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A friend asked me about changes in the Bank of England's balance
sheet as it suspended gold redeemability in 1914, and then returned
the pound to its prewar gold parity in 1925. I decided to look it
up.
This data is for year-end, except for 1913, which is for February
1913. The source of the data from 1914 is the Federal Reserve
Banking and Monetary Statistics. The 1913 data comes from the London
Gazette.
http://fraser.stlouisfed.org/publication/?pid=38
We see a rather large jump in base money in 1914, mostly in the form
of bank deposits at the BoE. This makes perfect sense; banks would
want to hold more "cash" under such dramatic conditions. However,
gold redeemability was suspended, so you could also look at it as
some effort by the BoE to monetize government debt, leading to
greater bank deposits. It looks like a little of both; the GBPUSD
forex rate, as recorded, shows a small decline in the forex value of
the pound vs. the dollar by the end of 1914, but not at all
proportionate to the increase in base money.
The BoE expanded the monetary base considerably during WWI, in part
to help finance the government. This led to a decline in the pound's
value vs gold. However, we don't have good statistics from that time
as to how much the pound declined vs. gold. All that I have is the
above information about GBPUSD forex rates. However, these rates
were fixed with capital controls during the wartime period, with the
controls obviously lifted after the war's end, in 1919. Also, the
dollar itself was not pegged to gold during the 1916-1921 period.
Mirroring action by the BoE, as the U.S. entered the war in April
1917, capital controls and a gold embargo were imposed, thus
effectively halting U.S. dollar gold redeemability. The Fed was
pressured into helping to finance the U.S. war effort, with
identical results (a falling dollar value vs. gold) as happened in
Britain. Unfortunately, due to the wartime gold embargo and capital
controls, I don't have good data as to how far the dollar's value
fell vs. gold. My data just shows the "official price," of
$20.67/oz. I am sure that, somewhere, in Shanghai, Singapore or
Tangiers perhaps, people were actively selling dollars, pounds and
gold bullion, in a free market at prices different than the official
price. However, I don't have such data.
March
...
25, 2012: The U.S. Dollar During WWI and the Recession of 1920
The U.S. dollar's weakness vs. gold was not fully resolved until
early 1922.
target="_blank" December
...
23, 2012: The Federal Reserve in the 1920s 4: The Historical
Record target="_blank"
target="_blank"December
...
16, 2012: The Federal Reserve in the 1920s 3: Balance Sheet and
Base Money
target="_blank" November
...
25, 2012: The Federal Reserve in the 1920s 2: Interest Rates
November
...
18, 2012: The Federal Reserve in the 1920s
Thus, to some degree, the GBPUSD rate doesn't really reflect the
gold value of the GBP until about the beginning of 1922. As wartime
capital controls were lifted and conditions normalized in the
1920-1922 period, the BoE contracted the monetary base considerably
during 1921, just as the Fed did. By early 1922, most of the return
of the GBP to its prewar gold parity was complete. There was another
dip in the pound's value in 1924, corresponding to an increase in
BoE base money supply. I would guess, from this data alone, that
there was some debate that the BoE had done too much too fast, or
perhaps had succumbed to pressure to again help with government
financing. In any case, as we can see, the pound returned to its
prewar parity in 1925, as the BoE contracted the monetary base again
during that year. There is a further contraction in base money 1926
and 1927, which is not particularly important as the pound was on a
gold standard system during that time. The pound's value didn't
change, and thus there would be no particular economic effects. I
would guess that was driven by commercial banks normalizing their
BoE deposit holdings, reducing them in light of stabilized
conditions worldwide and the reinstatement of the gold standard
system in Britain.
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