208 The Domestic Politics of International Monetary Order: The Gold Standard
The international segment of the financial sector was joined in its quest for
sound currency by a powerful new economic group that emerged as a result of
the wars. This group was composed of the owners of British government bonds
(Consols) that had been issued in vast quantities to finance the wars at a time of
high prices and interest rates. There were roughly 17,000 of these “fundholders.”...
Depreciation was decidedly costly to the fundholders, because it reduced the
purchasing power of the Consols’ dividends and, through the rise in interest rates,
reduced their capital value as well. If the inflationary trend could be reversed, the
fundholders—who had bought into the national debt with depreciated currency—
would receive repayment in a currency with much greater purchasing power. In
effect, deflation—the requisite of the return to gold payments—would produce a
large bonus for fundholders as the real value of the war loans and interest payments
rose. Indeed, interest on the war debt came to absorb over half the government’s
total revenue by 1827, redistributing wealth from taxpayers to investors.
The gold standard thus had a formidable political constituency behind it. It
was supported by the established center of wealth and power in England (the
landed aristocracy) and the economy’s most dynamic advancing sectors
(international banking and finance). With the addition of the country’s “first investing
public” (the fundholders) it is not surprising that England returned to gold at the
prewar parity as soon as the war emergency permitted....
INTERNATIONAL EFFECTS OF
ENGLAND’S MONETARY PRIORITIES
An important international consequence of England’s early and unfaltering
commitment to the principles of the gold standard was the full globalization of
the London money market. The immutable commitment to pay in gold and to let
market forces determine gold flows meant that sterling was as “good as gold” for
all international purposes. Systemic factors, in turn, provided the demand for sterling
facilities. England’s position as the world greatest trading nation meant that
foreigners were continually earning incomes in Britain or in countries making
payments there, and also continually making payments to Britain or to countries
earning incomes there. Sterling was thus attractive both as a unit of account and
as a medium of international exchange, and London was positioned to serve as
the world’s great settling center for commercial contracts—huge sterling balances
were built up in a system committed to the gold convertibility of sterling. In
addition, England’s head start in industrialization combined with the policy of
free trade to generate a huge stock of wealth and savings available for loan and
investment abroad. With the gold standard firmly in place English bankers, financiers,
and investors were no longer deterred by the possibility that unfavorable exchange
rate movements might cut deeply into profits. The great expansion in foreign
short- and long-term lending that followed further internationalized the London
money market. With London operating both as the “clearinghouse” for the world’s
commodity and product markets and as its primary source of capital, foreigners
were obliged to keep working balances in London to meet their short-term