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The Management of Sterling, 1932–1939

Published online by Cambridge University Press:  11 May 2010

Susan Howson
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Abstract

This article briefly discusses the operations of the British Exchange Equalization Account, 1932–1939, on the basis of the Treasury records of the time and in the light of modern views on exchange management. Its conclusion is that although the float may not have been “clean,” the intervention was probably justified by domestic objectives and the state of international capital markets.

Type
Papers Presented at the Thirty-Ninth Annual Meeting of the Economic History Association
Information
The Journal of Economic History , Volume 40 , Issue 1 , March 1980 , pp. 53 - 60
Copyright
Copyright © The Economic History Association 1980

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References

1 Howson, Susan, “Sterling's Managed Float or, the Operations of the Exchange Equalisation Account, 1932–9,” unpublished study, 1979Google Scholar. The documents are to be found in the Treasury files in the Public Record Office, London, and comprise both memoranda written by senior Treasury officials to each other, to the Chancellor of the Exchequer, and to the Bank, and patchy data on some components of gold and foreign exchange reserves. They are cited here by permission of the Controller of H. M. Stationery Office.

2 On the reasons for the abandonment of the gold standard see Moggridge, Donald E., British Monetary Policy 1924–1931 (Cambridge, 1972)Google Scholar; Howson, Susan, Domestic Monetary Management in Britain 1919–38 (Cambridge, 1975)Google Scholar, ch. 4; Sayers, Richard S., The Bank of England 1891–1944 (Cambridge, 1976)Google Scholar, ch. 17.

3 Sayers, Bank, Appendix 25.

4 On the Bank's intervention in foreign exchange markets in 1931–32, see ibid., pp. 416–30. The Bank continued to intervene on its own account for a year after the EEA's establishment but thereafter confined itself to its traditional function of holding gold in the Issue Department.

5 This aspect of EEA operations has been described often; see, for example, Waight, Leonard, The History and Mechanism of the Exchange Equalisation Account (Cambridge, 1939)Google Scholar; “The Exchange Equalisation Account: its origins and development,” Bank of England Quarterly Bulletin, 8 (Dec. 1968), 377–90Google Scholar; see also Howson, Domestic Monetary Management, pp. 99–103 and Appendix 2 on the factors determining market Treasury bills.

6 P.R.O. T175/57, Hopkins to Chancellor, “Exchange Equalisation Account Proposals,” 6 April 1932.

7 Howson, Domestic Monetary Management, pp. 82–6.

8 Ibid., pp. 86–8. The ultimate objective of economic policy at this time was the reduction of unemployment, currently over 3 million or 22 percent as officially measured.

9 In general, the Treasury set the targets, in the light of Bank advice tendered at regular Friday meetings of a joint Exchange Committee. Although the two “authorities” sometimes differed on the weight to be given to considerations of, say, reserves, there was a large measure of agreement between the Treasury and Bank officials involved in exchange management throughout the 1930s. On the differences see Howson, Susan, “The Managed Floating Pound, 1932–9,” The Banker, 126 (Mar. 1976), 249–55Google Scholar.

10 P.R.O. T175/71, Hopkins to Fisher and Chancellor, 9 July 1932; Waley to Hopkins, “Exchange Committee 5 August 1932”; Leith-Ross, , “Exchange Committee, 30th September”; Hopkins to Chancellor, 15 October 1932Google Scholar.

11 Sayers, Bank, pp. 452–3.

12 P.R.O. T175/71, Phillips to Hopkins, 22 December 1932; Hopkins to Fisher and Chancellor, 23 January 1933; Hopkins to Fisher and Chancellor, 30 January 1933; “Market Review,” 3 February 1933; Note by Phillips, undated, but February 1933.

13 P.R.O. T175/71, Hopkins, , “American Banking Crisis,” 3 March 1933Google Scholar; Hopkins to Chancellor, 5 March 1933; Note by Hopkins, 7 July 1933.

14 On the tripartite negotiations in 1936 and at the World Economic Conference in 1933, see Clarke, S.V.O., The Reconstruction of the International Monetary System: The Attempts of 1922 and 1933 (Princeton, 1973)Google Scholar, and Exchange-Rate Stabilization in the mid-1930s: Negotiating the Tripartite Agreement (Princeton, 1977)Google Scholar, and Sayers, Bank, pp. 475–81 and Appendix 17.

15 P.R.O. T175/71, Phillips, , “Future Exchange Problems,” 15 February 1934Google Scholar.

16 P R O. T160/840/F13427/3, Waley to Pinsent, 28 May 1936. The Tripartite Agreement consisted only of a declaration by the three governments of intention both to cooperate in reducing exchange fluctuations and to avoid competitive devaluation, and an informal agreement between the three central banks to buy and sell each others' currencies. The franc was devalued at the same time.

17 Howson, Domestic Monetary Management, pp. 123–4, 126–7; Sayers, Bank, pp. 474–75.

18 Sayers, Bank, pp. 561–7.

19 Howson, “Sterling's Managed Float,” pt. 3.

20 Ibid., pt. 4.

21 P.R.O. T177/39, Phillips, , “The Present and Future of Gold,” 11 May 1937Google Scholar.

22 Black, Stanley W., International Money Markets and Flexible Exchange Rates (Princeton, 1973)Google Scholar.

23 Minford, Patrick, Substitution Effects, Speculation and Exchange Rate Stability, pt. 2 (Amsterdam, 1978)Google Scholar.

24 On the basis of the considerations outlined in, say, Dornbusch, Rudiger, “The Theory of Flexible Exchange Rate Regimes and Macroeconomic Policy,” Scandinavian Journal of Economics, 78 (May 1976), 255–75CrossRefGoogle Scholar. The problem with this test is that full stock equilibrium implies full employment, a condition not satisfied in the 1930s.