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The gold standard is a monetary system that entails the use of various quantities of gold to gauge or measure the worth of a given region’s currency. Under this strategy, the countries would convert the money into an agreed amount of gold which would also be the price of that particular amount of gold. The classical gold system was prevalent in the years preceding World War I after which countries such as Britain abandoned it for the fiat system in 1931. These developments were due to a variety of reasons that will be explored in this paper.
One of the primary reasons as to why Britain abandoned the gold standard system was the economic turmoil of the post-war era and the vulnerability of the system to crashing as was the case in 1929 owing to the aftermath of World War I (Titcomb, 2015). Banks were struggling to cope with the demands of the national governments, and commodity prices were collapsing at an alarming rate. Most countries inflated their interest rates as they made attempts attract investors and encourage them to refrain from converting their money into gold. The United States, for instance, had withheld large volumes of bullion and was reluctant to release it for trade as it gave priority to the enhancement of its economic status. Consequently, the global economy suffered adversely forcing England to suspend its utilization within the country. Owing to the lack of unifying organization such as IMF to regulate the operations of the various trade partners caused England to lose confidence in the long-term sustenance of the system.
The UK government was also not pleased by the policies introduced by countries such as the US whereby investors in Paris and New York dismissed the value of the pound which had a fixated value, unlike the other currencies. These rules meant that the bank of England had to exchange gold for pounds at the stipulated rates to make sure that the value of the latter did not deteriorate. These conditions resulted in a budgetary crisis that necessitated a coalition between the Labour Party and the Conservatives who noted with concern the drastic rate at which the country’s foreign exchange reserves were wearing out and thus could not be sustained in the long term (Cawood, 2013).
Another factor that made England abandon the gold standard system was the deterioration of international relations (Bordo, Humpage & Schwartz, 2015). The war strained the relations between nations and hindered trade and exchange of gold and currency across countries. England thus had to seek a strategy that could enable her to sustain the economy with minimal dependence on other nations.
Walter & Sen (2008) explain the role of the working class in forcing the UK to do away with the gold standard through the use of ideas, interests, and institutions. This group usually experienced the most adverse consequences whenever the value of the gold was adjusted. As this lot gained political power, it managed to exert its influence as it advocated for a monetary system to the gold standard.
Britain’s successful abandonment of the gold standard and the consequent adoption of the monetary system with the sterling pound becoming the medium of trade was thus as a result of an aggregation of several factors. These factors include the fragility of the previous system, pressure from the working class, lack of a financial oversight body and poor trade relations. These elements made the option to abandon the gold standard a better choice. The UK has since then used the monetary system and served as a precedent for other countries that followed suit afterward.
Bordo, M. D., Humpage, O. F., & Schwartz, A. J. (2015). Strained Relations: US Foreign-Exchange Operations and Monetary Policy in the Twentieth Century. University of Chicago Press.
Cawood, I. J. (2013). Britain in the Twentieth Century. Routledge.
Titcomb, J. (2015, January 7). How the Bank of England abandoned the gold standard. The Telegraph [London], p. 1. Retrieved from http://www.telegraph.co.uk/finance/commodities/11330611/How-the-Bank-of-England-abandoned-the-gold-standard.html
Walter, A., & Sen, G. (2008). Analyzing the global political economy. Princeton University Press.