The Corner

Leave Gold Alone

The Daily Telegraph’s Ambrose Evans Pritchard weighs in (my emphasis added) on recent gold-standard talk:

The beauty of gold is that it is a store of value beyond political or state control, or largely so.

It is a coldly disassociated asset based on atavistic attachment dating back thousands of years. It is common to mankind, and therefore nigh impossible to suppress. It is, to boot, a safe haven from tyranny, the portable wealth of persecuted peoples over the ages. Once governments link their policies and fortunes to gold through a fixed system, the metal – or its owner – becomes prisoner of abuse. The reason why Franklin Roosevelt confiscated private gold in 1933 is because the Gold Standard blocked his economic strategy.

The linkage to gold in the dysfunctional fixed-exchange dollar system of the interwar years is precisely what made owners of gold a particular target. It is why their wealth was “stolen”.

Quite why gold bugs think that the Gold Standard prevents asset bubbles and excess debt is beyond me. The 1920s saw US debt levels surge to around 300pc to 350pc of GDP. It is very similar to what occurred in our own Noughties up to 2008. This credit creation happened under the post-WWI Gold Standard. The massive build-up in Germany’s external debt in the late 1920s – so like the Spanish build-up under the D-mark Standard (ie euro) in our own era – was directly caused by the perverse mechanisms of the interwar gold system….

The surplus states (US and France) kept monetary policy too tight. They hoarded gold rather than recycling to keep the global system in equilibrium. All the burden of adjustment fell on the struggling deficit states, forcing them to retrench ever deeper into a downward economic spiral. Eventually it engulfed everybody, until the victims seized their chance to escape and regain monetary sovereignty. Only then could they recapture their own precious demand, for their own precious industries. Those that did so early – the UK and Empire, the Scandies – recovered quickly.

Those that clung religiously to gold deflation – one thinks of Pierre Laval’s deflation decrees in 1935, the year before it all fell apart – were among the biggest losers in the end.

As Paul Krugman says [I know, I know], Europe has replicated the worst features of interwar Gold with monetary union. EMU is a D-mark peg instead of a dollar peg. No matter. The mechanism of debt-deflation torture for entire societies is much the same.

You could say that human folly and wickedness debauched the beautiful Gold Standard in the interwar years, but to concede that is to concede the argument. It is to admit that gold does not in fact prevent politicians running amok. It is just another monetary Maginot Line.

And one that imprisons those who shelter behind it.

The similarities between the operation of the gold standard and that fiasco better known as the euro are too strong to be ignored. And they were pretty much inevitable. I mentioned here the other day how the English Conservative, Enoch Powell (1912–98),  a controversial figure to say the least, but undeniably one of the first British politicians truly to grasp the importance of the money supply in the fight against inflastion, was already warning back in the 1970s about the disaster that a European monetary union might bring in its wake.

Here, for example, he is in the course of a parliamentary debate in 1978, roughly two decades before the creation of the euro.

Inflation or deflation, necessitated by the attempt to maintain fixed parities of exchange rate, runs right the way through the story, however, complicated or simple the mechanisms have been. When we had a fixed exchange rate on a gold exchange standard from 1925—I do not need to remind the House and certainly not the Labour Party—this meant that grinding deflation had to be imposed upon this economy.

And that, (in many respects) is what is happening in the euro zone’s periphery.

As I wrote, food for thought. And not just in Europe.

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