Jul

18

My favorite economic witticism (I think it's funny; others may not) is R. G. Hawtrey's comment that "currency is better explained in terms of credit than credit in terms of currency". Hawtrey thought it was self-evident that money existed in a society only because there was a government that required money to be used in the payment of taxes. In that sense he agreed with the Paulistas; in a perfectly free world there would be no need for legal tender because, in the absence of a government, people could freely agree on whatever they wanted to use for the settlement of private accounts. But, with governments and their monopoly authority, the payment of debts became a matter that involved "policy" - i.e. making certain the mandarins got paid for sitting and talking and writing and meeting. For governments to exist, money had to be invented because, unlike private parties, the government had nothing to offer in exchange.

Hawtrey had no success in convincing others in his profession that the importance of the gold standard was to let people go back to speculating about each other's credit and stop worrying about some final settlement of accounts into a sovereign currency or currency of all sovereigns. Whether or not a country stayed on the gold standard, left it, or tried to cheat by imposing capital controls would become simply a matter for discounting between private parties as long as one country in the world was willing to follow the simple rules and let its currency supply fluctuate depending on how much people wanted to hold gold or gold certificates and how much they wanted to convert dollars (for example) into bullion and send it abroad or do the reverse. That country's currency would be come the universal unit of account precisely because it would be the one money that would not have a political speculation attached to it.

Believing that the political manipulations of a currency could somehow rule economic behavior was, in Hawtrey's mind, literally to put the cart before the horse. (To my mind it also means the "wise" men and women are even worse the committee in charge of describing an elephant; they spend all their time looking at the ass-end of the wagon and talking about where it is going even as it stands completely still.)

Europe was broke in 1919 not because it failed to adopt the proper monetary unit of Keynesian design but because all of its nations had utterly ruined their public and private credit in the extravagance of 4 years of world war. This was no more a popular an opinion in the 1920s than it is now; reviewers of Hawtrey's book on the gold standard took him to task for arguing that money itself was unimportant except as a measure of credit-worthiness and the gold standard - at whatever value - was only important because it prevented the governments of the world from fudging the measurements. Hawtrey thought that governments' credit-worthiness was entirely dependent on their ability to conform their legal tender to what the country could, in fact, afford to pay to its foreign creditors and tax collectors; and that was all there was to it. Here is what he wrote in 1919: "There never was a time at which the currency systems of the world were so exposed to danger as they are likely to be in the immediate future. The portentous profusion of paper money affords unparalleled opportunities for deflation while the development of credit and the elaboration of such devices as the exchange standard have opened the way to an almost indefinite further inflation cloaked under the disguise of an economy of gold. Between these two contrary dangers there seems to be no clear principle to keep mankind in the middle way and it is even possible that one may succeed by way of reaction to the other.

Footnote: Under the "exchange standard" countries could pretend to pay each other in gold for the net balances of trade and credit without actually delivering the bullion. It was "the gold standard" without the essential element of that system - namely, the ability of the creditor to ask the borrower to actually settle up his account in specie. It was, in that regard, indistinguishable from our present fiat money system.

Britain did not, in fact, restore the gold standard until 1925. Britain's comparative success during the 1930s (even as Orwell was writing The Road to Wigan Pier British unemployment was slightly more than HALF what it was in the U.S.) can be attributed to the fact that Britain's banks did not, in fact, fail after the country went back on the domestic gold standard. Neither, for that matter, did the French banks fail as France also restored it promise that the franc could be changed into specie. In academia the severe U.S. depression is blamed - as David suggests - on the collapse of the Credit Anstalt, etc. yet the volume of U.S. trade in 1930 to central Europe was less than 1% of U.S. GDP. Smoot-Hawley raised the effective tariff rate by less than 5% for a country whose economy was almost entirely focused on domestic consumption; yet that also is the villain. What is ignored is the central fact; all the debtors to the U.S. were broke and, once they defaulted on their sovereign debts, they were in the position debtor-in-possession companies usually are - they could do business at a much lower cost. It was the U.S. response to this fact that made the defaults of the European debtors into a world collapse. Instead of accepting the fact that American consumers would now profit from cheaper imports - if Americans were allowed to send their money abroad, the Hoover and Roosevelt administrations decided that the solution to the problem was the ultimate Keynesian response - the country should do away with the barbarous metal by permanently hoarding its gold reserves and NEVER PAYING THEM OUT TO ANYONE.

That was, of course, Hawtrey's point; you kept money reserves precisely so they could be used in a credit crisis; but the reserves had to be actual money, not more pieces of government paper. The "global" banking collapse occurred throughout the 1920s, along with sovereign defaults from the German and Austrian and Italian and Polish and Czech and Russian (er, Soviet) hyperinflations; but the severity of the U.S. depression cannot be blamed on those events. It is attributable to the efforts of the U.S. to pretend that its underwater debtors could pay their war debts by having the U.S. lend them the specie and then have it immediately redeposited in the New York Fed's vault (quantitative easing's grandfather). The irony is that the U.S. decided that it had to abandon the gold standard and run away from world trade just as its European allies were finally ready to pay for their own imports with real money. Enough said, indeed.


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