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 Smith and Smith, who argue that expectations of return must have weakened the currency. We demonstrate, first that the positive but decreasing trend displayed in the exchange rate data is consistent with a pattern of autoregressive convergence in fundamentals; and second 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.