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"...The US Dollar's hoped-for
decline had now become a rout, driving the greenback down to new all-time
lows on its trade-weighted index..."
Saturday, 19th Sept. 1931
Montagu Norman - governor of the Bank of England - is sailing back to London from a vacation in Canada. He'd felt "under the
harrow" since February, and one day in late July had gone home early
"feeling queer".
After a week in bed, Norman
chose to take a month's complete rest across the Atlantic,
far from the pressures of work, politics and constant public calls for his
resignation - if not imprisonment.
The Sterling Crisis then raging had
already prompted Winston Churchill to say "I hope we shall hang Montagu
Norman...I shall certainly turn King's evidence against him." Why turn
snitch? Because six years earlier, Norman had persuaded Churchill - then
Chancellor of the Exchequer - to take Great Britain back onto the Gold
Standard at the old rate of £3 17s 10½d per ounce.
Pricing the Pound Sterling at that
pre-World War I exchange rate valued it at $4.86 in terms of the US Dollar,
some 10% above prevailing market prices. The aim had been to defend Sterling as the world's No.1 currency; otherwise
"the business not only of the British Empire but of Europe
as well might have to be transacted in Dollars instead of Pounds
Sterling," Churchill told parliament in May 1925.
But the "Norman Conquest of
$4.86" as it became known made British exports hopelessly uncompetitive,
leading to huge losses in the coal and steel industries. The pressure on
wages and unemployment led to the General Strike of 1926 - when Britain
flirted with revolution - while tax receipts covered less than half the
government's outlay that year.
By the time Norman
was sailing back from Canada
in Sept. 1931, the British Treasury was set to run an annual deficit of
£170 million, some 41% greater than the previous forecast. During one
week in August, the "Old Lady" - the Bank of England's nickname
since the last Sterling Crisis of 135 years earlier - lost more than
£40 million in gold reserves. Panicked foreign investors demanded gold
as they dumped the Pound on news reports of a mutiny over pay at the naval
station of Invergordon that eventually came to
nothing.
But finally, and with Montagu Norman
still out of the country, the Bank of England caved into public demand and
asked the government to close the gold window, suspending convertibility.
Just ahead of the parliamentary vote
required, Norman's
colleagues cabled a message to his ship as it neared the Irish coast:
"Old Lady goes off Monday..."
"Poor Norman!" writes Peter L.Bernstein in his tome, the Power of Gold. "He
thought they were referring to his mother's plans for a vacation..."
Wednesday, 30th Sept. 1987
Less than three weeks ahead of the US stock market's worst ever
one-day drop on Black Monday, Oct. 19th, US Treasury Secretary James Baker delivers
a speech to a meeting of leaders from world's top industrialized nations.
It's two
years after the famous Plaza Accord had slowly brought the Dollar down from
record highs against the rest of the world's currencies. But the problem of
"wild gyrations" in the forex markets
still plagued businesses and trade, as British Chancellor Nigel Lawson
remarked.
Crude oil remained subdued compared with
its record peaks of 1980, but global inflation rates were ticking upwards
from the trough achieved by Fed chairman Paul Volcker's kill-or-cure
double-digit interest rate policy in the first-half of the decade.
In establishing a series of target
ranges for the world's major currency exchange rates, the new Louvre Accord
of Feb. 1987 had also invited speculative attacks of the kind that would
force the British Pound and Italian Lira out of the European exchange-rate
mechanism five years later. And what's more, the US Dollar's hoped-for
decline starting in 1985 had now become a rout, driving the greenback down to
new all-time lows on its trade-weighted index.
The new instabilities prompted Karl Otto
Pöhl - president of the German Bundesbank - to say "the United States
should have a recession" to reduce its yawning trade deficit. So what
does Baker do in response?
"To the surprise of most of his G-7
partners," writes Steven Solomon in The Confidence Game,
"Baker unveiled a proposal for a new commodity price indicator,
including gold, to help anchor low inflation in the policy co-ordination
process.
"Proposals for a commodities-based
anchor had been floating around the Treasury since just after the Plaza
Accord [but] the inclusion of gold - the 'barbarous relic' that, to the
satisfaction of most experts, had been demonetized since President Nixon
ended dollar-gold convertibility by fiat on August 15, 1971 - mystified most
observers."
Was Baker serious? His British opposite
number, Nigel Lawson, thought so. He spoke at the Sept. G-7 on just the same
topic, proposing a new system of "managed floating" rates in a
speech prepared by "working with Jim Baker".
But their academic fiddling failed to
convince the German delegation that the Dollar's guardians would prevent it
slumping further, and one week later the Bundesbank raised its key lending
rate, forcing a spike in global bond yields.
That drove prime rates at the largest US banks 0.5%
higher by the morning of Black Monday - even as the Dollar lost 4% vs. the
Deutschmark inside three weeks - when the Dow Jones lost more than one-fifth
of its value.
(P.S: The Gold Price in Sterling
today recorded a PM Fix in London of more than £488 per ounce,
representing a loss of value in the British Pound of more than 99% in a
little over 76 years.)
By : Adrian Ash
Head of Research
Bullionvault.com
City
correspondent for The Daily Reckoning in London,
Adrian Ash
is head of research at www.BullionVault.com
– giving you direct access to investment gold, vaulted
in Zurich, on
$3 spreads and 0.8% dealing fees.
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