INTRODUCTION

During the 1920s UK economic performance lagged behind that of many other countries in the world economy. Much of the recent literature has attempted to explain this outcome in terms of the macroeconomic policy regime resulting from the return to a fixed exchange rate at the pre-war gold standard parity (Moggridge, 1972; Broadberry, 1986; Eichengreen, 1992).

During 1870–1914 the value of the Pound was fixed relative to gold. America, France and Germany also sustained a fixed gold value for their currencies for most of this period (1879–1914), implying a fixed nominal exchange rate across the leading industrial economies. A restricted version of this system continued during the First World War: however, the large trade deficit and the low level of gold reserves in 1919 resulted in the formal abandonment of the gold standard by the UK in March of that year. Nevertheless, this significant change of policy was seen as a transitory measure: the aim of the government was to restore the gold standard to the pre-1913 parity as quickly as possible. This was achieved in the budget of 1925. There is now extensive evidence to suggest that the decision to return to the pre-1913 gold parity resulted in an overvaluation of the real exchange rate during the 1920s.