Exchange rates and the financial press, September 1931-April 1932

"There has been a tendency amongst inter-war economic historians to examine the dramatic effects of the 1931 financial crisis on the British economy purely in relation to Britain’s abandonment of the gold standard in September 1931, and the subsequent introduction of the Exchange Equalisation Account in the spring of 1932. The movement of the sterling-dollar exchange rate between these two events, however, has received comparatively little attention from scholars. Sterling depreciated rapidly following Britain’s abandonment of the gold standard, moving from $4.86 to close the year at $3.36 (although the main fall came after the middle of November). The early months of 1932 saw a recovery, and by the spring sterling had risen to around $3.80. Eichengreen and Broadberry both interpret the initial fall and subsequent recovery of sterling as an instance of Dornbusch’s theory of exchange rate overshoot, whereby the interaction between sluggish goods markets and hyperactive asset markets necessitated the exchange rate overshooting its long-run equilibrium. The purpose of the paper is to conduct a wider survey of interpretations by comparing the Eichengreen/Broadberry explanation with those offered by contemporary writers. The intention here is to widen the scholarly debate surrounding the movement of inter-war exchange rates by drawing on the ideas an opinion of the contemporary financial press (and, in particular, on the work of the financial journalist, Paul Einzig) in order to gain insights into contemporary economic behaviour. A preliminary survey of the financial press from this period has already highlighted a variety of factors that appear suggestive in explaining the dramatic movement of the sterling-dollar exchange. The key theme of this paper will be an examination of contemporary insights into constantly changing degrees of market confidence. It will be argued that many of these insights have been ignored when the events surrounding the volatility of exchange rate movements are examined through the prism of Dornbusch’s overshoot model. One example that will be considered, associated with the upswing of the sterling-dollar exchange during the early months of 1932, concerned evolving market opinion regarding London’s future position as an international financial centre. The rise in the exchange was interpreted by Einzig as evidence of a growing realisation within the financial markets that other centres, most noticeably New York or Paris, were incapable of capturing London’s pre-eminent financial position. America, it was argued, was unable to demonstrate the strength and soundness of her financial machinery, while it became apparent that France was unable to accept the responsibilities that such a position would entail. Another example that will be examined concerned particular, well publicised events that financial commentators believed had led international financiers to re-evaluate their interpretation of Britain’s financial probity. One such event was the spectacular phenomenon of voluntary early payment of income tax in January 1932. In its emergency budget, the newly formed National government had both raised the standard rate of income tax from 4s.6d. to 5s., while reducing the exemption limit for unmarried persons from £130 to £100, and for married persons from £225 to £150. With the next instalment of the income tax set for 1 January 1932, the nation had been requested to pay promptly and not to defer payments until the final notice. The amazing response to this request was reported in The Times on 2 January 1932 as striking evidence of the “patriotic way in which every one seemed anxious to help in the national necessity."" In Birmingham, it was claimed that the percentage of the total charge for one district alone was ""about six times"" that of the 1931 level; Cardiff officials reported they had ""never known anything like it""; while an official in Leeds described the rush to pay as ""entirely without precedent."" (The Times – 5 January 1932). It was later reported that the Exchequers receipts had improved, in the first nine days of 1932, by over £9.5 million. (The Times – 13 January 1932). Although pressure on collectors eased by the second week of January, sizeable payments of income tax and surtax continued until the end of March. Although there was little material effect of such early payments, a number of contemporary financial commentators argued that the press – and in particular the foreign press – had interpreted the actions of British tax-payers as a sign of Britain’s determined response to importance of sound finance."