Churchill's plan to put gold back into the system of money was not the problem.
Winston Churchill was called a "Renaissance Man" because he did so many things well. Sandhurst educated soldier, journalist, painter, historian, world traveler, Nobel Prize winner, member of Parliament, President of the Board of Trade, Home Secretary, First Lord of the Admiralty, Secretary of State for the Colonies, Chancellor of the Exchequer, twice Prime Minister, statesman, wartime leader, world-class orator. Even though he had both wins and failures, he is still one of the most well-known and respected people of the 20th century.
To fully understand someone, we have to accept their whole life, flaws and all. No person is more than human. Everyone makes mistakes. No one has all the answers. Even the best mess up sometimes.
One of Churchill's biggest mistakes came from the fact that he never learned enough about economics. I'm a fan of and supporter of the gold standard, but I think that when Churchill tried to reconnect the British pound to the yellow metal, he made a mistake that turned out to be very bad for Britain and the rest of the world.
Churchill struggled with money issues, and this was clear in how he handled his own money. He was always going to casinos, bad at investing in stocks, and always late paying his bills. He always went over the limit on his bank account. He spent money he didn't have on expensive wines, liquors, and smokes. He was always late paying his taxes. David Lough, a scholar, wrote a book in 2016 called No More Champagne: Churchill and His Money. In it, he said that the great man "lived most of his life on the edge of a financial cliff." Luck, fame, and ties helped him stay out of debt more than anything else.
During the terrible events of World War I, Britain stopped letting the pound be changed into gold. By doing this, the government was able to make a lot of paper money that it wouldn't have been able to do if it only had gold. The value of the pound went down, and prices went up very quickly. At the beginning of the 1920s, people started talking about whether or not Britain should go back to the rules of the gold standard.
Churchill was against putting back gold backing at first. He thought that smart people could figure out how to handle paper money. When he became Chancellor of the Exchequer in 1924, which is the same as being Treasury Secretary, he changed his mind. In 1925, when he made his first budget for the country, he called for a return to the gold standard. He told the government:
We are often told that the gold standard will shackle us to the United States…I will tell you what it will shackle us to. It will shackle us to reality. For good or for ill, it will shackle us to reality. That is the only basis upon which we shall be standing, and I believe it to be the only basis which offers any permanent security for our affairs. That is my first broad reason. The foundation of Great Britain’s economic policy must be, as far as possible, based upon reality…I say that what is wanted in the general interest of the wage-earning classes of this country is a steady, trustworthy, honest, and, if possible, uniform standard of value.
The problem with Churchill's plan wasn't putting gold back into the monetary system; it was putting it back at the rate it had before the war, instead of a rate that showed how bad the paper pound had become. Churchill was too proud to admit that inflation had made the pound less valuable, so he brought back the ability to exchange pounds for gold at a rate that made it look like the government had never raised prices. This meant that the exchange rate between the pound and the US dollar was set at £1 = $4.86 instead of £1 = $4.40, which was the free market rate.
Churchill wanted Britain's economic policy to be based on "reality," but in 1925, he didn't do that very well. In fact, the pound wasn't worth what his rate said it was worth.
In his great book Understanding the Dollar Crisis, which he wrote before he died, the late economist Percy Greaves of the Austrian School described this flaw. Greaves, Murray Rothbard, Henry Hazlitt, and Hans Sennholz were the four best economists I've ever met. All of them agreed with Greaves's explanation of Churchill's mistake:
When England went back on the gold standard in April 1925, with the pound valued at $4.86, she had raised the value of the pound about 10 percent above its average value of about $4.40 on the open market the previous year. This meant that England, which operated largely as a factory, importing raw materials and exporting finished goods, had raised its export prices by roughly 10 percent. For Americans, buying a British product that cost a pound sterling, the price was now $4.86 instead of the earlier $4.40.
This apparently small mistake in setting prices led to a chain of bad things. Britain's export industries, especially coal, were hit hard, which led to strikes and slowdowns.
At the phony exchange rate that Churchill set for the pound compared to gold and the dollar, Britain would have given gold to the US. To help prevent this, the Federal Reserve Bank of the United States lowered interest rates at home and weakened the dollar on purpose. In other words, the U.S. central bank did things to make the dollar weaker than it really was so that Britain could act like the pound was better than it really was.
We know what happened next in this sad story. Much of the increase in currency and credit, as well as the overly low interest rates and Roaring 20s boom that led to the Great Depression, were caused by Churchill's mistake and the Fed's attempts to cover it up. (See Great Myths of the Great Depression for more on this sad story of failed attempts to help during the Great Depression.)
In 1925, the best thing for Britain to do would have been to recognize the real worth of the pound and keep it stable by making it possible to exchange it for gold at the market rate. The Great Depression might not have happened if the British and American governments hadn't played around with their money in the 1920s and afterward.
There's no question that Winston Churchill meant well for the economy. But good goals are never enough on their own. They need good business more than anything.
