What the Sterling's Past Can Tell Us About the US Dollar's Future

An America keen to preserve its currency's global status should learn lessons from how the UK handled similar trade-offs

- Barry Eichengreen

In April 1925, a hundred years ago this month, Winston Churchill, in his capacity as Britain's chancellor of the exchequer, took the fateful decision to return pound sterling to the gold standard at the pre-war rate of exchange.

Churchill then, not unlike US Treasury Secretary Scott Bessent now, was torn between two objectives. On one hand, he wanted to maintain sterling's position as the key currency around which the international monetary system revolved and preserve London's status as the leading international financial centre. On the other hand, he, or at least influential voices around him, saw merit in a more competitive—read 'devalued'—exchange rate that might boost British manufacturing and exports.

Why Churchill chose the first course remains uncertain. The weight of history—British economic pre-eminence under the gold standard prior to World War I—pointed to restoring the monetary status quo ante. The City of London, meaning the financial sector, lobbied for a return to the pre-war exchange rate against gold and the dollar. The most articulate opponent, John Maynard Keynes, had an off night when given an opportunity to make his case to the chancellor.

The effects were much as predicted. Sterling regained its position as a key international currency, and the City its position as a financial centre. Now, however, they had to contend with New York and the dollar, which had gained importance, owing to disruptions to Europe from the war and the establishment of the Federal Reserve System to backstop US financial markets.