In 1933, Britain and France were already anxious to reestablish a sound world monetary system, after the monetary disasters that followed the floating of the pound in 1931. In 1933, a World Economic Conference was held in London, whose purpose was to resolve the world monetary problem and strike an agreement on quick reductions in tariffs worldwide. The United States, whose currency was still near its 1929 level when the conference was scheduled, was expected to lead the European governments back to the world gold standard. At the conference, however, Roosevelt shocked the participants by announcing that he would devalue the dollar. The act, in the eyes of foreigners an unpardonable act of economic nationalism, torpedoed Cordell Hull's attempts to achive quick agreements on tariffs. In that situation, who wanted to open their markets to a country that was about to devalue and undercut them with cheap imports? In late 1933, Roosevelt devalued the dollar from $20.67 per ounce to $35 per ounce of gold - in essence mirroring the European devaluations and bringing exchange rates roughly in line with their pre-1931 levels- and repegged the dollar a that figure in January 1934. The dollar remained officially pegged at $35 per ounce until August 1971.
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The breakdown of Europe's monetary order began when Austria, in an attempt to reduce trade barriers, organized a customs union with Germany on March 21, 1931. France opposed the move, and the Bank of France and other major French banks suddenly called in their considerable loans and deposits in Germany and Austria. The strain on Austria's financial system, which was already severly weakened by the economic downturn, was too great, and in the midst of ba banking panic that May, Austria went off the gold standard. Germany was similarly destabilized in July. This provided just the excuse Britain's devaluationists were looking for. As pressure grew on the pound's link with gold, the Bank of England made no attempt to defend the gold standard through a rise in the discount rate, the mechanism by which the bank effectively reduced the supply of base money. (The head of the Bank of England was on vacation at the time, recovering from a nervous breakdown caused by the strains of defending the pound's link to gold, leaving the reins in the hands of underlings with more "modern" ideas.) It was argued that the rise in interest rates would be an additional burden on the deteriorating economy, although the Bank of England raised its discount rate soon after the devaluation as it struggeld to keep the pound from depreciating inot oblivion. Keynes had recommended a devaluation for Britain only a month earlier.
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More than 20 other countries, including British commonwealth countries, followed Britain's lead by the end of the year. This incensed the Japanese, who competed closely witht the British in the export market. (In 1933, Japan usurped Britain as the world's leading exporter of cotton cloth.) Japan had waged a deflationary struggle to put the yen back on the gold standard in January 1930, but faced with a competitive devaluation by Britain, among its other mounting problems, Japan floated and devalued the yen in December of 1931. After the devaluation, the yen/pound rate returned to roughly its predevaluation level of the 1920s.
The negative effects of Britain's devauation, and the "beggar thy neighbor" devaluations that were set off in response, are underappreciated today. If one small country devalues, it can be safely ignored by the rest of the world. However, when the word's leading currency is devalued, and several other major governments devalue alongsie, the consequences are almost impossible to resits. The pound's devaluation put immediate competitive pressures on all ohter countries who were getting "beggared" by Britain. Not devaluing after Britain and dozens of other countries, including Germany and Japan, had devalued would mean competing against dramatically lower prices in ohter countries, which wuould increaed hardship and downward price pressures at thome. To avoid this beggaring effect, countries had to dealue in line with the pound.
Certainly this is one reason why the gold standard is blamed for so-called deflation and economic contraction during the 1930, although the problem was that Britain, and many other countries, had left the gold standard! In this light, Roosevelt's choice to devalue the dollar in 1933-1934 should come as no surprise - nor should Britain's attempt to get the United States to stick with the gold standard at $20.67 per ounce while Britain repegged to gold at a devalued rate, which would allow the beggaring of the U.S. undustry by Britain, and the other countries that had devalued, to continue. The same thing happened during the 1970's, when even those countries that had no interest in imitating the devaluationist policies of the United States were sucked into the inflationary morass to avoid the trade consequences of dollar devaluation.
Even for those governments that decided to devalue in response to worldwide devaluation, it was not necessary to abandon the gold standard. The U.S. government devalued, but immediately repegged to gold at a new parity. The economic superiority of this solution, compared to a floating currency, is one reason the United States and the U.S. dollar rose to world prominence soon afterward.
The economic deterioration in the United States in 1931 was due largely to bad overseas policies. Britain pushed up income tax rates in 1930 and 1931, which drove it into hard recession much like the United States.
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