off gold stan

New York Times headline 9.21.31

In my previous posts on the Invergordon Mutiny of the Royal Navy, I wrote only about the effects on the Royal Navy. Like so much in life, the mutiny didn’t take place in isolation from other events nor was it pushed off the front page by more sensational news. That crews on some of the storied ships of the Royal Navy had mutinied was the most sensational front page news around the globe.

The world was in the middle of the Great Depression and news of instability in the largest, most admired navy on the globe caused people to worry—a lot. As hard as it is to picture this now, in the 1930s the British Empire stretched around the world. It was the largest empire in history and Great Britain was the most influential country in the country in the world. While the United States had the larger economy in spite of the Depression we pursued a policy of isolationism so we were not nearly as engaged around the world as the British. Hence what went on in London was far more important than what went on in Washington or Berlin or Paris. Then, as now, London was the center of global finance.

Since the Royal Navy was thought of as one of the bedrock institutions which underlay the power and prestige of the monarchy and the British government, for its main fleet to be in the hands of mutineers was shocking. I think a good analogy in our time would be if the US Marines refused to follow orders to simply carry out their everyday duties.


sterling plunges

New York Times 9.20.31

Financial markets do not like uncertainty. The mutiny caused the London stock market to sell off and forced the British Empire off the gold standard. Prior to what was then known as the Great War, all British currency had been backed by gold, a policy which minimized inflation and made for “hard money.” And being backed by gold, you could actually exchange your paper currency of the British pound into gold. (The United States dropped the gold standard in 1932)

Because the British Empire was the leading economic force in the world, they dictated this exchange rate system which pegged all the major currencies in the world to a fixed rate exchange relative to the price of gold. This system broke apart because of massive deficit spending by Great Britain and other Western governments during the First World War.


Winston Churchill as Chancellor of the Exchequer in 1924

Twelve years later, in 1924,  Churchill entered the cabinet of Conservative Prime Minister Stanley Baldwin as Chancellor of the Exchequer. In 1925, the Baldwin government decided to re-instate the gold standard–a disastrous economic decision. Often the re-institution of this policy is blamed on Winston Churchill.

In actuality, Churchill was vehemently opposed to this action and was supported by much of British industry and several of the major commercial banks. Senior officials in the Exchequer, the Governor of the Bank of England and the “establishment” in general demanded this return to the gold standard.

On 21 February 1925, Churchill wrote one of the senior officials in the Exchequer:

“The Treasury has never, it seems to me, faced the profound significance of what Mr. Keynes calls ‘the paradox of unemployment amidst dearth.’ The Governor [of the Bank of England] shows himself perfectly happy in the spectacle of Britain possessing the finest credit in the world simultaneously with a million and a quarter unemployed.”

As strong a personality as he was, Churchill could not stand alone against the wishes of the powerful officials of the Exchequer, the Governor of the Bank of England, the upper classes in general and his colleagues in the Cabinet. So the British government re-instated the gold standard and the system of fixed exchange rates in 1925. This policy tightened the money supply at the beginning of England’s slow economic recovery from the war.

Tightening the money supply slowed the growth of the British economy relative to the economies of the other major powers such as the US. Over time this policy resulted a slow strangulation of the British economy. One of the worst problems caused to the economy by the return of the gold standard was it overvalued the British pound by as much as 25% against other currencies and made British exports more expensive.

This caused the British industry to lose a number of key markets throughout the world. For an economy dependent on exports, this was calamitous. The policy was even more foolish since it blunted the other main economic policy of the government which was to re-capture export markets lost during the war.

Winston Churchill well understood that tightening the money supply through the re-imposition of the gold standard would strangle the British economy. His tutor in this matter was none other than the economist John Maynard Keynes. It is Keynes who advocated an increase in the money supply in a recession/depression. Whenever you hear or read the expression “Keynesian policy” or “Keynesian stimulus,” this is a reference to the British economist John Maynard Keynes.

The massive expenditure by the US Government during World War Two, a classic Keynesian stimulus policy, is what finally dragged the United States out of the Great Depression. (Obviously not everyone agrees with Lord Keynes as he was later known after his elevation to the peerage).

As the years went on, the re-imposition of the gold standard at its parity to the British pound prior to the war, inflicted major deflation in Great Britain. This  forced the Baldwin cabinet into cutting in government spending—much of it taken from social welfare programs which were keeping more than a million members of the British working class from absolute penury.

In 1929, the Great Depression struck, causing a massive dislocation of the economies of the industrialized world. In spite of this, the British government refused to drop the gold standard so as to maintain their high credit rating in international markets. The Baldwin cabinet was forced to make more cuts in government spending—including severe reduction of the military and naval budgets— or estimates as the British call them. This was done to balance the budget without thought as to how and get out of the slump caused by the re-imposition of the gold standard. At this time, Churchill resigned from the Cabinet.

London market sells off

New York Times 9.20.31


In 1931, the crisis came to a head. Gold was flowing out the country and the British government had been forced to borrow from the US and the French to defend their currency at parity to gold. Government expenditure on pensions, unemployment, benefits to veterans rose while revenue declined. A balanced budget would be almost impossible to create. Yet Baldwin was determined to do so because he felt it would damage Great Britain’s prestige to go off the gold standard. This was not a wise decision.

To maintain the gold standard the British had to reassure foreign creditors in order to stem the outflow of gold–which they could not afford to continue for much longer. So against all sensible advice,  government released a balanced budget in 1931. This was accomplished by increased taxes and massive cuts in social spending. This exacerbated the iniquity of the British class system and just as bad, cut military estimates to the bone and more. The budget passed and the savage cuts took effect. This worsened the Depression in Great Britain.

These massive cuts made in military budgets were never made good nor were military expenditures increased until the mid-1930s. Because of the foolish decision to cut the military budgets of the services so much, critical measures such as rebuilding and enhancing the defenses of Malta, of Singapore and even of the Royal Navy fleet anchorage at Scapa Flow, were all to have painful and bloody consequences to the British in the Second World War.

What makes these decisions so damning to the government of Stanley Baldwin is experts at the time predicted the under investment in the military, especially the Royal Navy, would have bitter consequences.

Said Churchill of the Baldwin government after he had been pushed out of the cabinet:

“The government cannot make up its mind, or they cannot get the Prime Minister to make up his mind so they go on in strange paradox, decided only to be undecided, resolved to be irresolute, adamant for drift, solid for fluidity, all powerful to be impotent.”




By | 2014-01-20T00:51:14+00:00 January 20th, 2014|British Empire, Depression, London, Winston Churchill|Comments Off on INVERGORDEN MUTINY FORCES GREAT BRITAIN OFF THE GOLD STANDARD

About the Author:

Charles McCain is a Washington DC based freelance journalist and novelist. He is the author of "An Honorable German," a World War Two naval epic. You can read more of his work on his website: