Read Lords of Finance: 1929, the Great Depression, and the Bankers Who Broke the World for Free Online

years from £10 million to over £22 million, doubling prices.
    In 1810, a parliamentary inquiry known as the Bullion Committee was formed to examine the whole issue. The committee included Henry Thornton, a banker, parliamentarian, brother to a director of the Bank of England, and the most creative monetary economist of the nineteenth century, whose insights would unfortunately be lost by succeeding generations in charge at the Bank. The committee recommended that the Bank resume gold payments as soon as possible, and in order to achieve this goal, begin to contract its credits to banks and merchants and shrink the supply of paper money by withdrawing its notes from circulation. The Bank wisely waited until 1815, when a defeated Napoléon was safely in exile on St. Helena, before taking this advice. Over the next six years, it almost halved the supply of paper money in Britain, driving down prices by 50 percent. And though those years from 1815 to 1821 had been years of riots and agricultural distress, Britain went back on gold in 1821. Over the subsequenthalf century, it transformed itself into the world’s largest economic power. Many believed that the “resumption” of 1821 had been the single most important defining decision in its financial history. That the Bank had been willing to inflict the pain of a 50 percent fall in prices in order to restore the gold value of the pound had set sterling apart from every other currency in Europe, and made it the world’s premier store of value.
    Inspired by this example—and in complete contrast to every other European country—in 1920, the Bank of England chose the path of deflation, matching the Fed and raising interest rates to 7 percent. The budget was balanced. The economy plunged into sharp recession, two million men were thrown out of work. Nevertheless, by the end of 1922, the Bank had succeeded in bringing prices down by 50 percent, and the pound, which had fallen as low as $3.20 in the foreign exchange market on the fear that Britain was headed for devaluation, climbed back to within 10 percent of its prewar parity of $4.86.
    But whereas the U.S. economy, more dynamic and unhampered by a large internal debt, was quickly able to bounce back from the recession, Britain remained stuck. The number of unemployed would not fall below one million for the next twenty years. It soon became apparent that Britain had sustained terrible damage as an economic power during the war. Industries such as cotton, coal, and shipbuilding, in which it had once led the world, had failed to modernize and the traditional markets had been lost to competitors. Labor costs had risen as unions negotiated shorter working hours.
    Norman now faced the uneasy prospect that the only way to follow the example set by his forerunners—his grandfather joined the Court the year of “resumption”—was by keeping unemployment high. But while before the war it might have been politically acceptable to create unemployment deliberately in order to support the currency, in the charged climate after the war—with Lloyd George promising the electorate “a land fit for heroes”—Norman would find himself constantly under pressure to find an alternative.
    T HE PROBLEM OF resurrecting the gold standard went much deeper than selecting new exchange rates for the key currencies, for the war had brought about such a tectonic shift in the distribution of gold reserves that it seemed to threaten the very viability of a monetary system resting on gold.
    Before the war, the four largest economies—the United States, Britain, Germany, and France—had operated their monetary systems with about $5 billion worth of gold among them. The amount of new gold mined during the war was small, and by 1923, monetary gold had increased only to $6 billion. Meanwhile, prices in the United States and the UK, even after the postwar deflation, were still 50 percent higher than before the war, which meant that in effect the real