Chapter CXXXV: All That Glitters.
Broadly speaking there are three ways to support a currency: back it with a precious metal; back it with someone else's currency; or back it with a central bank. The unspoken fourth option is just not to support the currency at all and let it float, but no 1930s Central Banker would dream of suggesting this option, particularly given the British experience after leaving the Gold Standard in 1931. Of the three acceptable options, the second is something of a fudge and doesn't really solve the problem, only reduce it in scope. An example would be the Sterling Area, the countries in that group left it up to Britain to control and support the international value of Sterling against the Dollar, Franc, Mark and so on, but they still had to maintain the 'peg' between their currencies and Sterling. Admittedly as the Sterling Area mostly consisted of the countries of the Empire and those with close economic links to Britain this was a relatively easy task, their economic fates were already heavily intertwined with Britain. For the unofficial members of the Sterling Area, such as Japan which had decided in 1932 to 'peg' the Yen to Sterling, they received no such support but still contributed to a virtuous circle that support the currency: more countries joined the Sterling Area; trade increased; economies rebounded; there was more confidence in the Pound; and so more countries saw it as the key currency and wished to join the Sterling Area. Beneficial as this undoubtedly was it did pile pressure upon London to maintain the value of the currency, which leads us onto the third option. After leaving the Gold Standard the British financial authorities had had no wish to burn further reserves defending a new level (and in any case were somewhat short of said reserves, hence the devaluation) so determined to let Sterling float. This did not go particularly well. While the Bank of England continued to intervene to 'smooth' daily fluctuations there were still massive gyrations, in dollars terms the pound crashed from it's 'Gold Standard' value of $4.86 down to barely over $3, then rocketed back up to $4.5 dollars, all in less than six months. The City, and the wider business community, made it clear this was causing havoc to the economy and so the Exchange Equalisation Account was introduced, a fund controlled by the Treasury but operated by the Bank of England. The EEA had far larger resources than the Bank alone and a target band to work with, so by late 1932 had stabilised Sterling, though by then it found it's main job was to prevent further rises in the currency rather than stopping it falling. Indeed in 'defending' the upper limit of their target band the Bank found itself accumulating ever larger quantities of Gold and foreign exchange as it sold Sterling into the market to weaken it, rebuilding the reserves that had been lost scant years earlier trying to stop the pound falling.
A contemporary one pound note from the Bank of England. The 'Promise to pay the Bearer on Demand the sum of' had never actually been true as the UK had returned to the Gold Bullion Standard rather than the classic Gold Standard. The difference was that under the Bullion Standard no gold coinage circulated and the Bank had no duty to redeem notes for gold, so declined to do so. Instead that Bank was required to sell 400 oz gold bars ('Bullion') on demand for 77s 10½d per ounce. That made a single bar cost in the region of £500,000 in today's money (relative to average earnings), so in practice almost no-one outside of banks and merchants were doing much trade with the Bank. That limited group still generated enough demand for Bullion to force the National Government off the gold standard.
We now come to the first option on the list, piling up large amounts of precious metals in a vault and declaring your currency was exchangeable for a fixed amount of said metal. The summer of 1937 saw several countries that had chosen this route grappling with the problems it brought and applying radically different solutions. We begin in Switzerland where the Gold Bloc was having another conference, the previous one having gone so well. Gathered in Geneva were the French, American, Dutch, Belgian, Polish, Luxembourgish and Swiss finance and foreign ministers, the last major (and not so major) economies that were clinging to the Gold Standard. The location was considered auspicious, the offices of the League of Nations 'Economic and Finance Organisation', a body who's Gold Delegation could almost be considered an extra member of the Bloc given their strong position on the stability of gold and the foolishness of abandoning it. With the conference duly opened, and given a veneer of academic respectability by a speech from the League's chief economist, the Bloc were faced with the question of Italy. Officially Italy was on the Gold Standard and so had asked to attend, however Rome had abandoned two of the key tenets of the Standard (convertibility between the currency and gold and a minimum of 40% of the circulating currency backed with Gold reserves, in 1934 and 1935 respectively). Despite this the Lira had maintained it's value and not been devalued, though this was a much due to the personal prestige Il Duce had poured into the 'Battle of the Lira' as any coherent economic policy. The Bloc thus faced a choice, if the main concerns were economic and preventing further devaluations, then bringing Italy into the group would both bolster their credibility and encourage Mussolini to carry on supporting the Lira. In the end however, Italy's request to join was declined, Rome was deemed as
de facto not on the gold standard due to it's earlier actions and the purity of the Bloc's commitment to gold was maintained. With this vital decision over, the group turned to other matters, not least tariffs and the co-ordination of central bank and finance ministries. As before a few minor tariffs were mutually lowered, though not in any area a country deemed sensitive or strategic (descriptions which turned out to cover most of the economy) and a effort to instead raise tariffs on non-Gold Bloc countries soon faltered as the group contemplated the inevitable reaction from the rest of the world. The co-ordination efforts however went well, the Banque de France and Federal Reserve Bank of New York had been co-operating for years with short notice currency loans, gold swaps and the various other tools needed by Central Banks fending off speculators, the conference agreed to expand this to include the entire Gold Bloc. Further co-ordination however was hampered by the ambitions of the two main powers in the Bloc, both New York and Paris dreamed of replacing London as the pre-eminent financial centre and knew the other was their main rival in this. Fundamentally however the group agreed to stay the course, confident that in the end the sacrifices required to remain on Gold would be vindicated. The extent to which this confidence was shared by their electorates, still suffering under the effects of the Depression, is a different matter.
On the other side of the world the Chinese government was also contemplating it's currency's relationship with precious metals, though in contrast to Geneva the metal in question was Silver and China was very much not staying the course. For historic reasons Silver had always had more resonance in China than Gold and so was the natural choice for a precious metal to back the currency. The Silver Standard, which went back to at least the first introduction of the Yuan in the 19th century, had served China well during the Great Depression, though ironically it did this by collapsing in value. As the Silver price plummeted so did the Yuan, devaluing the currency and giving the country's exports an edge. This, along with the large Chinese internal market, allowed the country to almost avoid the Depression entirely. Sadly for China this advantageous situation would be destroyed by one of the more unusual pieces of law to emerge from the US Congress; the Silver Purchase Act of 1934. To the outsider it seems strange that an industry that employed fewer than 3,000 people and was, at best, a rounding error in the national economy could hold the US Federal government to ransom. However those handful of mines were scattered across seven sparsely populated States and gave the silver mining industry a solid, and bi-partisan, caucus of 14 senators and a large number of congressmen. Thus an industry valued at barely $30 million a year (where peanut farming alone produced more than $50million) was able to ram the Act through Congress with a combination of wild promises, favours to the agriculture lobby and legislative blackmail. It was variously promised it would rebuild the mining industry, re-vitalise the mid-West economy, expand the money supply and restore confidence in the dollar. The Act of course failed to do all of those things, what it actually did was require the Federal government to purchase Silver until the price rose five fold or the national Silver reserves were equal to a third that of the Gold reserves. To aid in achieving these wildly ambitious targets the Act also nationalised the entire American Silver stock, but this yielded nowhere near enough metal to meet the objectives and so large scale purchasing began. These efforts soon drained all the Silver out of the US economy and, as domestic Silver mining did not recover (the mines had been in decline for reasons beyond just the Silver price) the purchases began sucking Silver in from abroad, particularly from the last major country on the Silver standard; China. Traders hastened to buy Chinese silver and sell it to the US government and this served as a deflationary shock (less Silver meant less currency could be in circulation, assuming the minimum reserve requirements were kept) which was enough to push the Chinese economy into a severe recession. While the US government was aware of this problem, the China Lobby had made sure of that, US Secretary of the Treasury Joseph P Kennedy made it clear that domestic concerns were more important and the purchases would continue.
A typical small scale Mexican Silver mine in the early 1930s. As one of the leading producers of Silver Mexico should have benefited from the massive US purchases, unfortunately they had also chosen to use the Silver Standard to back the Peso. The government was soon forced to abandon the standard, float the Peso and reduce the silver content in their coins, which had ben worth more melted down than as currency. The mining issues were, if anything, worse. The mines mostly foreign owners, looking nervously at the railroads that had been nationalised at below market rates a few years earlier and at mining law 'reforms' which promoted workers co-operatives taking over mines, reacted as one would expect; they used the boom to pay larger dividends rather than invest in mines they might soon lose.
Into this bleak scene entered the unassuming figure of Frederick Leith-Ross, chief economic advisor to His Majesty's Treasury. British interests in China were considerable, some £200million of direct investment in Shanghai and the wider Yangtze Delta and River, ownership of 40% of all shipping to and from China and finance, insurance and chartering for much of the rest. To protect these interests Britain offered to assist in putting China's finances back in order and share their experience of floating a currency, this offer was gratefully accepted and prompted the despatch of the Leith-Ross Mission in late 1935. That such a senior figure was sent indicates the importance of this to London, or at least it's importance to those in the City and the Bank of England who had connections in the Treasury. While notionally an economic mission the wider strategic implications were obvious and, as was traditional for the time, the Foreign Office remained the proverbial 'Hotbed of Cold Feet'. Well aware of Japanese designs on China, the Foreign Office were concerned the Leith-Ross mission would be successful and that Britain being seen to aid China would anger Japan. In line with their preferred policy of appeasement the Foreign Office staunchly opposed the mission and tried it's best to bureaucratically undermine it in London. These efforts were interrupted as the Abyssinian Crisis blossomed into war, so attention naturally left the Far East and focused on the Mediterranean. By the time interest could be spared for China there was a new Prime Minister and a sea-change in government policy which was against appeasement and less narrowly focused on European affairs. Leith-Ross had not been idle while war was raging, he had successfully prepared the Chinese institutions for leaving the Silver standard and helped setup a new 'Currency Board' to support the Yuan in the future. In these efforts he had made liberal use of the carrot and the stick, though it should be noted the stick was mainly used on the local offices of the British banks in China. It had taken a King's Regulation to make it clear to the leading British bank in the region, the Hong Kong and Shanghai Banking Corporation (HSBC), that they were going to accept the new, non-Silver backed, Yuan at par. But once they had fallen in line the rest of the British banks and traders followed as did the rest of the international banking community in China.
While Leith-Ross had achieved all that on his own authority, he could not authorise the vital next step before China officially could float the currency; a very large hard currency loan. No longer required to hold Silver the Chinese authorities could liquidate those reserves on the open market and use the proceeds to form new hard currency reserves to support the Yuan. However with a change of US president the Americans were no longer buying Silver quite as frantically and so China selling its substantial reserves on the market all at once risked crashing the price. Thus China was requesting a large loan, in the region of £20 million (to quote our typical comparison HMS
Ark Royal cost £3million, so this was not a small sum) to help establish the board until the sales could be made at a slower rate. Naturally there were doubts as to whether the money would actually be used for those purposes, what would happen to the Silver sale proceeds and if the loan would be repaid; some 80% of the Chinese budget in 1935/36 went on the armed forces, existing loan repayments and the cost of tax collection, not a set of figures which inspired confidence. Leith-Ross, who by now had developed strong connections to the Nationalist government, was aware of the concerns and had agreed various mitigations with the Chinese; there would be permanent British advisors on both the Currency Board and on the board of the Central Bank of China, the inspector-General of Customs would be re-organised by the British (customs being the bulk of Chinese government revenue) and the Treasury would provide advice on restructuring existing debts and training on tax reform. Aside from strengthening the Chinese economy, these measures would effectively bring the nation into the Sterling Area, a considerable prize. Freed of currency and exchange concerns, and with the assurance that Customs would be applied according to the law not 'local interpretation', a boom in Anglo-Sino trade could be expected to follow.
The Imperial Airways RMA Dorado at Kai Tak Airport, Hong Kong, the first scheduled international flight to land at the airport. While the de Havilland D.H.86 could notionally carry a dozen passengers, the RMA (Royal Mail Aircraft) designation clearly shows that Imperial's prime concern was carrying Air Mail, the route from Penang to Hong Kong having been surveyed and developed as part of the Empire Air Mail Scheme discussed in Chapter CXXIV. However as the British began re-establishing their presence in China passenger numbers would climb and Hong Kong would become the regional hub airport, linking China to French Indochina, the American trans-Pacific route via Manila and the wider Imperial Airways network. Initially the 10 day journey from London was seen as a vast improvement over the month long sea voyage, but soon the Chinese/Hong Kong business community would be joining Australia and New Zealand in demanding a passenger only 'direct' flight, one that cut out all the mail stops and got the journey time down to a week or less.
This optimistic vision from Leith-Ross was not uniformly accepted in London, not all of his Treasury colleagues were as confident as him about the ability of China to manage a currency or repay the loan. In King Charles Street the Foreign Office, while grudgingly resigned to the end of appeasement, was still seething at what they saw as the Treasury getting involved in Far Eastern Policy, so naturally opposed the loan. The threat from Japan was once again highlighted along with the precarious nature of the British defences in the Far East; the Eastern Fleet may have been safely in Singapore but the 'Gin Drinkers Line' fortifications in Hong Kong were incomplete, the Far Eastern Air Force under-strength and the new Territorial forces in Hong Kong and Malaya untrained. The service ministries broadly agreed with that, also taking the opportunity to say the increased Japanese threat clearly justified an increase in spending, but also made clear that the they would have those measures complete by 1937 as had been agreed at the Imperial Defence Conference. Domestically the big intervention came when the Chancellor Leo Amery over-ruled the Governor of the Bank of England and confirmed that the loan didn't actually require any additional spending. It could be classified as a Sterling line of credit between the Bank of England and the Chinese Central Bank, so while the Treasury had to guarantee the loan the government didn't actually have to put any money up (as long as the Chinese paid up of course). This had the happy side effect of making it harder for any funds to be embezzled, as the credit could only be drawn down if the Currency Board needed to intervene to defend the Yuan and there would be British officials on both the Board and the Chinese Central Bank to confirm this actually happened. Overall then the loan was never in doubt, for the Imperially minded Prime Minister Austen Chamberlain it was a small price to pay to strengthen British interests in China and the wider Far East.
So in the early Summer of 1937, while the Gold Bloc were desperately convincing each other that precious metals were the one true way to support a currency, the Chinese finance ministry was celebrating the final large Silver sale. The Bank of England's line of credit, which had been heavily drawn down in the early months to support the currency, had been paid back; with the sales complete China now had it's own hard currency reserves. Guest of honour at the celebration was of course Frederick Leith-Ross himself who made the journey on the now regular London to Shanghai air route. As a sign of Anglo-Sino co-operation, and a gesture to Chinese sensibilities, the final Hong Kong to Shanghai leg was flown by the Chinese National Air Corporation in their brand new Bristol Blackpool airliners. As the celebrations continued the Chinese government hoped to put it's economic concerns behind it and looked to the second half of the decade with confidence and hope.
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Notes:
3,500 words on inter-war economic policy and grand financial strategy. I will wager you will not see the like of this in any other update anywhere on this forum. Some might consider that a good thing. From the top;
Lots of countries still on gold in Butterfly, the Gold Bloc OTL died in 1936 but here it staggers on. The Swiss and (Sort of) the US were the only survivors and even they had devalued by this point (i.e. you could still convert your currency to gold, just far less gold. And of course normal people couldn't actually exchange gold only banks). Italy did indeed do all that mucking about but had devalued by late 1936. Here Mussolini is even less keen on losing face by admitting defeat in the Battle of the Lira (genuine OTL phrase he used) so has not devalued. I am sure this decision will not cause any sort of problems at all.
The Sterling Area was very much a thing with members from Argentina to Norway as was Japan's choice to peg to Sterling, all that and the exciting movements of the pound are OTL. The Exchange Equalisation Account was also a very busy body keeping the Pound within it's band. All this influence and power dragged on post-war, even as late as 1950s the BIS reckoned 55% of global currency reserves were in Sterling, followed by Gold and only then Dollars. Random minor Butterfly - No Fort Knox in Butterfly. OTL the US piled up Gold Reserves in the late 1930s as people shipped it out of a risky looking Europe and swapped it for dollars at the artificially low rate the US had fixed after devaluation. This gold needed storing, and as per policy that store had to be in-land, hence Fort Knox. With the US still fixed at the high level, and the US economy doing badly, none of that is happening.
The Silver Act is OTL, because I wouldn't have the audacity to make something like that up, because it is ridiculous. Interestingly Abyssinia and Persia both on the Silver standard at that point so suffered as well, arguably this weakened Abyssinia prior to the Italian invasion, though they were probably doomed regardless.
On the subject of China, the Leith-Ross mission did happen and Britain did help the Yuan move to a currency board system. However OTL the loan didn't happen for a lot of reasons; The FO was much more concerned about Japan, appeasement was still policy, the US was more interested in the region and concerned about British influence in China, etc. So OTL there was joint Anglo-US support for the currency and some co-ordination around Silver sales/purchases, etc. That said some of the mitigation measures are OTL, particularly around British involvement in customs. Treasury training is new but with Britain taking more risk they would want more reassurance over the loan.
Leith-Ross did become something of a Sinophile, but in a very old school, slightly condescending way. For instance he thought the Chinese could run a Currency Board ‘as well as, say, the average Eastern European country’, which was quite the radical statement to make at the time but still manages to condescend to everyone involved.
Imperial Airways did run mail (and very few passengers) to Hong Kong and the Dorado is OTL, but the proper EAMS seaplanes never made it that far, though they did have posters printed showing Imperial running to Shanghai so there were plans.CNAC existed but was part owned by PanAm so used DC2s and similar, that's been butterflied due to stronger British interest/pressure, so now it's part British owned and flying proper British planes.
