immediate increased demand for transfer facilities, with the vast majority of these funds being moved to New York.5 This situation was clearly complicated, however, by the fact that an increased demand for foreign exchange was coming to a market in which the supply of foreign funds – secured through shipping earnings and interest payments – had been reduced due to the world economic depression.6

Yet the important factor determining the rapid fall of the exchange, and indeed determining the overall durability of sterling as a commodity, was market anxiety regarding the stability of the domestic price level. The possibility that the abandonment of the gold standard could lead to severe problems was clearly appreciated by the financial markets from the very beginning, especially since post-war events in Germany and Austria had demonstrated that a depreciation of the currency had been accompanied by a disastrous inflationary spiral. While there existed a strong probability that Britain’s departure from gold would confer a bonus on her export industries, there nonetheless remained the fear that any potential benefits would be off-set by the rise in the price of vital imported raw materials and food-stuffs. Such increases in the price of imported commodities would alter the cost of living, thereby creating an increase demand for higher wages which, if unchecked, could lead to national impoverishment.7

Contemporary accounts also raised the suggestion that the financial markets were prepared to believe that Britain would deliberately initiate an inflationary boom. In late September, the Economist published the comments of a “foreign observer in close touch with international finance”, who reported a “vague idea” that had had developed in the immediate aftermath of the abandonment of gold. This “vague idea” centred on the market view that Britain was about to take steps to initiate “a bout of inflation” in order to stimulate trade and industry, and so abandoning any concern about what would happen to the external value of the pound.8

In early October 1931, the Paris Correspondent of the Times reported on the nervousness of French investors and financiers regarding the British political situation and the “continued uncertainty” surrounding a probable general election.9 The eventual announcement that there would be an election brought a feeling of relief to the market, and it was even suggested that a number of trust companies and individual investors had disposed of their dollar investments and reinvested in sterling securities.10 While the value of sterling had witnessed a dramatic depreciation following the abandonment of the gold standard, between 1 October and 30 October, the exchange had only fluctuated within the range of $3.83 and $3.98 (or, in other words, between 79 per cent and 82 per cent of its gold standard value). This serves to indicate that the market was not prepared to act on the suggestion that Britain would initiate deliberate inflation.

Nonetheless, the decision of the Bank of England to maintain the Bank rate at 6 per cent was seen to conform to general market expectations, and so reassure the City that Britain was action to prevent inflationary tendencies from developing.11 The effect of saddling manufacturers with the burden of high money rates was, in effect, treated as an essential evil in order to demonstrate Britain’s resolute intention to eschew the fallacious expedient of inflation.

The result of the general election (27 October 1931) was a virtual landslide for the National Government, with the coalition winning 554 seats of the 615 in the House of Commons.12 The remarkable success of the National Government was attributed by the Economist to the “simultaneous operation of fear and patriotism” evoked by the abandonment of the gold standard and the growing realisation of Britain’s economic predicament.13 An interesting example of the relationship between this emerging sense of unity and the exchange rates was highlighted by T.E. Gregory, who suggested that, throughout the autumn of 1931, a national desire to triumph over economic adversity had led British citizens to express a preference for domestic over foreign holidays, thereby reducing the demand for foreign exchange.14 Faced with the realisation that the nation faced a crisis comparable with the Great War, the electorate had voted for a government of national safety.15 The nation’s economic future was dependent on a strong government whose primary purpose was to secure budgetary solvency. It was certainly suggested by Gregory that the success of the National Government owed a great deal to the fear of inflation and unbalanced budgets, even though every political party had disclaimed any intention to resort to such a policy.16
Downward Trend of Sterling (November 1931)
The immediate effect on the value of sterling following the coalition victory, however, was a fall from $3.93 to $3.89. The Economist reported that a “marked recovery” in the exchange following the general election had been anticipated in some quarters17, yet the actual course of events suggests that the market had fully discounted the outcome in advance. In the weeks following the general election, the exchange developed a decidedly weaker tendency, moving from $3.89 on 27 October to $3.52 by 27 November (a fall of around 9.5 per cent). One obvious interpretation of this movement would be that sterling was beginning to loose the general sense of optimism and confidence engendered by the victory of the National Government.

The contemporary literature, however, provides a far more subtle analysis of this movement. On the whole, it was argued that the comparative stability of sterling in the period leading up to the general election was attributed to influences of a temporary nature that had quickly evaporated by the beginning of November. One example of this involved renewed confidence in the dollar. Widespread uneasiness regarding the future stability of the dollar had prevailed throughout October, reflecting market anxieties regarding the possibility that the hasty withdrawal of French official deposits from New York and the possible effects of this on the American banking system. Agreements reached between the American and French monetary authorities towards the end of October had restored confidence in the dollar, so leading to a general negative tendency on the sterling exchange.

A second factor affecting the exchange was seen to lie in the sudden emergence of a considerable volume of postponed British demand for foreign currencies. It was suggested that British importers had refrained from covering their necessary requirements of foreign exchange – in other words, held up their sales of sterling – during the course of the general election in anticipation that a National Government victory would create a more favourable market for such transactions. The extent of these postponed dealings in the early weeks of November clearly reflected the non-emergence of an anticipated increase in the exchange. Increased pressure on sterling was also seen to lie in the sudden emergence of a heavy inflow of raw materials and manufactured goods, and attributed to (a) the increased activity in Britain’s manufacturing resulting from the general depreciation of sterling, and (b) the sale of sterling to cover imports of foreign goods in anticipation of a tariff.18

A final interpretation of events involved seasonal variability associated with large payments on account of maturing cotton bills that generally took place during November, together with the important seasonal movement of agricultural imports. It is perfectly obvious that such seasonal variations, particularly for agricultural goods, were not associated purely with the events of November 1931, but may be regarding as an underlying influence on the movement of exchanges ever since the abandonment of the gold standard. The timing of the purchase of seasonal agricultural products – wheat, tobacco, cotton, for example – had long meant that industrialised nations were indebted to the agricultural countries during the autumn and winter months. In order to ensure that they obtained the necessary quantities, on the best terms, once the harvests were collected, the industrialised nations established financial preparations for the purchase of agricultural goods during the late summer and early autumn months.19 Sterling was therefore traditionally strong during the summer months and weak during the winter months due to the seasonal purchase and payment of agricultural goods, and seasonal requirements for short-term credits had long been facilitated by the transfer of floating balances between London and New York. It was argued by J.H. Jones, however, that with British liquid capital having been frozen by international moratoria, the absence of this once assured stabilising force had led to a precipitate fall in the exchange throughout the late months of 1931.20

Rising Fears of Inflation (December 1931)

A sharp fall in the dollar value of sterling – from $3.52 to $3.39 – occurred on 30 November (“after a little initial fluctuation there was a persistent fall, which became increasingly accelerated towards the close of business”21). Further weakness occurred on 1 December, with the exchange falling at one stage to its lowest level since 4 February 1920 although it later rallied slightly to close at around $3.30.22 None the less, the exchange had plummeted by more than 6 per cent over the course of a mere two days.

Early contemporary accounts attributed the decline to the large continental sale of sterling resulting from (a) nervous French and Dutch investors who had decided to dispose of sterling assets, (b) speculative-minded foreigners who had sold sterling short in the hope of making a profit, and (c) foreign holders of the British Five per cent. War Loan who had sold sterling in anticipation of a half-yearly dividend payment that was due that same day. Similarly, the absence of any proper support for sterling was attributed to exchange restrictions that were then prevalent in many countries. The implication was that while there would be no difficulties in British importers paying for their purchases abroad, foreign importers in countries where restrictions were in place were prevented from buying sterling in order to discharge their obligations. On this basis, it can be argued that foreign importers were rationed according to the supply of sterling at the command of their respective central banks, implying that the countries concerned were short of sterling.23

While these factors were seen to have depressed the value of sterling, they were largely dismissed as being of “no important significance”, and the Times stated its confidence that there was “no untoward development” responsible for the dramatic fall in the exchange. The one-sided condition of the market had simply meant that any movement was wholly disproportionate to the volume of business24, and on the whole trade volumes were deemed to be “comparatively unimportant.”25 The narrow conditions of the market appeared to dictate that even the offer of a small sum in sterling was sufficient to depress the New York rate by several cents, and it was suggested that foreign exchange dealers no longer attributed much importance to movements in sterling. Nonetheless, the Times was fearful that unless the public appreciated the subtle nature of the situation, they were likely to exaggerate the significance of such movements.26

A more damaging influence was identified a few days later, however, and was connected with foreign misconceptions surrounding the nature of Britain’s banking practices. It had been announced on 1 December that the Bank of England would continue its practice of issuing fiduciary bank notes up to the total authorised amount of £275,000,000 until 14 December.27 Faced with a possible increase in the season demand for currency, it was further reported that the Bank could act to temporarily increase the fiduciary issue on a temporary basis after that date.28 Such a move would reflect the normal seasonal increase in the demand for currency, associated with an increase in the seasonal volume of trade, that would, by its very nature, disappear after a few weeks.29

The interpretation of this term, “fiduciary issue”, together with the esoteric character of British banking legislation that surrounded it, provides an important insight into the attitudes and understanding of the financial markets during this period.

Recalling the events of December 1931 in his book, The Comedy of the Pound (published in 1933) Paul Enzig highlighted the exaggerated attention that the financial markets had attached to the fiduciary issue, an attention that sprang from distinct difference between the British and foreign meaning of the term. The nearest French equivalent of the term, circulation fiduciaire, simply referred to the total note issue; the British definition of “fiduciary issue”, however, meant that proportion of the note issue which was not secured against an equivalent amount of gold. An increase in the fiduciary issue by the Bank of England would therefore not necessarily refer to an increase in the total note issue (indeed such a move could have meant an unchanged note circulation in face of a lower gold reserve). Einzig argued that the British definition of the term “fiduciary issue” was “thoroughly obscure to foreign observers”, and that even very well-informed foreign investors had, for many years, never been made fully aware of the distinctions that had to be applied to the British use of the term. These obscurities inevitably paved that way for misinterpretations that were liable to operate against sterling.30

It may be argued that such false interpretations were intensified by other elements of Britain’s antiquated banking practises. For example, in many countries, the “note reserve” was defined as the gold and foreign exchange backing of the note issue. In Britain, however, it meant that part of the authorised total of the note issue that was not in circulation. To give a simple example31, assuming that the gold reserve was £130 million and the fiduciary issue was fixed at £275 million, the total amount of notes that the Bank of England was authorised to issue would be £405 million. If, at a given moment, the active note circulation amounted to only £365 million, then the note reserve (as defined by Britain legislation) would be £40 million. If, however, the active note circulation were to increase from £365 million to £375 million (corresponding, for example, to changes in the seasonal demand for currency) the note reserve would show a corresponding decline from £40 million to £30 million. Yet, by operating on the assumption that the term “note reserve” had an identical meaning in Britain as it had in their own country, a perfectly innocent decline in the British note reserve again had the potential to generate fear and confusion amongst foreign financiers. Indeed, in the above example, it would appear to such investors that there had been a sudden 25 per cent fall in the gold backing of the notes!

As a final example, we may note the differences surrounding the use of the term “reserve ratio”. In other countries, this ratio meant the percentage of gold reserve (and possibly foreign exchange reserves) to the note circulation; in Britain, it represented the percentage of coins in the Banking Department together with the “note reserve”, to Public Deposits, Other Deposits, and Seven Day and Other Bills. If the amount of these items were held constant at £120 million, and allowing only for a fall in the British note reserve from £40 million to £30 million, foreign financiers would interpret this incorrectly as a fall in the reserve ratio from 33.3 per cent to 25 per cent.

Foreign misconceptions regarding British banking practices that developed in the early days of December 1931 (a time of already extreme nervousness of the foreign-exchange markets) was identified by the Times as the primary causes for the sudden depreciation of the sterling-dollar exchange.

Foreign fears of currency inflation had been stoked by the mere suggestion that Britain would increase the fiduciary issue. Yet this fear, it was argued, did not stem from any actual deterioration in Britain’s financial position, but rather from foreign misconceptions, influenced by “some sensational writers on the Continent”, relating to the mere suggestion that Britain might use a particular financial procedure in order to deal with a purely seasonal increase in the demand for currency.32 As the Times sought to make clear on 4 December, the suggestion that there might be an increase in the fiduciary issue did not signal the first, critical step towards inflation, but only that trade was always active during that particular time of the year (“December 25 has come round again”).33
Renewed Confidence (December 1931)
Market fears clearly persisted throughout the early days of December, with the exchange closing at around $3.26 on 8 December. This constituted a fall of over 4 per cent since 30 November, and nearly 33 per cent from its previous fixed exchange value. While it was widely accepted that the awakening of fears regarding British inflation was the chief case of this sudden weakness, discussion also drew in suggestions regarding the effects of continuing uncertainty surrounding British tariff policy34, together with anxiety surrounding possible speculative activity arising from forthcoming conferences aimed at settling the German debt question.35

This downward trend in the exchange suddenly reversed itself in the second week of December, when on Monday 14 December sterling rose from $3.38 to $3.47 (an increase of approximately 2.7 per cent). A general firmer tone within the markets had been noticed in the proceeding days, and was attributed in the press to a number of factors. One source of this renewed confidence involved evidence of improvements in Britain’s overall economic position. Examples of this included the voluntary acceptance by the dockers throughout the country of a 10d. a day reduction in the wages36 (later identified by the Times as evidence that the working classes were prepared to make a significant contribution to the resuscitation of industry37), together with government statistics showing that, between 21 September and 9 December, 184,500 more insured persons had found employment. Evidence of improvements in the labour market were particularly notable, argued the Times, given that this fall had occurred during a period when unemployment normally increased.38

The chief cause of the sharp recovery in the value of sterling, however, was widely attributed to a reaffirming statement, given by Neville Chamberlain in the House of Commons on 11 December, regarding Britain’s budgetary and currency position. It was stated that the British government would be able to meet its obligations for the financial year out of current annual revenue (revised budget estimates suggested a surplus of revenue over expenditure of £34,121,000), thereby allowing for a substantial contribution (around £32,500,000) to be made towards debt redemption. Chamberlain also sought to reassure foreign investors regarding the question of the fiduciary note issue by emphasising that such actions in no way suggested that Britain had resorted to pernicious inflationary, but merely that it represented a perfectly legitimate response to seasonal variations in the demand for currency. Both the Times and the Daily Mirror applauded the Chancellors firm comments, and believed that they would act to reassure market concerns that the British government was not resorting to the printing press in order to fill the gap between revenue and expenditure.39 Such renewed confidence received a further boost following an announcement by the United States Treasury regarding European war debts (with special reference to the position of Britain), together with the crucial announcement on 14 December that the Bank of England would maintain the fiduciary note issue at the existing figure of £275,000,000 until 31 January 1932.40

The Times reported than, towards the end of December, an “undercurrent of confidence” had emerged in the financial markets, fuelled by, amongst other things, reassurances regarding the fiduciary issue41, a further reported fall in the number of unemployed (bringing the total fall since September 21 to over 252,000)42, together with government statements that the budget would balance on the right side.43

By December 1931, the financial markets had not only witnessed the success of the National government in securing budgetary solvency, but also evidence of a power determination amongst the British people. The general expectation was that 1932 would witness a significant improvement over past events.
Income Tax Payments (January – March 1932)
Perhaps the most spectacular evidence of Britain’s new financial spirit can be seen in the phenomenal increase in income tax payments that emerged in the early days of 1932. In an emergency budget on 10 September 1931, the government had both raised the standard rate of income tax from 4s.6d. to 5s., while reducing the exemption limit for unmarried persons from £130 to £100, and for married persons from £225 to £150.44 The next instalment of the income-tax fell on 1 January 1932, and the nation had been requested not to defer income tax payments until the final notice. On 1 January, the Daily Mirror emphasised that the success of the September Budget was dependent on “the goodwill of the taxpayer” and the “prompt payment” of income-tax between January and March.45 Anticipatory payments of income-tax liabilities had actually been arriving towards the end of December46, and it had been suggested that the fall in the price of British Government securities in early December 1931, apart from being influenced by the depressed character of the market at the time, could be accounted for by individuals raising funds in order to cover impending heavy income-tax demands.47 It was in the early days of 1932, however, that this gradual trickle developed into a torrent. The national response was reported in the Times on 2 January 1932:
The request of the nation for early payments of the three-quarters instalment of income-tax which fell on New Year’s Day met with a most satisfactory response in London yesterday. The offices of the collectors of income-tax in the City were kept “phenomenally busy” in the words of an official. He said that it was the most active New Year’s Day in their experience, and afforded striking evidence of the patriotic way in which every one seemed anxious to help in the national necessity.48
Inland Revenue officials were clearly astonished at the willing response to the appeal to pay. In Birmingham, it was claimed that the percentage of the total charge for one district alone was “about six times” that of the 1931 level, while officials in Cardiff and Leeds reported that the rush to pay was entirely without precedent.49 In Bournemouth over £20,000 was received during the first day, while at Wood Green the morning post brought a letter that read: “Here within my dues to the Chancellor of the Exchequer. God bless him. With best wishes for a happy New Year.”50 Further reports were published over the next few days, including the story of an elderly lady who queued for over an hour to pay her income-tax, only to discover she lad lined up with the unemployed.51 An income tax collector in the Grimsby West District office reported receiving an envelope containing £35 in £5 notes, together with a note “Contribution to Budget of account from the sender.”52 The leader in the Daily Mirror on 7 January suggested that the rush to pay was “turning tax-paying into a form of sport like a football scrum in a Cup Final.”53 The Treasury also received a number of voluntary gifts of money, such as the case of that Lady Houston who, although domiciled in Jersey, voluntarily agreed to pay income-tax “in consideration of the nation’s needs.” 54

The Exchequer returns soon indicated the incredible response of the appeal for early income-tax payments. Total receipts (income-tax and surtax together) was given as £29,023,000 for the first 9 days in January 1932 alone, compared with £17,360,000 in the first 10 days of 1931 (an increase of approximately 67 per cent).55 Although pressure on collectors eased by the second week of January, sizeable payments of income tax and surtax continued until the end of March.

Throughout the early weeks of January, the Times once again emphasised the patriotic character of British taxpayers56, while the Economist applauded the “promptitude” with which British citizens were paying their income tax (“[T]he British public are shouldering their heavy burden with unwonted zeal”57). Evidence of Britain’s determination to win through the financial crisis was also reported to have been well received by foreign investors.58 Einzig later recalled that the London correspondents of foreign papers had “despatched glowing descriptions of taxpayers lining up in queues in front of collectors’ offices”, and that several French journalists had later been sent to London specifically to watch the spectacle.59 Although there was little material effect of such prompt income-tax payments, it is impossible to ignore the dramatic psychological effect that these events, in the early weeks of January 1932, had on foreign investors’ perceptions of sterling.

In addition to this, there appeared a growing belief that the threat of inflation had been exaggerated. While economic theory had predicted an increase in the cost of living index, the unfavourable consequences of the devalued exchange had not materialised: unemployment had fallen, the cost of living index had recorded only a slight increase, while various indices suggested that prices had actually fallen over the period 1930 – 31. Gregory attributed this unexpected situation to the actions of both producers and retails in response to the economic confusion during the autumn of 1931, the persistence of the world depression, and the general sense of national patriotism. Put simply, a fear of being charged with “profiteering” was seen to have diminished the willingness of producers and retailers to raise prices to the extent of the fall in sterling.60

The financial markets, which now appeared “encouraged” and “firm in tone”61, were reported as “buoyant” in late January following the announcement of the repayment of the Bank of England’s outstanding foreign debts to the central banks of New York and Paris62 (although the sterling exchange remained steady at $3.46). By late February, it was clear that sterling was able to hold its own in the financial market (the exchange was, as the Economist described it, “buttressed by a scrupulously balanced Budget”)63 and over the course of March, the exchange appreciated from £3.48 to $3.80 (a rise of nearly 9 per cent).

Throughout the spring of 1932 there were calls for an efficient mechanism capable of off-setting speculative movements in the sterling exchange. The British government eventually established the Exchange Equalisation Account (or Fund), so heralding the era of large-scale currency manipulation.

London’s Future Position and Indian Gold (September 1931 – February 1932)
Thus far, this paper had concentrated on identifying the general trend of the sterling-dollar exchange, and so highlighting contemporary interpretations during particular periods e.g. events following the victory of the National Government, rising fears of inflation in December 1931, and so on. A more over-arching interpretation of the movement of the exchanges following Britain’s departure from gold was provided by Paul Einzig. Over the autumn of 1931 and the early spring of 1932, Einzig published several articles in The Banker in which he attempted to assess the impact of the abandonment of gold on the various markets – discount market, bullion market, and foreign loans market – that characterised London’s financial system.64 The importance of the interconnected structure of London’s financial system was clear for all to see: bullion transactions had a prominent position in the foreign exchange market, with foreign firms dealing in bullion maintaining sterling accounts in London.65

In these articles, Einzig sought to explain the movement of sterling in relation to the market’s perception of London’s future role as an international financial centre. This theme reflected Herbert Foxwell’s earlier pronouncement that London’s acknowledged position as the money centre of the world ensured that sterling was more than a mere unit of account.66 For Einzig, exchange movements in the latter half of 1931 were a manifestation of evolving market assessments regarding London’s, and hence sterling’s, future role within the international financial system.

As a consequence of general market uncertainty in the months following the abandonment of the gold standard, it was suggested that British banks had directly contributed to the dramatic movement of the exchanges. This effect had its origins in the established banking practice that while foreign banks maintained large sterling balances in London, British banks had failed to develop adequate balances in foreign financial centres. Sterling had entered deeply into the mechanism of international trade, yet with the gold standard suspended, and doubts having developed surrounding sterling’s future role as a “universal means of payment”, it was argued that British banks had hurriedly sought to accumulate balances of francs, reichmarks and guilders in foreign centres. The desire of British banks to protect themselves against uncertain future commercial needs was therefore seen as a contributory factor to exchange rate movements after September 1931.67

Even before the gold standard had been suspended, Einzig argued, the decline in foreign demand for sterling bills was evidence of a growing international distrust towards British banking houses. Following Britain’s departure from gold, this distrust was seen to have turned to a fear (or possibly a hope?) that London would be permanently eliminated from the discount market. This attitude, he argued, appeared to have strengthened both Paris and New York’s attempts to capture London’s dominant position within the international system. Yet by January 1932 distrust of London had turned to support as foreign financiers had come to recognise the indispensable character of the London discount market to international trade. In comparison with many foreign banks (“French banks have failed by the dozen and American banks by the hundred”68) British banks possessed as strength of international goodwill and respect that had not easily be destroyed. Einzig’s argument was simple: prestige lost through the depreciation of sterling had, by the early weeks of 1932, been counteracted by the international communities’ realisation of the strength and stability of Britain’s financial system69

It was evident that the activities of the London bullion market had significantly increased following the suspension of the gold standard. Apart from the continued supply of South African gold, it was well reported that that London bullion brokers and refiners had been kept busy by large shipments from India. Since the beginning of the century, India had been steadily absorbing considerable quantities of gold. Between 1900 and 1931, official returns showed that India’s net imports of gold amounted to Rs.5,47,75,58,328, or around £365,000,000 (although the actual amount of gold was predicted to be higher than this). By the beginning of October 1931, India’s position had completely changed: she had become an active seller and was shipping gold to London at well over £1,000,000 per week. The major part of the gold was shipped in bars, but it was reported that most of this was not all of the same fineness and so had to be refined and converted into 400oz. bars of a fineness of 959/1,000 or over.70

This vast outpouring of gold was identified by both Einzig and Jones as a result of the appreciation of gold, in terms of the rupee, at a time of Indian economic and political uncertainty.71 A similar argument is presented by Balachandran, who notes that with the rupee pegged to sterling, the depreciation of sterling caused the price of gold, expressed in both currencies, to rise.72 Yet where as Einzig and Jones saw the appreciation of gold in terms of the rupee as a direct consequence of the abandonment of gold, Balachandran identifies it as an indirect force that modified the effects of suspension.

Einzig believed that, following the events of September 1931, the market had acted on the assumption that bullion brokers and refiners in Paris possessed the ability to establish a gold market capable of rivalling, if not over-taking, London’s privileged position.73 From the perspective of the market, this may be regarded as a logical decision, since uncertainty regarding the stability of the franc had long ensured the successful operation of an active retail gold market throughout France. It was this, argued Einzig, that appeared to have generated the belief that Paris was capable of capturing London’s position as the world’s leading gold market. But while Paris possessed a strong domestic gold market, it had gradually become apparent that her ability to establish an international gold market would necessitate the re-routing to Paris of gold already marketed in London. In this respect, London possessed a strong organisational advantage arising from the regularity of shipping routes between India and South Africa. In November 1931, for example, it was reported that India was shipping gold to London at well over £1,000,000 per week.74 This had increased to an average of £2,5000,000 by early December75, while £3,500,000 was reported to have left Bombay on 19 December alone.76 Further more, it was becoming increasingly apparent that France possessed inadequate refining facilities. Attempts by the Comptoir Lyon-Alemand to exploit existing under-utilised facilities collapsed with the failure of the firm.77

Although not exerting a strong influence on the foreign exchange market, Einzig’s nonetheless believed that some account had to be made regarding the effect that the resumption of large-scale foreign lending had on international attitudes toward London. Before 1931, Britain’s foreign loans had largely been directed towards the Dominions and South America. During this period, other financial centres had sought to expand their operations. The belief that London would be the first among the great leading centres to resume foreign loan activities arose from a belief that the problems of defaults during the 1931 crisis had discouraged many foreign investors. If foreign governments and foreign borrowers required loans, Einzig argued, it was to London that they would inevitably turn.78

Summary and Conclusion
The purpose of this paper has been to offer some account of contemporary attitudes and interpretations surrounding the movement of the sterling-dollar exchange between the autumn of 1931 and the spring of 1932.

Between the end of September and the general election of October 1931, the sterling-dollar exchange moved from its fixed value of $4.86 to fluctuate between a fairly narrow range of $3.80 and $4.00. Contemporary discussion regarding the sudden depreciation in the exchange during November 1931 did not only concentrate on an upsurge in market concerns regarding inflation, but instead emphasised an unfortunate coincidence of events that was seen to have placed a temporary strain on sterling. Such events included renewed confidence in the dollar, hasty sales of sterling to execute postponed orders, the anticipation of a tariff in consequence of the National Government’s victory, together with general seasonal variability. Fear regarding post-devaluation developed rapidly in early December, leading to a dramatic falls in the exchange. The contemporary literature provides interesting insights into the reasons for these inflationary fears by arguing that they arose from foreign misconceptions regarding British banking legislation and its relation to seasonal influences associated with the Christmas holiday trade.

The contemporary debate surrounding the reasons behind the revival of sterling after December 1931 again serve to support the historiography, but also point towards a more subtle interpretation of events. Instead of simply arguing that the revival of the exchanges stemmed from renewed market confidence following the non-emergence of inflation, we see particular events that acted upon market expectations. The most dramatic of these was the spectacular level of income-tax payments in the early weeks of January 1932, and its obvious relationship to the growing question of British national unity in the face of economic turmoil.

Einzig’s interpretation of the movement of the exchanges provides another layer to the argument, and one that is certainly worthy of further investigation. Einzig argued that exchange fluctuations following the abandonment of the gold standard reflected evolving market expectations regarding the position of London within the international financial system. A marked degree of uncertainty had initially manifested itself in a swing against sterling, first with foreign balances hurriedly withdrawn from London, and second with British banks hurriedly acquiring foreign balances in other financial centres. Once it became apparent that neither New York nor Paris were capable of capturing London’s discount market or open gold market, and with growing optimism surrounding the future of the foreign loans market, liquid balances were transferred back to London. For Einzig, the period from October to December eventually destroyed many of the illusions regarding the likely future position of London. The sterling-dollar exchange had benefited once reticence had disappeared, and renewed international respect and confidence had enable London to re-establish her position as the financial centre of the international economy. By April 1932, we find Einzig remarking that “in spite of the suspension of the gold standard, London has retained her supremacy as the world’s best foreign exchange market and bullion market.”79

It is clear that this paper is heavily biased towards the British press, and their interpretation of the attitudes of international financiers. Insight into wider, contemporary analysis of these attitudes would clearly necessitate some research into the foreign press. For example, how did the French and German newspapers discuss the problems regarding the expected increase in the fiduciary note issue in December 1931? How was the dramatic spectacle of British tax-payers queuing to pay income-tax demands in January 1932 presented to foreign readers?

Nonetheless, the paper has sought to highlight the subtle nature of the factors surrounding the movement of the exchanges, and so move away from more broad (“inflation/non-inflation”) interpretations of these events. Contemporary financial commentators did not accept that there was one single, constant factor (i.e. market fears of inflation) influencing the movement of the exchange. Instead, we find the contemporary view that while there existed an underlying fear of inflation (which erupted during early December), the movement of the exchange was largely influenced by a combination of different, short-term forces.

Newspapers and Journals
Daily Mirror

The Economist

The Times
Primary Sources
Cole, G.D.H. (1931) ‘The Danger of Inflation’, New Statesman & Nation, 2 (24 October), pp. 505 – 506
Dearle, N. B. (1929) An Economic Chronicle of The Great War For Great Britain and Ireland 1914 – 1919, London: Humphrey Milford
Einzig, P. (1931) ‘Future of the London Exchange Market’, The Banker, 20 (November), pp. 108 – 111
_______. (1932) ‘Future of London’s Discount Market’, The Banker, 21 (January), pp. 33 – 35
_______. (1932) ‘The Future of the London Bullion Market’, The Banker, 21 (February), pp. 233 – 337
_______. (1932) ‘Future of London’s Foreign Loan Market’, The Banker, 22 (April), pp. 21 – 23
_______. (1932) The Tragedy of the Pound, London: Kegan Paul
_______. (1933) The Comedy of the Pound, London: Kegan Paul
Foxwell, H.S. (1922) “The Pound Sterling”, The Accountant, 67 (25 November), pp. 769 – 774
Gregory, T.E. (1932) The Gold Standard and Its Future, London: Methuen & Co. Ltd (2nd edition)
_________. (1932) ‘Whither The Pound?’, The Nineteenth Century, 111 (April), pp. 432 – 442
Hall, N.F. (1935) The Exchange Equalisation Account, London: Macmillan
Hirst, F.W. (1934) The Consequences of the War on Great Britain, London: Humphrey Milford
Jones, J.H. (1931) ‘The Departure From Gold’, The Accountant, 85 (31 October), pp. 567 – 568
________. (1931) ‘The Fall in Sterling’, The Accountant, 85 (12 December), pp. 763 – 765
________. (1932) ‘The Rise in Sterling’, The Accountant, 86 (12 March), pp. 327 – 328
Robertson, D.H. (1931) ‘The Economic Situation’, Cambridge Review, 53 (23 October), pp. 48 – 49

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