The Lend-lease scheme of 1941 changed history. It ensured that the Allies could wage war in the cause of liberal democratic values without financial restraint.
What was the ‘Gold Standard’? Why was it so important in dictating government policy during the 19th and 20th Centuries?
Between the mid-19th and mid-20th Centuries, central banks were created to help regulate economies – by issuing authorised paper money. Further, the paper money was full underwritten by bank-held gold reserves. This practice was known as the ‘Gold Standard’. A nice idea – as it discourages overprinting of paper money (which encourages hyper-inflation), which a government short of money might be tempted to do (in some other universe, of course…). A government will print money sufficient quantities to redeem with its gold reserves – but the Gold Standard had its drawbacks. If your country produces gold, you can print lots of money to keep pace with your gold production. Which is great if you happen to be a large gold producer – in 2010, the largest gold producers were (in order of output) China, Australia, US, South Africa and Russia. Of these countries, how many do you think were major industrial economies in the early to mid-20th Century? (I will give you a clue. I have only mentioned the US in my blog series so far) – Therefore, the Gold Standard is not so good if you happen to be anyone-else. Which means that your economic growth is constrained because you cannot print enough money to keep pace with economic growth. So, in short, your economic growth is always hampered.
Due to economic pressures, western governments departed from the Gold Standard during the World Wars and the Depression. In the case of the World Wars, governments needed to buy more munitions than they had gold with which to back up the value of their money – so they threw out the Gold Standard for the duration and used their gold reserves to buy more munitions instead. Guess what happened to the value of their currency? In all cases, it plummeted. In the case of Germany after WW1, the value of its currency kept plummeting through the 1920s. Not so the currencies of the victorious countries. They could use their remaining funds, and the consumer optimism engendered by their victory, to begin trading their way out of the economic hole into which they fallen thanks to the war. Germany, on the hand, was required to pay war reparations while endeavouring to fund its post-war recovery. In short, more money was leaving the country than was being derived from its own economic efforts. The result was not good for Germany.
Governments were also forced to depart from the Gold Standard during the Great Depression. With consumer confidence falling, bank customers tried to cash out their deposits – known as a ‘run on the banks’. As a bank’s gold reserves became exhausted, the bank was forced to close. The longer a country remained on the Gold Standard during this period, the longer the economic stagnation that followed – as the gold reserves in banks dwindled, money had to be withdrawn from circulation to keep the paper money in circulation in sync with the value of the available gold reserves. And so the downward spiral continued. As governments departed from the Gold Standard, they could print more money to kick start their economies. Obviously, any increase in the printing of paper money has to reflect a likely increase in the value of that country’s economic activities, otherwise it risks compounding the problem. But in the midst of the Great Depression, governments were desperate.
In Part 7 (of this 10 Part series), with understanding of the ‘Gold Standard’ under our belts, I will discuss the dire economic situation facing Britain in 1940 and 1941.