Back to Gold: Sterling in 1925

CFS Working Paper No. 515

24 Pages Posted: 22 Sep 2015

See all articles by Stefan Gerlach

Stefan Gerlach

Central Bank of Ireland; Centre for Economic Policy Research (CEPR)

Peter Kugler

University of Basel

Multiple version iconThere are 2 versions of this paper

Date Written: July 30, 2015


Expectations of Sterling returning to Gold have been disregarded in empirical work on the US dollar – Sterling exchange rate in the early 1920s. We incorporate such considerations in a PPP model of the exchange rate, letting the probability of a return to gold follow a logistic function. We draw several conclusions: (i) the PPP model works well from spring 1919 to spring 1925; (ii) wholesale prices outperform consumer prices; (iii) allowing for a return to gold leads to a higher speed of adjustment of the exchange rate to PPP; (iv) interest rate differentials and the relative monetary base are crucial determinants of the expected return to gold; (v) the probability of a return to Gold peaked at about 72% in late 1924 and but fell to about 60% in early 1925; and (vi) our preferred model does not support the Keynes’ view that Sterling was overvalued after the return to gold.

Keywords: Gold Standard, Sterling, exchange rate, PPP, expectations

JEL Classification: E5, F31, N1

Suggested Citation

Gerlach, Stefan and Kugler, Peter, Back to Gold: Sterling in 1925 (July 30, 2015). CFS Working Paper No. 515, Available at SSRN: or

Stefan Gerlach (Contact Author)

Central Bank of Ireland ( email )

P.O. Box 559
Dame Street
Dublin, 2

Centre for Economic Policy Research (CEPR) ( email )

United Kingdom

Peter Kugler

University of Basel ( email )

Petersplatz 1
Basel, CH-4003
+41 61 267 3344 (Phone)
+41 61 267 3340 (Fax)

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