Introduction
United States President Donald Trump aims to maintain the international role of the US dollar as a reserve and payment currency. The history of the British pound sterling suggests that promoting financial stability, limiting tariff use, and strengthening the United States’ geopolitical alliances should be prioritized.
Historical Context: The Pound Sterling in the 1920s
Tokyo – A century ago, in April 1925, Winston Churchill, as Britain’s Chancellor of the Exchequer, made a pivotal decision to return the pound sterling to the gold standard at pre-war exchange rates.
Churchill, much like current US Treasury Secretary Scott Bessent, juggled two objectives. He wanted to maintain the pound’s position as a leading currency within the international monetary system and preserve London’s status as a premier global financial center. However, some influential voices saw advantages in a more competitive exchange rate that could boost British manufacturing and exports.
The reasons behind Churchill’s choice remain unclear. The weight of history—Britain’s preeminent economic position under the gold standard before World War I—pointed towards restoring the previous monetary status quo. The City of London, representing Britain’s financial sector, pressured for a return to pre-war exchange rates against gold and the US dollar. John Maynard Keynes, a prominent critic, had an unfortunate night when he was given the chance to present his arguments to the Chancellor of the Exchequer.
As anticipated, the pound sterling regained its position as a key international currency, and the City maintained its status as a financial hub. However, they now had to compete with New York and the US dollar, which gained importance due to European disruptions caused by the war and the establishment of the Federal Reserve to support US financial markets.
Predictably, British exports stagnated. At current prices, they were lower in 1928-29 than in 1924-25, when the decision to stabilize exchange rates was made.
In this instance, a strong pound and the high interest rates needed to defend its exchange rate proved unhelpful. However, attributing the poor performance of the British economy solely to exchange rates is hasty.
Challenges Faced by British Industries
British industries traditionally relied upon, such as textiles, steel, and shipbuilding, now faced intense competition from newer industrialized nations like the United States and Japan. This situation mirrors today’s challenges faced by the US manufacturing sector from emerging markets like China.
A weaker pound might not have made a significant difference, given the rise of these emerging powers. The tariffs imposed by Britain in the 1930s also failed to revitalize its industries.
Moreover, Britain struggled to develop new industries at the technological frontier (electric engineering, motor vehicles, and durable home goods). The US and other countries adopted new technologies and production methods, like the assembly line, more rapidly. Union militancy discouraged investment, skilled workers were scarce, and work ethic was lacking. These complaints echo those heard today from operators of TSMC’s new semiconductor factory in Arizona or Samsung’s chip manufacturing plants in Texas.
The 1930s, marked by trade wars and a decade-long depression, further compounded Britain’s difficulties.
Lessons for the US Dollar
Despite these issues, the pound sterling’s position as an international currency survived the 1930s. In fact, it regained some of the ground lost to the dollar in preceding decades as a reserve and payment currency.
Britain managed to maintain banking and financial stability, while the US experienced three debilitating banking and financial crises. The UK maintained stable trade relations with the Commonwealth and British Empire under an imperial preference system, nullifying restrictive tariff effects. Additionally, the UK maintained good relations with trading and political allies beyond the Commonwealth and British Empire, including Scandinavia, Middle East, and the Baltic states, where monetary authorities continued linking their currencies to the pound sterling.
The lessons for those seeking to preserve the dollar’s global status are clear: avoid financial instability, meaning prevent cryptocurrency issues from affecting the broader banking and financial system; limit tariff reliance, as the widespread international use of the dollar largely stems from US trade relations with the rest of the world; and maintain the country’s geopolitical alliances, as these partners are likely to view the US as a reliable manager of their foreign assets and keep the dollar as a sign of good faith.
The US, however, seems to be moving in the opposite direction, jeopardizing its financial stability, imposing tariffs haphazardly, and alienating allies. As Churchill once warned: “To build may require patient years of planning and labor, but to destroy can be the thoughtless act of a single day.”
About the Author
Barry Eichengreen, Professor of Economics and Political Science at the University of California, Berkeley, is the author of In Defense of Debt (Oxford University Press, 2021).
Copyright: Project Syndicate, 1995 – 2025
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