Speculative Anticipations of Sterling's Return to Gold: Was Keynes Wrong?

The view held by Keynes that there was a speculative appreciation of sterling prior to its return to the gold standard, has been challenged by Gregor Smith and Todd Smith, who argue that expectations of return must have weakened the currency. The authors demonstrate that the positive but decreasing trend displayed in the exchange rate data is consistent with a pattern of autoregressive convergence in fundamentals and that this continues to be true when there is a positive speculative element based on expectations of an early return. Hence, the key features of the data seem compatible with Keynes's views. Copyright 1994 by Royal Economic Society.