Role of Gold in the British System of Wartime Economic Mobilization during World War I

The purpose of this article is to investigate the actual role of gold in the British system of wartime economic mobilization during World War I. We consider how gold made up for two kinds of disequilibrium that threatened the system and were the main cause of the abolition of the gold standard system. One disequilibrium related to the British external balance of payments and the other concerned to the domestic supply of money. First, the export of gold contributed to the necessary purchase of goods and debt settlements in foreign countries. It was a prerequisite for compensating for the balance of payments deficit. This compensation was one of the important factors that enabled the British government to maintain a stable rate of exchange between the pound sterling and the dollar. Second, the government’s gold reserve contributed to preserving people’s confidence in money. The government satisfied the great demand for money chiefly by issuing a large number of inconvertible “currency notes” without regard to the gold reserve. While the government announced that the issue was emergent and temporary, it made efforts to collect as much gold as possible to keep the proportion of the gold reserve to the banknotes issued by the Bank of England. It was not until the people felt confident in the banknotes that the government could issue a large number of currency notes. Thus, gold played a significant role in the British system of wartime economic mobilization in both external and internal aspects.