On Britain's Return to the Gold Standard: Was there a ‘Pigou–McKenna School’?†
Abstract
It is common to refer to the ‘Keynes–McKenna school’ in opposition to Britain's return to the gold standard. However, after considering A.C. Pigou's reading of Sir Reginald McKenna's testimony to the Chamberlain–Bradbury Committee and the influence of that reading on Pigou's draft of the Committee's report to the British government, the case is made for the ‘Pigou–McKenna school’ as a policy school that was supportive of a return to the gold standard but against doing so prematurely. This is perhaps more meaningful than reference to the ‘Keynes–McKenna school’, which incorrectly implies that McKenna was opposed to Britain returning to gold.
1 Introduction
In his volume of reminiscences entitled Prejudice and Judgement (1948), Sir Percy Grigg carefully chronicled the discussion at Winston Churchill's dinner on 17 March 1925 with Sir Reginald McKenna, John Maynard Keynes, Sir John Bradbury and Sir Otto Niemeyer. At the time, Churchill was Chancellor of the Exchequer, Grigg was his private secretary, and the purpose of the dinner was to discuss the proposal for Britain to return to the gold standard. Following publication of Grigg's beautifully written account of that event, the literature dealing with Britain's return to the gold standard has tended to refer the event as Churchill's ‘famous dinner party’.
This dinner party is famous for three reasons. First, its timing suggests that it was important to the decision-making process, with records of public officials noting that Churchill reached a decision on the matter by either 19 or 20 March (Moggridge, 1969, p. 56) and Churchill announcing, in his budget speech of 28 April 1925, that Britain would be returning to the gold standard. Second, the meeting is presented as something of a polemic, with Keynes and McKenna paired up as the ‘antagonists’ to a return to gold, and Bradbury and Niemeyer paired up as the ‘proponents’ of that return (Grigg, 1948, p. 182). The polemic character was subsequently underlined by Donald Moggridge, who coined the phrase ‘Keynes–McKenna school’ (Moggridge, 1969, p. 61, 1972, p. 85). Moggridge's choice of phrase was no doubt inspired in part by Bradbury's memo of 5 February 1925 to Niemeyer, in which he characterises the author of a Treasury memo on ‘Mr. Churchill's exercise’ as appearing to ‘have his spiritual home in the Keynes–McKenna sanctuary’ (Moggridge, 1969, p. 45). Third, after agreeing with Keynes that the discrepancy between British and US price levels implied by the gold standard was 10 per cent, and not 2.5 per cent as implied by the actual exchange rate (Grigg, 1948, p. 182), McKenna then says something like: ‘There is no escape; you have to go back; but it will be hell’ (Grigg, 1948, p. 184). In the words of Lord Skidelsky (1992), ‘in the end McKenna, a former Chancellor, gave way… Keynes stood firm’.
Of course, the literature on the return to gold is extensive and much wider than just Churchill's much discussed dinner. Among other things, considerable importance is also given to the activities of the Committee on the Currency and Bank of England Note Issues (henceforth referred to as either ‘the Chamberlain–Bradbury Committee’ – after Sir Joseph Austen Chamberlain, its first chairman, and John Bradbury, who replaced him in that post when Chamberlain became Foreign Secretary on 6 November 1924 – or simply ‘the Committee’). The Committee was appointed by a Treasury minute of 10 June 1924 and, when the exchange rate was $4.79 in January 1925, it determined that a 6 per cent fall in British price levels, relative to those in the United States, would be required for the exchange rate to return to the pre-war gold standard exchange rate of $4.86 (Moggridge, 1972, p. 62). On 5 February 1925 the Committee reported to Churchill, recommending in unequivocal terms that Britain make a rapid and decisive return to gold. Significantly, the two protagonists characterised by Grigg as favouring an immediate resumption of the gold standard at Churchill's famous dinner, also served on the Chamberlain–Bradbury Committee.
For the purpose of this study, however, the first point to emphasise is that A. C. Pigou was also a member of the Chamberlain–Bradbury Committee. The final report of that Committee was preceded by four draft reports, the second of which was prepared by Pigou and completed in early September 1924. Perhaps the key feature of Pigou's draft of the report is that, instead of recommending a rapid return to the gold standard, it highlights that the matter will not become urgent for more than a year and suggests that a wait-and-see stance be adopted. Furthermore, the Committee interviewed McKenna on 10 July 1924; and although Pigou was absent from the deliberations on that day, his personal copy of that record of interview is extant and includes vertical lines drawn, in pencil, down the margin next to transcribed sentences.1
The traditional interpretation of the late stages of Britain's return to gold presents the ‘Keynes–McKenna school’ as opposing Britain's return to gold and generally supporting Keynes's preference for freely floating exchange regime. Pigou is presented as pro-gold, and his views are implicitly regarded as contrary to those of the ‘Keynes–McKenna school’. But that traditional interpretation does not recognise that Pigou was very interested in what McKenna had to say on Britain's return to the gold standard and he highlighted much of McKenna's testimony as a part of his preparations to write the September 1924 draft of the Committee's report.2
The general purpose of this paper is two twofold. First, to establish the character of Pigou's reading of McKenna's testimony. Second, to consider the content of Pigou's draft of the Committee's report, and reflect on the relationship between McKenna's testimony and Pigou's report to consider whether it is legitimate to talk of a ‘Pigou–McKenna school’ on Britain's return to the gold standard. In pursuit of this twofold purpose, the paper is structured as follows. Section II briefly provides the historical context of the study, starting with the creation of the currency notes, followed by Britain's abandonment of the gold standard and ending with Pigou's appointment to the Chamberlain–Bradbury Committee. Section III provides an overview of McKenna's ideas on currency, credit and gold, which is followed by a narrative account of Pigou's reading of McKenna's testimony before the Committee. Section IV considers Pigou's memorandum for the 1920 International Financial Conference in Brussels 1920 and the September 1924 draft of the Chamberlain–Bradbury Committee's report and their relationship to McKenna's testimony to that committee. Using the evidence presented, the case for the ‘Pigou–McKenna school’, as a school of thought that was supportive of Britain returning to the gold standard in principle but not supportive of doing so prematurely, is developed in Section V. The paper concludes, in Section VI, that reference to the ‘Pigou–McKenna school’ is an appropriate way of characterising a significant missed opportunity in British monetary policy.
2 Currency Notes and the Lead-up to the Chamberlain–Bradbury Committee
With the formal declaration of war between Austria and Serbia on 28 July 1914, panic reached the British shores and banks started to call in their loans to the discount market and the stockbrokers. On Friday 31 July, the London Stock Exchange was shut down and the demand for rediscount at the Bank of England rose rapidly and forced the Bank of England to raise its rate from 3 to 8 per cent – and to 10 per cent the very next day, on Saturday 1 August. After emergency deliberations by authorities over the weekend, a royal proclamation was issued postponing payments on bills of exchange by a month – with the moratorium later renewed until 4 November – and the bank holiday on Monday 3 August was extended to the following Thursday. During this interval, a series of meetings involving authorities, bankers, merchants, industrialists and stockbrokers were held at the Treasury. On 6 August, among other measures to ensure an adequate provision of liquidity, and after a suggestion by the Clearing Bankers’ Association, the Currency and Bank Notes Act was rushed through Parliament in a single day to authorise the Treasury to issue currency notes of one and ten shillings in amounts the institution saw appropriate. Those notes were to be distributed through the Bank of England to financial institutions at the bank rate, which was reduced to 6 per cent on that same day and to 5 per cent 2 days later (Morgan, 1952, pp. 3–32; Seabourne, 1990; Peters, 1993).
Despite the 1914 liquidity crisis, specie payments were formally maintained. For much of the war period, though, the risks associated with shipping were so great that insurance for gold being exported from Britain could not be obtained (Moggridge, 1969, p. 11), so an outflow of gold would not be triggered by the exchange rate falling below the traditional gold export point. As the end of the Great War approached, the British government started to give consideration to currency and exchange issues in the early post-war period of reconstruction. In January 1918, Lord Cunliffe, the Governor of the Bank of England, was appointed to chair the ‘Committee on Currency and Foreign Exchanges after the War’ (or ‘Cunliffe Committee’, as it became known). Pigou was a member of this Committee,3 which was instrumental in setting the future agenda for monetary matters and in shaping the financial framework that the Chamberlain–Bradbury Committee confronted in 1924 and 1925.
In regard to the agenda for currency reform, the first interim report of the Cunliffe Committee (House of Commons Committee on Currency and Foreign Exchanges after the War, 1918) noted that witnesses appearing before the committee were unanimous concerning the restoration of the gold standard at pre-war parity; and recommended that this step should be taken as soon as permitted by fiscal constraint (cessation of government borrowings) and monetary conditions (suitable machinery to allow the Bank of England discount rate to check a drain of gold overseas; and limitation of fiduciary issue). With regard to reaching that end, two conditions were noted in that report. The first, which became operative before the Chamberlain–Bradbury Committee met, was the recommendation that the issue of fiduciary notes should become subject to law once again; with the final report of the Cunliffe Committee noting in 1919 that effect should now be given to the recommendation of the interim report that the actual maximum fiduciary circulation in any 1 year become the legal maximum for the following year. The second condition was the termination, at the earliest possible moment, of the exchange of deposits of Bank of England notes for currency notes without affecting the reserves of the Banking Department (Cunliffe Committee, 1920, pp. 142–3).
A year after the Cunliffe Committee had reported, the USA ceased its support for the sterling in 1919 (Eichengreen, 1992, pp. 100–7), and in the following year, with the value of the pound declining, the British government introduced the Gold and Silver Export Control Act (1920) to virtually prohibit the export of gold for 5 years. This prevented Britain's gold reserves from being drained in the event of the exchange rate falling below the gold point. In effect, this meant that the transitional arrangements established in the post-Cunliffe period could continue until 31 December 1925 (Sayers, 1976, pp. 55–6). On 21 May 1924, Sir Otto Niemeyer, in his capacity as the Comptroller of Finance at the Treasury, wrote to Pigou stating that ‘The Chancellor is appointing a small Committee to advise him privately whether the time has come to amalgamate the currency and the Bank of England notes issues’ and indicating that ‘the Chancellor would be very grateful if you would consent to serve on the Committee’ (Niemeyer in G1/433). Pigou then joined Chamberlain, Bradbury, Niemeyer, and Gaspard Farrer (Director of Bearings, merchant bankers) on that Committee, with Mr N. E. Young, from the Treasury, serving as Secretary to the Committee.
The Committee convened seven meetings to hear testimony from 12 invited witnesses, as well as other meetings without witnesses. Pigou's absence in July and August meant that he was only present when the Committee interviewed Montagu Norman, the Governor of the Bank of England, and Charles Addis, a former Governor of the Bank of England. He had to rely on the transcripts of interview to read the testimony of McKenna, as well as that of other interviewees, such as those associated with the Treasury,4 the financial sector,5 industry in general6 and academia.7 However, Pigou was diligent in reviewing the transcripts of interview from the meetings of the Committee that he missed and the testimony of McKenna was, judging from the number of lines he inserted to highlight text, of particular interest to him.
The final report of Chamberlain–Bradbury Committee, submitted to Churchill on 5 February 1925, advised the Chancellor to make a rapid and decisive return to gold. In the introduction to his Gold Standard Bill (1925), Churchill explicitly referred to the Committee's final report (House of Commons Committee on the Currency and Bank of England Note Issues, 1925) as crucial: ‘It contains a reasoned marshalling of the arguments which have convinced His Majesty's Government, and it sets forth a series of recommendations, in which my right hon. Friend [Chamberlain], though he ceased to be Chairman on becoming Foreign Secretary, has formally concurred, and which His Majesty's Government are intending to follow in every respect’ (Financial Statement, 1925, cc. 52–58).
3 McKenna and Pigou's Reading of McKenna's Testimony
McKenna (1863–1943), a Liberal MP from 1895 to 1918, was appointed as the Financial Secretary to the Treasury in 1905 when H. H. Asquith was the Chancellor of the Exchequer. Shortly after that he was appointed to Cabinet rank, holding a range of ministerial-level appoints until, in 1915, he succeeded Lloyd George as Chancellor of the Exchequer in Asquith's government. He remained in that office until late 1916 when Asquith was replaced as Prime Minister because the Liberal Party was in a state of political crisis due to its war policy. McKenna became a director of Midland Bank in 1917 and held the post of chairman of that Bank from 1919. His invitation to give evidence to the Chamberlain–Bradbury Committee was, no doubt, made in recognition of McKenna's capacity as a former Chancellor of the Exchequer, when he was at ‘the height of his powers’ (Cregier, 2004), and as the current chairman of Midland Bank.8
3.1 McKenna's First Target: A Monetary Regime to Deliver Stable Exchange Rates
Unlike Keynes,9 McKenna was not opposed to Britain returning to the gold standard; rather, he opposed a premature resumption of the old sterling–dollar parity. When asked by members of the Chamberlain–Bradbury Committee if ‘the fact’ of a stable exchange rate with the US dollar, which had already returned to the gold standard,10 was a reason for Britain going back to the gold standard as soon as possible, he replied by saying ‘no it is not’; he then offered three reasons why Britain may want to return to gold. The first was that public confidence in a currency, be that confidence unfounded or founded, was a pertinent consideration when setting the monetary regime. In his understanding, gold still commanded widespread public respect. The second reason was that the monetary regime established for Britain should be set with regard to real economic benefits for the British Empire, and not just for Britain itself. In that regard, he reminded the Committee that Empire countries such as Australia were gold-producing countries. The third reason, which is also related to public confidence in a currency, was that simple monetary arrangements allowed the public to have a greater understanding of the monetary system. In that regard, the public understood the gold standard better than monetary policy managed through credit arrangements.
But if these three factors in favour of the return to gold were to be decisive, stability first had to be attained. That is, McKenna did not see a return to gold as creating financial stability, but once that situation had been attained, then the gold standard could assist in the maintenance of stability. The first order point in that regard is McKenna's contention that it was not the level of the exchange rate regime that was important, but the gains from international trade associated with the exchange rate regime. If the exchange was stable relative to commodities – as suggested by the relative version of purchasing power parity – and if the exchange was stable relative to gold, then trade would be in a position to flourish following the introduction of a gold standard. To return to the gold standard at pre-war parity from an exchange rate moderately below that parity, price levels in Britain had to rise more slowly (or fall more rapidly) than price levels in her trading partners such as the USA. Once monetary policy aimed at reducing relative price levels caused the exchange rate to appreciate and return the currency to the pre-war gold standard exchange rate, the gold standard could be reintroduced and monetary policy aimed at influencing domestic price levels relative to the USA could continue to maintain the exchange rate at the gold parity rate.
There is no question in my mind of there being any advantage of trade of the Exchange being at one level more than another level … There may be advantage in getting down to a level, there may be disadvantage in getting down to a level; there may have been advantage in getting up to another level, there may have been a disadvantage in getting up to another level. But when you are there, stay there so far as trade is concerned. (McKenna in ACP 4F25, p. 21).
When viewed in the context of a return to the gold standard, McKenna's reference to ‘when you are there’ means when the sterling has successfully returned to the pre-war gold parity exchange rate where one pound exchanges for 4.86 US dollars and inflation in the UK and the USA is maintained at a similar level. But a stable exchange rate with stable prices is only the first of two necessary conditions for a return to gold. The second concerns the stability of the gold price itself. Because of the interdependence between the exchange rate and the gold price, especially in a world where some nations’ exchange rates are pegged to the gold standard and some are not: ‘I would not be at 4.86 without that [stability]. I do not want to fluctuate. If gold is going to fluctuate I do not want to fluctuate with gold: I want stability’ (McKenna in ACP 4F25, p. 22).
McKenna's views on these relationships were unequivocal. For example, he rejected any suggestion that the exchange rate at the time was a result of sentiment. It was, in his view, completely determined by the price level in Britain relative to the price level of other nations (McKenna in ACP 4F25, p. 19). Indeed, when divergence between movement in the relative sterling–dollar exchange rate and movement in the relative British–US price level was evident from estimates of price levels, McKenna suggested that that would be probably due to error in deriving price estimates and not the result of sentiment.
Now am I correct in saying that the advice you would be disposed to give would be to do nothing at all until such time as the pressure of events brings Sterling to par, and then to have an international monetary conference with a view to settling the general terms, as between nations, for the ultimate resumption of the gold standard? Is that a correct summary?11 (Bradbury in ACP 4F25, p. 24)
3.2 McKenna's Second Target: A Stable Gold Price to Support a Stable Exchange Rate
Now if gold were depressed in value the United States being on the gold standard, that is today, having their Mints open and obliged to coin gold on demand into dollars, if the gold were allowed to fall in value the dollar would also fall in value and immediately prices would rise in the United States and the United States would get into a state of real bad inflation. (McKenna in: ACP 4F25, pp. 9–10).
As a gold standard country, McKenna observed that the USA had undertaken two actions to prevent the emergence of high rates of inflation following a fall in the price of gold. First, it had become a major buyer in international gold markets. In that regard, he estimated the value of world consumption of gold to be about £70 million, £60 million of which was purchased by, or deposited in, the USA to support the price of gold; with the remaining £10 million purchased by ‘genuine buyers’ (McKenna in ACP 4F25, p. 9). Secondly, McKenna pointed out that the US sterilised the impact of excess gold purchases, undertaken for the purpose of maintaining the gold price, on overall credit-creating capacity. It did so through the Federal Reserve, which sold securities.12
The moment Britain returned to the gold standard, it would have to join with the USA in meeting a share of the cost of gold price maintenance activities. It would have no alternative but to ‘buy gold’. But if Britain decided it could afford to contribute to the cost of gold price maintenance and intended to return to the gold standard, then McKenna regarded the question of whether Britain should, or should not, sterilise all or some of its gold surplus as very important. As McKenna saw it, Britain's capacity to sell securities to sterilise associated credit growth following the purchase of gold was diminished by its weak fiscal position and large national debts. In view of this, his preferred solution would be to not sterilise all of the gold inflow from gold price maintenance activities, leaving some of it as a basis for providing new credit opportunities because a modest degree of inflation would be conducive to trade and economic growth.13 Consequently, once Britain returned to the gold standard and added to its gold surplus to maintain the price of gold, the extent to which that increase in the gold surplus needed to be sterilised would be consistent with maintaining relatively modest inflation rate in Britain, provided it did not exceed the inflation rate in the USA (and other countries returning to the gold standard). A rapid re-establishment of the old parity before the change in price levels in the USA relative to Britain had brought the exchange rate back to its pre-war level would, in McKenna's view, be folly.
Nothing that he [the Chancellor of the Exchequer] could do in the way of restricting credit here and forcing down prices in this country would get him to the gold standard. He would cause infinite trouble, cause unlimited unemployment, immense losses and ruin, but he could not balance his Budget while he was doing it, and he would have to begin to borrow. Before he got our price level down 10 per cent he would be borrowing again because his revenue would not be coming in. He would be having to inflate before he got there. The Budgetary difficulty will always beat them in forcing down prices. (McKenna in ACP 4F25, pp. 18–19).
4 Pigou's Draft of the Committee's Report in Relation to the McKenna Interview
Four years before joining the Chamberlain–Bradbury Committee, Pigou was invited by the Secretariat of the League of Nations to submit a memorandum on credit, currency and exchange fluctuations (henceforth ‘memorandum’) to the 1920 International Finance Conference in Brussels (Pigou, 1920). A year later he also discussed issues related to Britain's return to the gold standard in Chapter XV (‘The Aftermath in Currency and Exchanges’) of The Political Economy of War (Pigou, 1921). The 1920 memorandum and the 1921 chapter on currency and exchanges in the aftermath of the war, both of which are discussed in detail by Aslanbeigui and Oakes (2013), have some implications for the relationship between Pigou's and McKenna's ideas on the return to gold. These implications are discussed below.
Pigou's memorandum is forward-looking to the extent that it discussed policy responses once inflation has been ‘stayed’ and the danger of progressive depreciation eliminated, so that a ‘rough centre of equilibrium’ could emerge about which exchange rates would fluctuate. Like McKenna, Pigou too was seeking stable exchange rates through stable domestic price levels. On this issue Pigou invoked the name ‘purchasing power parity’, which McKenna did not name in his testimony before the Committee, even though it was quite clearly the concept he has in mind.
Pigou, however, was noticeably more cautious than McKenna when reflecting on the limits of purchasing power parity. Instead of asserting that exchanges rates are ‘entirely’ determined by prices, he pointed out that exchange rates may fluctuate widely around purchasing power parity mark when the normal balance of indebtedness is altered (Pigou, 1920, p. 13). Similarly, exchange variability around purchasing power parity results when foreign anticipation of future price changes differs from the domestic anticipation of future price changes, which itself may be influenced by changes in the normal balance of indebtedness.
In The Political Economy of War (Pigou, 1921, p. 177) Pigou further clarified his views on the relationship between purchasing power parity and the exchange rate by differentiating between the ‘fundamental’ and the ‘accidental’ influences that had led European currency to have large depreciations that brought their exchanges well below the pre-war exchange parity. Specifically, Pigou characterised fundamental influences as factors that determine the ‘proper’ exchange, which he defined as the exchange rate that is compatible with purchasing power parity. Accidental influences are associated with variations around the proper exchange rate; however, when these ‘accidental’ influences are a legacy of the ‘commotion of war’, systematic biases in the actual exchange rate may result. In that regard, Pigou asserted that accidental influences on the exchange due to the commotion of war had not subsided by 1921, citing temporary trade conditions and uncertainty over the nature of post-war exchange rate regimes to be adopted by European countries as evidence of this. The result was that the actual exchange rates for European countries were below their ‘proper’ (purchasing power parity) exchange rate. In the case of Britain, Pigou judged that influence to be modest, perhaps 10 per cent, but for other European nations such as Austria, Germany, Italy and France, their actual exchanges rates were substantially below their ‘proper’ exchange rates.14
Nothing that Pigou wrote in either his memorandum or The Political Economy of War represents a fundamental disagreement between Pigou and McKenna over the relationship between exchange rates and purchasing power parity per se. However, it does reveal a difference in emphasis in the role of accidental influences derived from the commotion of war on exchange rates, and an associated difference in view over the speed with which exchange rates adjust to changes in price levels in different circumstances.
parity not with gold but with things in general is theoretically attractive. … But it is a policy not at present understood by the business world, and it postulates a strong and resolute government commanding popular confidence. In present conditions of difficulty and distrust it is scarcely practical politics.15 (Pigou, 1920, p. 11)
J. Bradbury: Should you contemplate that as a permanent currency system?
McKenna: Well, if we were living in an intelligent world, yes I should. (ACP 4F25, p. 29)
But when Bradbury asked what should apply in the world in which we are, McKenna replied: ‘In the world in which we are, no. … the true argument is very inapplicable in the state of ignorance in which we live’ (ACP 4F25, p. 29). Given the subject of this paper, this is a critical point. In McKenna's ‘intelligent world’ and Pigou's world where businesses understand and trust the present system, a return to the gold standard was not necessary. But neither man saw the conditions of the time as indicative of an ‘intelligent world’. The ‘state of ignorance in which we live’ was such that the prevailing monetary system was ‘not at present understood by the business world’ and the subject of ‘difficulty and mistrust’, and both men advocated a return to the gold standard at pre-war parity, but, as already evident in the case of McKenna, and as we shall shortly see in the case of Pigou, only after the exchange rate had returned to gold parity rate of its own accord.
The September 1924 draft Report of Chamberlain–Bradbury Committee, written by Pigou after considering the transcripts of McKenna's testimony, was drafted in three sections: (I) untitled but which deals with introductory and contextual matters; (II) titled ‘The Gold Standard’; and (III) titled ‘The Amalgamation of the Note Issues’. Given the objectives of this study, Section II of Pigou's draft, on the gold standard, is of greatest relevance. Within it, his opening paragraph mentions, and then immediately dismisses, the options of: (i) returning to the gold standard with a lesser gold content per pound sovereign than applied under the pre-war standard (so exchange rate at parity would be achieved at a lower exchange rate than that which prevailed pre-war); and (ii) the abandonment of the gold standard altogether. Without reflection on either of these options, the following assertion is made: ‘as a practical present day policy for this country there is, in our opinion, no alternative comparable with the return to the former gold parity of the sovereign’ (Pigou in T160/197).
After the introductory paragraph, Pigou's Section II, ‘The Gold Standard’, is discussed under two revealing sub-headings: ‘Is the restoration of the gold standard a matter of immediate urgency?’ and ‘The three routes to the restoration of gold standard at pre-war parity’. Given the purpose of this study, it is necessary to underline the coincidence between much of what Pigou wrote under these two headings and a considerable part of the testimony that McKenna presented to the Chamberlain–Bradbury Committee.
Was the restoration of the gold standard a matter of immediate urgency?
In our view, however, the provisions of the Dawes Report by no means necessarily imply that the mark will be continuously maintained at full gold parity. We do not think it inconsistent with the successful application of the recommendations of that Report that the mark would, at any rate for some considerable time, stand at a discount in relation to gold as great as that at which sterling now stands. (Pigou in: T160/197, p. 4)
McKenna, in his testimony, was similarly dismissive of the proposition that Germany's return to gold, by pegging the mark to the gold standard US dollar, would cause problems for sterling. In the Committee's draft September 1924 report, Pigou similarly concluded that ‘we are not therefore convinced that this consideration need be treated as of immediate urgency’ (Pigou in T160/197, p. 5).16
As noted earlier, McKenna pointed out in his testimony that some of Britain's self-governing dominions were gold producers that would potentially gain from a return to the gold standard. Pigou also picked up on that point by noting, in his draft of the Committee's Report, the ‘strong desire of the self-governing dominions’ for Britain to return to the gold standard. But again, he pointed out that that this did not add to the urgency of reaching that position.17 His preferred approach remained that of wait and see!
The three routes to the restoration of gold standard at pre-war parity
The first of Pigou's three routes to the restoration of the gold standard was basically McKenna's preferred path, with the Bank of England adopting a banking and credit policy that maintained general price levels in Britain while waiting for the American expansion in credit to drive the dollar–pound exchange towards par before the embargo on the export of gold was removed. The second route was for the Bank of England to adopt a banking and credit policy that depressed prices in Britain to a point that the dollar–pound exchange rate rose to par before removing the embargo on the export of gold. The third route was for the government to announce that Britain would remove the embargo on the export of gold on a particular date in the near future, which would force the Bank of England to use banking and credit policy to return to the pre-war parity before the gold embargo was lifted. This third route was basically a variation on the scenario that led McKenna to suggest that the Chancellor, or government in this case, would be acting like King Canute if he thought that a simple announcement could return Britain to the gold standard.
Plainly it [the mechanism of the process for reducing prices] is one which is undesirable if there is reasonable hope that, within a short time, American action will permit our goal being attained by the first of these three routes. (Pigou in T160/197, p. 7)
In these circumstances, on the assumption that the Bank of England is willing and able to prevent sterling prices from rising in any marked degree, we conclude that the British Government should not at present take any active steps towards restoring the gold standard. … we recommend18 that, for another year, the Government should wait upon events. If at the end of 1925 the dollar has not approximated to parity, deliberate action to secure that result may become necessary. (Pigou in T160/197, pp. 8–9)
5 The Case for the ‘Pigou–McKenna School’
We have seen that, in spite of the Committee's shortcomings, we should have escaped from the tragedy if the Labour government had stayed in office for another month and accepted the Report which the Committee had virtually finished in September, 1924. (Reddaway, 1970, p. 28)
That draft was, of course, prepared by Pigou following careful reflection on the written record of testimony provided to the Committee by its witnesses, especially McKenna. The question now arises as to whether it is legitimate to speak of the ‘Pigou–McKenna school’ on Britain's return to gold.
The case against that proposition would place great weight on the fact that the September 1924 draft of the Report indicates that the Committee has a ‘decided preference’ for a permanent fixed fiduciary issue, although it was recognised in the report that this limit could not be fixed until the actual conditions of a free market for gold were known. McKenna, however, was opposed to that idea. Discretionary control of credit by the Bank of England was McKenna's instrument of choice for monetary policy, not controls on the issuing of bills, and his preference for the use of the Bank rate policy to influence credit has some similarity to Keynes's position.19 But that similarity should not be exaggerated as McKenna did not advocate the use of credit control as a permanent arrangement in place of the gold standard, at least not in the ‘the world in which we are’, which he regarded as something quite distinct from the ‘intelligent world’ in which it could apply.20
The process to be gone through on the return journey to pre-war parity is not a smooth one either for employers, whose dividends will fall, or for wage-earners, whose employment will be threatened. Moreover, the successful accomplishment of it involves afterwards the payment of interest on war loans in a currency much more valuable than that in which a large part of them was subscribed. This is, prima facie, unfair. It is also, on the fiscal side, exceedingly inconvenient … and this will make more difficult the problem of balancing the budget. (Pigou, 1921, pp. 176–7)
Of course, a return to pre-war parity would increase the debt burden irrespective of whether that return was activated by market forces alone or by market forces aided by government intervention. But McKenna and Pigou also perceived that forcing the exchange to return to pre-war parity before purchasing power parity estimates of exchange suggested that parity has been attained by market means alone would aggravate the fiscal problem because increasing the Bank rate to reduce inflation, and appreciate the exchange rate, would also reduce the real value of tax bases.
So long as nine people out of ten in every country think the gold standard is the best, it is the best. If in the future there were an immense increase or decrease in the output of gold and consequently a startling rise or fall in prices, re-consideration of the subject might be forced upon public attention, but at the present there is no single nation, so far as I know, which is now off the gold standard, that does not regard the return to it as the most desirable of all financial measures. (McKenna, 1928, p. 103)
But it must nevertheless be conceded that the case for the ‘Pigou–McKenna school’ is temporally constrained, as it ended shortly after Pigou's draft of the Committee's report was distributed to the Committee members. Pigou's reaction to critical comments from Chamberlain and Bradbury on the wait-and-see aspect of Pigou's September 1924 draft of the Committee's report22 made it clear that he was not willing to actively persuade his fellow members of the Committee of the merits of the Pigou–McKenna line he had drafted in the report: ‘It would be inappropriate of me as an academic person to press for heroism,23 but if the rest of the Committee had been in favour of it, I doubt if I should have opposed’ (Pigou in Moggridge, 1972, p. 49). Pigou justified this by indicating that he was only ‘just on-balance’ in favour of the position presented in his draft of the report. That might have been satisfactory justification if the wait-and-see option had been presented as an alternative for the government to consider in the Committee's final report. But that was not the case. Consequently, there appears to be at least one significant ground for Keynes's (1972a, p. 212) complaint that Churchill was ‘gravely misled by his experts’.
6 Conclusion
Pigou's reading of McKenna's testimony to the Chamberlain–Bradbury Committee highlights a fundamental consistency with Pigou's basic thinking on the matter, as outlined in his Memorandum on Credit, Currency and Exchange Fluctuations (Pigou, 1920) and The Political Economy of War (Pigou, 1921); and Pigou's September 1924 draft of the Committee's report – most especially the discussion of the potential routes to pre-war parity, the sterilisation of the effect of gold inflows on monetary policy, Germany's possible return to gold under the Dawes Plan and, of course, the final ‘wait and see’ recommendation – was clearly written under the influence of that testimony. As Reddaway has suggested that the non-submission of that draft of the report to the government represented something of a missed opportunity in Britain's monetary history, reference to the ‘Pigou–McKenna school’ – as a school of thought that was supportive of Britain returning to the gold standard in principle but not supportive of doing so prematurely – is an appropriate way of characterising the ideas that lay behind that missed opportunity. Furthermore, reference to the ‘Pigou–McKenna school’ is arguably more meaningful than reference to the ‘Keynes–McKenna school’, which is also intended to characterise a missed opportunity, at least to the extent that it incorrectly implies that McKenna was opposed to Britain returning to the gold standard.
This ‘on-balance’ judgement in favour of the ‘Pigou–McKenna school’ is given added weight when it is recalled that every quote from McKenna's testimony cited in the present paper was personally highlighted by Pigou in his own copy of the Treasury's transcript of witness testimony given before the Chamberlain–Bradbury Committee.
