Monetary Policy, 1914-1939

At the outbreak of World War I the pound sterling was the dominant international currency and the Bank of England, although still a privately-owned institution, operated what monetary policy there was. At that time the chief aims of the Bank were to preserve the gold convertibility of the pound, promote the international standing of the City of London and protect the soundness of the domestic monetary system. World war, the economic disruption that followed in its wake, the economy’s continuing weaknesses throughout the inter-war period and the Great Depression of 1929-32 were to test traditional monetary arrangements and enforce change. In the case of policy, most changes affected the determination and defence of the international exchange value of sterling which was in the process of losing its former pre-eminence as a reserve currency. More generally, the economic pressures of the period called for greater discretion in the use of monetary policy and in the choice of instruments for implementing it. Inevitably the exercise of such discretion on matters of high policy became a political issue. Consequently, the inter-war years witnessed a shift of responsibility away from the Bank towards government. The Bank lost much of its nineteenth-century independence but, of course, the Bank governor continued as the government’s main adviser on monetary affairs and the Bank retained its central position in the application of policy.