Keynes was no fan of the gold standard. In fact, he railed against it. In the mid-1920s, for instance, he pressed Winston Churchill to take England off the gold standard. Curiously, Robert Skidelsky, who’s written a best-selling biography that’s favorable to the economist—Keynes: The Return of the Master—seems to favor the gold standard.
Britain fired the first shot in the 1930’s currency war, leaving the gold standard in September 1931. The US retaliated by leaving the gold standard in April 1933. The pound fell against the dollar, then the dollar against the pound.
While the two main currencies of the day were slugging it out, France headed a European “gold bloc” of countries whose currencies became increasingly overvalued against both, until the bloc collapsed in 1936. A world economic conference, convened in London in 1933 to end the currency war, adjourned without reaching any decision.
Substitute China for Britain and today’s eurozone for the gold bloc and the trend of events today has the same ominous feel.
Ominious? Keynes clearly wanted Britain to abandon gold. In fact, there’s a small library of academic research published over the last several decades documenting how the gold standard helped turn a recession into the Great Depression in the 1930s. A few of the many examples: Lessons from the Great Depression and Golden Fetters: The Gold Standard and the Great Depression, 1919-1939, for instance. As a 2006 academic paper observed, “there is little debate that monetary contraction was a central cause of the Great Depression in the United States.” The overwhelming evidence is that the gold standard was at the heart of that contraction. Indeed, history shows that the sooner countries abandoned the gold standard in the 1930s, the sooner the recovery process began.
That’s hardly antithetical to what Keynes preached. And yet Skidelsky seems to argue that Britain, the U.S. and other countries were wrong to give up the gold standard in the thirties. In fact, Skidelsky’s latest essay suggests that the modern equivalent of abandoning gold in matters of monetary policy is wrong as well. Keynes would disagree.