The City and Industrial Problems in the Re-established Gold Standard Years 1926-1931

Abstract

The purpose of this paper is to investigate how the leaders of British joint-stock banks considered the industrial depression and what remedy they recommended from the point of view of. finance, so that we can understand the real meaning of the new policies pursued after the suspension of the gold standard in 1931. The orthodox view of the City, which was announced by F. C. Goodenough, was that since the main cause of trade depression in the 1920s was the loss of competitiveness of British industries, its remedy consisted in the reduction of production costs through the re-organization of British industries, "rationalization". He insisted that London money market contributed to the prosperity of British industry in the sense that it supplied them with short-term working capital and it facilitated overseas investments which provided domestic industries with market for manufactured goods. Therefore, the traditional structure of the London money market should be preserved as it was, and the principles of the Bank Charter Act of 1844 were to be maintained. On the other hand, even in the City, there was "progressive" view that the expansion of domestic credit was indispensable for the recovery of British industries and that the present structure of the City, which was in favor of overseas banking businesses, should be reformed. For example, R. McKenna insisted that the Bank Charter Act of 1844 should be abolished and the Bank of England should be operated in line with the principles of proportional reserve system as the Federal Reserve System in the United States. Although this view was in the minority in the City, Labour Party accepted it. Prior to the General Election in 1929 Labours committed themselves to the banking inquiry in order to investigate the relationship between finance and industry. Consequently, this "progressive" view was materialized as the Macmillan Committee under the Second Labour Government. In the course of 1929's crisis, there appeared the discussion on the causes of the fall of world commodity prices. Some thought that the collapse of commodity prices was due to the over-production of primary products, others attributed it to the mal-distribution of monetary gold. According to the latter diagnosis, which was held by McKenna, we can tackle the depression by monetary policies such as cheap money policy, which became the strategy for economic recovery in 1930s' Britain. It is because there existed the "progressive" view in the City that the bankers calmly dealt with the suspension of the gold standard in 1931.