POLI 211 Lecture Notes - Lecture 10: Pound Sterling, International Regime, John Studebaker
17 May 2018
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28/03/2018- Britain returns to Gold in 1925
Two layers to this: General notion of Britain choosing it. But the real question is how they try to
do it. And the fact is that the policy they implemented in 1925 overvalued the pound. So it is
really that second that is more puzzling.
The Question: Why aim for such a high valuation for the pound?
World War I disrupted monetary policy in Britain. Britain had been on gold standards for a
while.
The Central Bank allowed to take the paper money, or to start circulating them in the economy
only after they receive a deposit in gold.
Government wanted to borrow more, after the war had been emerged to fund its war effort.
Broke the CB constraint to have the paper money without depositing anything due to war.
Peace raises questions about best route to recovery with an end of the war.
Key element in plan: return to gold standard, return to peace practices, as people became
interested in using pound again.
But target valuation of the currency set very high, hard to attain. Why did they choose to do so?
Analysis can help us with it.
System-Level Argument: Britain as Hegemonic Leader
Realists: Britain had been hegemonic leader in nineteenth century (Gilpin)
Bank of England (which was an institution, run privately but operates with the government)
begins gold standard in early 1800s
Goal to give British pound high confidence, so that foreigners will accept it, to promise the bank
that their money worth same as gold.
International regime emerges — pound actually serves as the international medium of
exchange
Benefits Britain, or at least British service sectors
System-Level Argument: Hegemonic Decline
What does World War I do?
redistributes power, us does great, by exporting guns and etc, and thus many people wanted
dollars instead, thus made us economy bigger
weakens confidence in the pound
Realists:battle over hegemonic power, over superiority Britain wants to reassert its leadership,
get its power and the exchange rate
U.S. Dollar feared as rival — so aims for pre-war exchange rate (£1 = $4.86)
Thus overvalued the pound (hurting British industry)
Domestic-Level Argument: Changes inside Britain
Analytical Liberal view: domestic interests shape preferences on monetary policy
Gold Standard = particular mix of attributes (highconfidence, low inflation)
Creditors favour, debtors dislike
Political expectation = parties on the right favour, parties on left dislike. Creditors are tend to
be conservatives. The distribution of interest in the society can really tell us a lot. (Simmons)
Domestic-Level Argument:
Changes inside Britain
World War I does not alter those preferences; it leads
to redistribution of power among groups
find more resources at oneclass.com
find more resources at oneclass.com
Document Summary
Two layers to this: general notion of britain choosing it. But the real question is how they try to do it. And the fact is that the policy they implemented in 1925 overvalued the pound. So it is really that second that is more puzzling. World war i disrupted monetary policy in britain. Britain had been on gold standards for a while. The central bank allowed to take the paper money, or to start circulating them in the economy only after they receive a deposit in gold. Government wanted to borrow more, after the war had been emerged to fund its war effort. Broke the cb constraint to have the paper money without depositing anything due to war. Peace raises questions about best route to recovery with an end of the war. Key element in plan: return to gold standard, return to peace practices, as people became interested in using pound again.
