It is the second time this century that monetarist dogma has become the official creed of the Government of Britain. The first occasion was in the 1920s when, egged on by the Cunliffe Committee and pressures from the City, Britain was driven to return to the Gold Standard at the pre-war parity -- despite, as we now know, the opposition, if not the hostility, of the then Chancellor of the Exchequer, Winston Churchill. The disastrous consequences, and the reactionary character of this step were brilliantly analysed in a pamphlet by Keynes (a pamphlet far ahead of the times and ahead of much of his own future writing on the subject), in which he branded monetary policy as 'simply a campaign against the standard of life of the working classes', operating through the 'deliberate intensification of unemployment . . . by using the weapon of economic necessity against individuals and against particular industries -- a policy which the country would never permit if it knew what was being done'.1 As the decade wore on, resistance to any 'reflationary' policy intensified. The 'Treasury view' of the 1920s was no more nor less profound than the present views of Mrs Thatcher.
But in 1931 Britain was saved from the horrors of monetarism against her will. The maintenance of the Gold Standard was regarded as the supreme objective, for the sake of which a group of right-wing Labour Ministers, led by the Prime Minister, Ramsay MacDonald, deserted the Party and formed the National Government. But despite the highly deflationary budget which the new Government hastily introduced -- more deflationary, in comparable terms, than the present Government's recent efforts -- the Gold Standard could not be saved.
And with its abandonment, on 18 September 1931, the rule of monetarism came to an abrupt end. The Bank Rate was reduced almost overnight from 6 per cent to 2 per cent, the new Chancellor, Neville Chamberlain, carried out the greatest conversion operation in history (the reduction of the interest on the War Loan from 5 per cent to 3½ per cent, which brought down the whole structure of long-term interest rates) and introduced a protective tariff on all manufactured goods which led to the fastest rate of economic growth in British history.____________________