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There is some truth to this. I just finished reading John K. Galbraith's "The Great Crash 1929" and he does blame the 1925 decision by Winston Churchill (then Chancellor of the Exchequer) to set the Pound exchange rate (on the gold standard) at pre-WWI levels.

Galbraith wastes no time calling Churchill an economic ignoramus (funny, that, appointing such a person to be Chancellor) and attributes the chosen rate (nearly $5 to the pound) to sentimental attachment to a 15-year-old figure. It may have been that the figure was suggested to him by people like Lord Montagu Norman, but Galbraith doesn't go into that.

What happened then was that the European central banks pressured the US to raise its interest rates to allow them to get rid of their surplus capital. Devaluation of the European currencies would have been the proper course of action in this case, I suppose, but the UK had just adopted the gold standard and the exchange rate was not supposed to be changed every 6 months.

The resulting rush of money into the US fuelled the speculative bubble leading up to 1929.

The rate cut by Montagu Norman in the autumn of 1929 is also not mentioned by Galbraith. In fact, he clearly states that the bull market ended on Labor Day weekend (first weekend of September, for those non-USians out there) though it took two months to crash.

It also appears that in 1929-32 Hoover actually did all that he was allowed to do by the establishment, which was intent on fiscal conservatism and keeping inflation down.

We have met the enemy, and he is us — Pogo

by Carrie (migeru at eurotrib dot com) on Wed Mar 5th, 2008 at 06:40:04 AM EST
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