This paper focuses on the impact of the London forward exchange market on the sterling crisis from July to September 1931, examining changes in daily data of pound-dollar exchange rates and bid-ask quotes before the onset of the crisis. After World War I, the forward market expanded in London and information about the bid-ask spread became important in the price-making process. Even after the British restoration of the gold standard, the London forward market worked well through international interest rate arbitrage. In January 1931, when two- and three-month forward rates fell sharply against the dollar, spot and one-month forward pound rates did not fall, while, under the crisis, the spot and forward pound rates fell sharply against dollar. The difference of the market behaviours of these two cases depended on investors' expectations of whether or not the British abandonment of the gold standard was urgent. The behaviour of forward rates reflected changes of the investors' expectations of the credibility of the British gold standard. The establishment of the well-functioning forward market in London before the onset of the crisis had the potential to force the British government to abandon the gold standard.
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