Churchill as Chancellor of the Exchequer 1924 29

Churchill as Chancellor of the Exchequer 1924 -29 The Price of Gold?

In Hindsight • Churchill’s Chancellorship has been overshadowed by the return to the Gold Standard and the view that this was a fateful decision, both for the industrial disputes of 1926, and because it was not sustained, Britain being driven off gold again on 20 September 1931. • Churchill listened to but did not follow Keynes. With hindsight Keynes’ The Economic Consequences of Mr Churchill came to be seen as prescient, whilst the failure of the return to the Gold Standard became associated with the 1930 s Slump.

Post-war Problems • Whilst Churchill’s time at the Treasury has been judged largely through hindsight, at the time he was primarily tackling problems stemming directly or indirectly from the Great War of 1914 -18. • Internationally he was concerned to: (a) Reduce inter-allied debts (especially the high levels of debt to the US); (b) Preserve Free Trade, particularly on food; (c) Thereby increase international credit and trade.

Domestic Economic Objectives • Domestically Churchill sought to: (a) Reduce government expenditure, especially on the Navy; (b) This would enable him to reduce direct taxes, with some compensating increases in duties on luxury goods; (c) More international credit and trade, with lower taxation would, he hoped, secure economic recovery; (d) This would in turn help to reduce unemployment.

Interpretations • Churchill did not claim to be an economist and has sometimes been seen as being very much guided by his officials, not least to the Gold Standard decision. • He was, however, a very political Chancellor: Daunton argues that the 1925 Budget was a major restatement of fiscal policy, not least for political ends. It sought to persuade the middle classes to accept a more onerous post-war tax system, balancing this with welfare benefits for the working classes. In the process, Churchill made the tax system more progressive, and undercut Labour demands for a capital levy.

A Wide-Ranging Chancellor • This political approach to his portfolio might also be seen in the observation of his Principal Private Secretary: ‘The range of his official interests alone was extraordinary’. For instance, to respond to Admiralty demands for money he set up his own study into Japanese naval expenditure. • Yet was there a coherence to his economic objectives linking all this activity, including the return to the Gold Standard?

Expand or Deflate? • After all, the broad aim of Churchill’s policy was expansionist. • However, he did not like what he saw as artificial means to expansion, such as the credits under the Trade Facilities Act 1921 which he cancelled in 1926. • But nor did he like what he in 1927 condemned as the ‘policy of deflation, debt repayment, high taxation, large sinking funds and Gold Standard’ followed by the Bank of England Treasury since 1918, fearing it brought ‘bad trade [and]. . fierce labour disputes’.

Social and Strategic Considerations • A running theme of Churchill’s Chancellorship was that this policy benefited fundholders at the expense of middle class taxpayers and working class wage-earners. This he saw as socially, economically and strategically unwise, noting in 1927: ‘In a few years’ time you will see on the one hand Germany free from debt with a strong credit, a most active industry and low taxation, and Britain with gigantic taxation and an enormous rentier class’.

The Politics of Gold • Churchill, accordingly, was always ready to listen to those like Keynes who seemed to offer an expansionist alternative to Treasury policy. • However, restoring the Gold Standard was not purely deflationary, it could be seen as: (i) Providing cheaper credit; (ii) Aiding global (and imperial) trade.

How to Encourage Enterprise? • Churchill’s preferences for expansion were set out in his first Budget in 1925: (i) Tax reductions to encourage production; (ii) His room for manoeuvre on this was however limited. Accordingly he also sought to encourage the expansion of international trade by debt reductions and the restoration of the Gold Standard.

The Gold Debate: Background • Convertibility of Sterling into gold had effectively been suspended with the outbreak of war in August 1914. • Wartime inflation in Britain led to a large effective depreciation of Sterling against the Dollar (to £ 1 = $3. 40 by February 1920). A huge US trade surplus and net gold imports helped to drive this devaluation, making restoration of British gold payments impossible. • In 1919 restoration of the Standard was formally suspended. This prevented the export of gold and silver bullion. In 1920 legislation required the situation to be reviewed within five years.

Why Return to Gold? • Chaos in the postwar monetary system exacerbated problems of restoring trade. • Historically paper-based currencies had been unstable and prone to inflation. • Gustav Cassel (1923) argued ‘This result has so fully discredited the paper standards in the eyes of the general public that the desire for the return to the gold standard has become very general and very powerful’.

Gold, Stability and Recovery • The Genoa Economic Conference (1922) concluded that currency stability was essential for European economic recovery. • Gold was seen as providing that stability for currencies: in 1925 Churchill fixed the price at £ 3/17/10 per ounce. Effectively this also fixed international currency parities (for instance, a return to the pre-1914 parity of £ 1 = $4. 86).

Defining the Gold Standard • In theory the Standard prevented the over-expansion of credit through requiring a relationship to gold reserves held in the central bank. What mattered, however, was the par of the currency to gold, not the ratio of gold reserves to money in circulation. • As Gustav Cassel (1923) put it: ‘The constant relation to gold must rest upon the simple fact that the internal purchasing power of the currency is in a stable proportion to the purchasing power of gold within a gold standard country’.

Operating the Gold Standard • For a country like Britain, heavily dependent upon imports for food and raw materials, ‘gold bugs’ argued that the Standard would provide price stability. • This because the Gold Standard was seen as an automatic means for recalibrating disequilibria between economies. By tying their value to gold it was argued that it prevented governments from debauching their currencies. • It was also seen as a means of managing finance across the Empire. • Not least, it was felt to have been central to the successful expansion of trade globally before 1914, though in the inter -war years the required co-operation between central banks was not always so forthcoming.

The Road Back to Gold • In 1924 the Labour government set up a committee under Sir Austen Chamberlain which recommended a return to Gold. • Return was strongly supported by the Governor of the Bank of England, Montague Norman, and by Treasury officials led by Sir Otto Niemeyer. • It was opposed by John Maynard Keynes and the banker and wartime Chancellor of the Exchequer, Reginald Mc. Kenna.

Churchill and the Gold Debate • Churchill had doubts about a return to Gold. He was concerned that it might reward the Americans for hoarding gold and hit trade and unemployment. • Keynes’ alternative of a managed currency was, however, seen as likely to replicate the inflationary tendencies associated with paper-based currencies. Nor would it help to restore order to international finance. • Hawtrey subsequently (1927) argued that following Keynes’ prescription would mean ‘a gigantic system of relief works with borrowed money and an evergrowing burden of debt and taxation’.

Reasons for Restoration • In his 1925 Budget speech Churchill argued the Gold Standard would: (a) prevent price fluctuations that benefit speculators but harm wage-earners; (b) establish a common price mechanism throughout the Empire; (c) Protect the City as an international financial centre making a large contribution to the British economy; (d) encourage the Americans to deploy their gold to expand international trade.

Implementing the Gold Standard • The export of gold was restored but not the promise to pay gold to bearers of Bank of England notes. This was in line with Cassel’s warning (1923) that this would tend to increase demand for gold, something which had to be avoided as deflationary. • When the Gold Standard was restored, on 28 April 1925, price levels in Britain were still above the US. Bank Rate was raised to bring these prices down closer to parity.

The Price of Gold? • Mc. Kenna (1926) argued that restoration was delayed by ‘the natural opposition to a reduction in wages, and by the high cost of production on a diminished output’. • These were problems that the Gold Standard might exacerbate, but did not cause: as Cassel (1926) pointed out, ‘It is very desirable that the real shortcomings of the economy of a country should not be obscured by alleging its monetary policy to be responsible for them’. • It did, however, exacerbate export problems for the Coal industry, leading to the 1926 industrial dispute.

Was it a Mistake? • Keynes claimed that the pre-war parity was about 10% too high. • Cassel (1926), in contrast, felt that British restoration of the Gold Standard would help to undermine US dominance of international finance. • Large gold holdings in the US (and France) tended, however, to push up credit and prices there. This produced deflation elsewhere, exacerbated by actions such as the 1930 Smoot. Hawley tariffs.

Gold and Expansion • The restoration of the Gold Standard therefore did not achieve the goals Churchill hoped for, but this was as much because of failures in its co-ordination as because of the Standard itself. • This restoration did not in itself prove sufficient to correct the imbalances in the world economy which had led to calls for its return. • Meanwhile, Churchill sought other, internal, means to stimulate expansion. • This was primarily through tax reductions: (a) of income tax in 1925; (b) the derating introduced in the 1928 Budget.

The Economics of Derating • Intended to relief industry and agriculture of £ 30 m burden of local rates. • These fell heaviest on the depressed industries and led to flight to greenfield sites in low-rated districts. • In the process, derating assisted particularly those businesses most exposed to international trade – that is, those most affected by the restoration of the Gold Standard.

Attitudes to Taxation • Keynes believed that tax tended to be passed on to consumers. • Churchill did not. Entertainment tax, for instance, he felt ‘has not fallen as intended wholly on the consumer but with very painful effects on a hard-working profession’. • Similarly, the betting duty he introduced in 1926 turned out to be difficult to pass on to customers. • Not least, export industries could not pass the tax on to customers because of the competitive environment, so reducing taxes was a way of reducing their costs and allowing them more capital to reinvest.

The Politics of Derating • It was a means of encouraging modernisation in industry without having to use Protectionism which, as a Free-Trader, Churchill wished to avoid. • It was also an alternative to nationalisation. • Keynes claimed that it would primarily help industries that did not need it. However, as Mair points out, because the rates burden was much higher as a percentage of profits for the depressed industries derating was effectively targeted. • As well as a fiscal response to the Gold Standard, it also tied in with Neville Chamberlain’s reforms to local government in 1929.

Overall Goals • Churchill in 1924 -29 sought to produce a noninflationary expansion (a) through restoring financial stability and international credit; (b) domestically, through stimulating enterprise through tax cuts; (c) this was financed by expenditure savings, not least on the Navy.

Stinting the Navy • Churchill has been criticised for cutting capital expenditure on the Navy and the Singapore base. • Yet he had been notably cool towards naval expenditure as a Liberal before becoming First Lord of the Admiralty in 1911 -15. • Both then and in 1924 -29 he sought to find savings, in 1911 -15 by seeking international agreement on halting ship construction and in 1924 -29 by looking, for instance, for cheaper and more effective ways to defend Singapore.

The International Context • Defence costs and debt management were influenced by international security problems and fears. • For instance, France ‘gave up the Rhine frontier in return for a promise by the US together with Great Britain to come to her aid in the event of German aggression. This American promise has been withdrawn’. • The Admiralty wanted Singapore because of the threat of Japan. • Security against Japan was constricted by the limits on shipbuilding in the 1921 Washington Naval Treaty. • Churchill told the Prime Minister in 1924 ‘I do not think there is the slightest chance of [war with Japan] in our lifetime’.

Geneva and After • Lord Robert Cecil urged Churchill to support disarmament because it saved lots of money. • However, the American naval disarmament negotiations in 1927 created additional French anxieties. • Churchill responded that he favoured disarmament ‘provided that it does not mean France will not be strong enough to defend herself against German aggression or England capable of feeding herself in the face of American naval power’. The risk was that instead disarmament talks fuelled the fears that they were intended to allay.

Final Assessment • This limited Churchill’s ability to reduce costs as much as he wished. • He made some progress with domestic expansion, claiming in his 1929 Budget that employment in insured trades was up by 591, 000 whilst the cost of living had fallen substantially. • However, progress internationally was stymied by gold hoarding and American unwillingness to see substantial debt reductions. • This should not detract from the creativity with which Churchill attempted to manage the considerable financial and economic challenges he faced.

Essay Questions • Why was Churchill so concerned to reduce tax levels in the 1920 s? • Were Britain’s economic problems of the 1920 s all shaped by the First World War? • Assess the arguments for and against the Gold Standard. • Why could the restoration of the Gold Standard not be sustained? • ‘All my efforts, such as they have been, have failed’ (Churchill, 1927). Discuss.