The Devaluation of the British Pound,
September 21, 1931
May 22, 2016
Today, we are making use of a new weekly dataset just released by the
Bank of England. It is here:
I thought I'd use it to get an idea of what was going on when the
British pound was devalued on September 21, 1931.
The British pound was the leading
international currency and reserve currency at the time. Its
devaluation was a shock that led directly to many echo devaluations
worldwide. By the end of 1931, 23 countries had left the gold standard.
The vertical line of course represents the devaluation. We see a drop
in gold a little before, which is related to a big rise in
government securities. I would have to look at some history to get an
idea of what's going on here. It looks like either a) the BOE was
fooling around with an "activist" monetary expansion, or b) there was a
big gold redemption, which was intentionally "sterilized," so that the
monetary base would not change. Both are pretty scary, and definitely
NOT what the BOE should have been doing -- although, other central
banks were doing similar things around that time, including the Federal
Reserve in 1932. Definitely not confidence-inspiring.
It may have been related to a desire to hold down short-term interest
rates, which were already pretty high, probably reflecting fears of
Nevertheless, the BOE certainly had plenty of gold. It was not
suffering chronic "outflows" except for that one decline. However, the
flatlining of gold before the devaluation suggests that gold conversion
was being quietly blocked, before the official end of gold
convertibility. That would probably induce a little panic among those
The rise in government securities/sudden gold outflow does not
correspond with the cut in the discount rate, which was actually in
May. It actually corresponds to the rise in the discount rate, in July.
Oddly enough, this does not correspond with the Credit Anstalt
bankruptcy, which was 11 May 1931. It might have been related to
capital controls in Germany. I would have to look at the history more
closely to figure out why things got so serious in July 1931.
Here we have a look at the monetary base and its composition. We see a
rise in the monetary base from around the beginning of 1931. Nothing
wrong with this in itself. However, if the pound's value was weak and
"defense of the pound" was a priority, then there should have been some
meaningful reduction in the monetary base. There certainly seems to be
no attempt whatsoever to support the value of the pound via monetary
base reduction before the day of the devaluation. On the contrary, base
money was steadily rising. This corresponds to the historical
narrative, which was that any base money contraction was avoided on the
grounds that it would send the already-high short-term rates/discount
rate still higher. The Keynesian "low interest rates" notion was
getting the upper hand, in people's minds, over the "stable value"
basis of the gold standard.
Here is the Bank's discount rate. The discount rate was rather
notoriously not raised from its level of 4.5% before the devaluation.
However, it was raised to 6% literally the day after. Discounts were a
big part of the BOE's operation before 1913, but by this time, they
were obviously overshadowed by "open market operations" in government
bonds, which were then a much larger portion of total assets.
This is just a preliminary look. However, it looks pretty clear to me
that the BoE didn't take any appropriate action to support the pound,
via a reduction in the monetary base, probably because they were afraid
that it would lead to higher short-term rates and a higher discount
rate, perceived as being bad for the economy. However, the high rates
(compared to the U.S. for example) themselves reflected a (justified)
fear of devaluation.
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