The 1925 Return to Gold: Keynes and Mr Churchill's Economic Crisis

Abstract:     
Winston Churchill’s decision in April of 1925 to resume convertibility of the Pound Sterling at the pre-WWI parity prompted one the greatest financial crises of the century. Churchill chose this course despite John Maynard Keynes’ prescient predictions that deflation, unemployment, and domestic unrest would follow. This paper attempts to explain Churchill’s fateful decision. It argues that Churchill was intimately familiar with Keynes’ insistence that the return to gold would create transitional unemployment. Churchill, however, was principally concerned with the structural unemployment endemic to the postwar economy. Keynes' theory, however, did not account for structural unemployment. Churchill gambled that the drastic policy would force through fundamental adjustments necessary to meet the realities of Britain’s new position in the world economy. Keynes’ failure to influence Churchill in 1925 illuminated the gaps in his policy-making framework and drove his subsequent intellectual development. This paper follows in the tradition of those scholars who have shown the influence of positive ideas and intellectuals on policy. Borrowing from work on the history of science, it attempts to link the development and construction of these ideas with their adoption and implementation.

Number of Pages in PDF File: 70

Keywords: Keynes, Gold Standard, Churchill

JEL Classification: B31, F31

working papers series