When Winston Churchill was named Chancellor in November 1924, he is said to have assumed it was the largely ceremonial post of Chancellor of the Duchy of Lancaster and was as surprised as anyone, given his lack of interest in economics, to find that it was Chancellor of the Exchequer, constitutionally the second most powerful office in the British government. “I was surprised”, he wrote, “and the Conservative Party dumbfounded”.

The controversy that would follow Churchill’s tenure has implications for policy debates today. It all has to do with macroeconomics and exchange rates: how they affect trade and development, whether they should be fixed or floating, and the problems these questions create for policymakers. In the short term, the decisions Churchill made led to the General Strike of 1926, and these debates continue to echo in the longer term.

Churchill inherited a difficult problem: returning Britain to the gold standard at the pre-World War I parity. In 1914, sterling was exchangeable into gold at the rate of £4.25 per ounce, which implied an exchange rate with the dollar of £1 for $4.87. On the outbreak of war, convertibility was suspended to prevent losses of gold and Britain, like other combatants—indeed, to a much lesser extent—issued currency to finance the war. Between 1914 and 1918, total metallic reserves as a share of bank notes plus deposits (currency) fell from 40% to 33%.

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