[ Pobierz całość w formacie PDF ]
by new technologies such as automobiles and communications, would experience an unpre-
cedented period of strong growth and low inflation.
At the opposite end of the spectrum from the United States was Germany, which had
taken the path of least resistance during the war and expanded its money supply by 400 per-
cent. By the end of 1920, German prices stood at ten times their 1913 level. Germany had is-
sued so much currency that it had no hope of being able to reverse the process, and when
the war ended, seemed clearly headed for a massive devaluation. In retrospect, that would
have been a blessing. But instead of trying to rebuild its finances, the German government
adopted a policy of systematic inflation, in part to meet reparations, and thus launched itself
on that voyage of fantasy into the outer realms of the monetary universe.
FIGURE 1
Britain and France lay somewhere in between. During the war, France had expanded its
currency by 350 percent, pushing up prices equivalently. After the war, the Banque de France
avoided German-style hyperinflation and currency collapse by putting a lid on the issue of
new currency. However, France continued to flirt with disaster by running budget deficits of
$500 million and was saved once again only by the remarkable thriftiness of its people. While
there was a group within the Banque who harbored the fantasy of reversing the more than
threefold price increase and returning the franc to gold at its prewar parity, most rational ob-
servers agreed that when France returned to the gold standard, it would have to be at a radic-
ally lower exchange rate and even that still seemed many years away.
Britain was therefore the only major country that truly faced the choice between devalu-
ation and deflation. To a modern observer, less wedded to the principle that currency rates
are sacrosanct, some measure of devaluation would have made sense. After all, Britain was
finding it harder to compete in the postwar world economy and, having liquidated vast
amounts of its holdings abroad, could only draw upon a much reduced foreign income to
cushion the blow. Its exchange rate should have been allowed to fall as a means of making its
goods cheaper on world markets.
However, Norman and his generation lived in a different mental world. They saw devalu-
ation not as an adjustment to a new reality but as something more, a symptom of financial in-
discipline that might precipitate a collective loss of confidence in all currencies. When people
talked of the City of London as banker to the world, this was no mere figure of speech the
City operated literally like a gigantic bank, taking deposits from one part of the world and lend-
ing to another. While gold was the international currency par excellence, the pound sterling
was viewed as its closest substitute, and most trading nations the United States, Russia, Ja-
pan, India, Argentina even kept part of their cash reserves in sterling deposits in London.
The pound had a special status in the gold standard constellation and its devaluation would
have rocked the financial world.
In the last months of the war, the British government set up a commission, chaired by the
ubiquitous Lord Cunliffe, only recently departed from the Bank of England, and including Sir
John Bradbury of the UK Treasury; A. C. Pigou, professor of political economy at Cambridge;
and ten bankers from the City, to review postwar currency arrangements. Twenty-three
parties gave evidence before the commission, every one of them, with not single note of dis-
sent, in favor of a return to gold at the prewar rate. To a man, they believed the restoration of
the traditional parity was essential if Britain was to retain its position at the hub of the world s
banking system.
The model they had in mind, which was especially seared into the collective memory of
the Bank of England, was Britain s experience a century earlier after the Napoleonic Wars. In
1797, four years into the Revolutionary war with France, there was a run on the Bank of Eng-
land, provoked by rumors that a French army had landed in Wales. The Bank, which had be-
gun the war with gold reserves of £9 million, saw them shrink to £1 million, and was forced, as
it would be in 1914, to abandon the gold standard. Under the pressures of war finance, Bank
of England notes, which formed the basis for paper money in the country, increased over the
next fifteen years from £10 million to over £22 million, doubling prices.
In 1810, a parliamentary inquiry known as the Bullion Committee was formed to examine
the whole issue. The committee included Henry Thornton, a banker, parliamentarian, brother
to a director of the Bank of England, and the most creative monetary economist of the nine-
teenth century, whose insights would unfortunately be lost by succeeding generations in
charge at the Bank. The committee recommended that the Bank resume gold payments as
soon as possible, and in order to achieve this goal, begin to contract its credits to banks and
merchants and shrink the supply of paper money by withdrawing its notes from circulation.
The Bank wisely waited until 1815, when a defeated Napoléon was safely in exile on St.
Helena, before taking this advice. Over the next six years, it almost halved the supply of pa-
per money in Britain, driving down prices by 50 percent. And though those years from 1815 to
1821 had been years of riots and agricultural distress, Britain went back on gold in 1821. Over
the subsequent half century, it transformed itself into the world s largest economic power.
Many believed that the resumption of 1821 had been the single most important defining de-
cision in its financial history. That the Bank had been willing to inflict the pain of a 50 percent
fall in prices in order to restore the gold value of the pound had set sterling apart from every
other currency in Europe, and made it the world s premier store of value.
Inspired by this example and in complete contrast to every other European country in
1920, the Bank of England chose the path of deflation, matching the Fed and raising interest
rates to 7 percent. The budget was balanced. The economy plunged into sharp recession,
two million men were thrown out of work. Nevertheless, by the end of 1922, the Bank had
succeeded in bringing prices down by 50 percent, and the pound, which had fallen as low as
$3.20 in the foreign exchange market on the fear that Britain was headed for devaluation,
climbed back to within 10 percent of its prewar parity of $4.86.
But whereas the U.S. economy, more dynamic and unhampered by a large internal debt,
was quickly able to bounce back from the recession, Britain remained stuck. The number of
unemployed would not fall below one million for the next twenty years. It soon became appar-
ent that Britain had sustained terrible damage as an economic power during the war. Indus-
tries such as cotton, coal, and shipbuilding, in which it had once led the world, had failed to
modernize and the traditional markets had been lost to competitors. Labor costs had risen as
unions negotiated shorter working hours.
Norman now faced the uneasy prospect that the only way to follow the example set by his [ Pobierz całość w formacie PDF ]
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by new technologies such as automobiles and communications, would experience an unpre-
cedented period of strong growth and low inflation.
At the opposite end of the spectrum from the United States was Germany, which had
taken the path of least resistance during the war and expanded its money supply by 400 per-
cent. By the end of 1920, German prices stood at ten times their 1913 level. Germany had is-
sued so much currency that it had no hope of being able to reverse the process, and when
the war ended, seemed clearly headed for a massive devaluation. In retrospect, that would
have been a blessing. But instead of trying to rebuild its finances, the German government
adopted a policy of systematic inflation, in part to meet reparations, and thus launched itself
on that voyage of fantasy into the outer realms of the monetary universe.
FIGURE 1
Britain and France lay somewhere in between. During the war, France had expanded its
currency by 350 percent, pushing up prices equivalently. After the war, the Banque de France
avoided German-style hyperinflation and currency collapse by putting a lid on the issue of
new currency. However, France continued to flirt with disaster by running budget deficits of
$500 million and was saved once again only by the remarkable thriftiness of its people. While
there was a group within the Banque who harbored the fantasy of reversing the more than
threefold price increase and returning the franc to gold at its prewar parity, most rational ob-
servers agreed that when France returned to the gold standard, it would have to be at a radic-
ally lower exchange rate and even that still seemed many years away.
Britain was therefore the only major country that truly faced the choice between devalu-
ation and deflation. To a modern observer, less wedded to the principle that currency rates
are sacrosanct, some measure of devaluation would have made sense. After all, Britain was
finding it harder to compete in the postwar world economy and, having liquidated vast
amounts of its holdings abroad, could only draw upon a much reduced foreign income to
cushion the blow. Its exchange rate should have been allowed to fall as a means of making its
goods cheaper on world markets.
However, Norman and his generation lived in a different mental world. They saw devalu-
ation not as an adjustment to a new reality but as something more, a symptom of financial in-
discipline that might precipitate a collective loss of confidence in all currencies. When people
talked of the City of London as banker to the world, this was no mere figure of speech the
City operated literally like a gigantic bank, taking deposits from one part of the world and lend-
ing to another. While gold was the international currency par excellence, the pound sterling
was viewed as its closest substitute, and most trading nations the United States, Russia, Ja-
pan, India, Argentina even kept part of their cash reserves in sterling deposits in London.
The pound had a special status in the gold standard constellation and its devaluation would
have rocked the financial world.
In the last months of the war, the British government set up a commission, chaired by the
ubiquitous Lord Cunliffe, only recently departed from the Bank of England, and including Sir
John Bradbury of the UK Treasury; A. C. Pigou, professor of political economy at Cambridge;
and ten bankers from the City, to review postwar currency arrangements. Twenty-three
parties gave evidence before the commission, every one of them, with not single note of dis-
sent, in favor of a return to gold at the prewar rate. To a man, they believed the restoration of
the traditional parity was essential if Britain was to retain its position at the hub of the world s
banking system.
The model they had in mind, which was especially seared into the collective memory of
the Bank of England, was Britain s experience a century earlier after the Napoleonic Wars. In
1797, four years into the Revolutionary war with France, there was a run on the Bank of Eng-
land, provoked by rumors that a French army had landed in Wales. The Bank, which had be-
gun the war with gold reserves of £9 million, saw them shrink to £1 million, and was forced, as
it would be in 1914, to abandon the gold standard. Under the pressures of war finance, Bank
of England notes, which formed the basis for paper money in the country, increased over the
next fifteen years from £10 million to over £22 million, doubling prices.
In 1810, a parliamentary inquiry known as the Bullion Committee was formed to examine
the whole issue. The committee included Henry Thornton, a banker, parliamentarian, brother
to a director of the Bank of England, and the most creative monetary economist of the nine-
teenth century, whose insights would unfortunately be lost by succeeding generations in
charge at the Bank. The committee recommended that the Bank resume gold payments as
soon as possible, and in order to achieve this goal, begin to contract its credits to banks and
merchants and shrink the supply of paper money by withdrawing its notes from circulation.
The Bank wisely waited until 1815, when a defeated Napoléon was safely in exile on St.
Helena, before taking this advice. Over the next six years, it almost halved the supply of pa-
per money in Britain, driving down prices by 50 percent. And though those years from 1815 to
1821 had been years of riots and agricultural distress, Britain went back on gold in 1821. Over
the subsequent half century, it transformed itself into the world s largest economic power.
Many believed that the resumption of 1821 had been the single most important defining de-
cision in its financial history. That the Bank had been willing to inflict the pain of a 50 percent
fall in prices in order to restore the gold value of the pound had set sterling apart from every
other currency in Europe, and made it the world s premier store of value.
Inspired by this example and in complete contrast to every other European country in
1920, the Bank of England chose the path of deflation, matching the Fed and raising interest
rates to 7 percent. The budget was balanced. The economy plunged into sharp recession,
two million men were thrown out of work. Nevertheless, by the end of 1922, the Bank had
succeeded in bringing prices down by 50 percent, and the pound, which had fallen as low as
$3.20 in the foreign exchange market on the fear that Britain was headed for devaluation,
climbed back to within 10 percent of its prewar parity of $4.86.
But whereas the U.S. economy, more dynamic and unhampered by a large internal debt,
was quickly able to bounce back from the recession, Britain remained stuck. The number of
unemployed would not fall below one million for the next twenty years. It soon became appar-
ent that Britain had sustained terrible damage as an economic power during the war. Indus-
tries such as cotton, coal, and shipbuilding, in which it had once led the world, had failed to
modernize and the traditional markets had been lost to competitors. Labor costs had risen as
unions negotiated shorter working hours.
Norman now faced the uneasy prospect that the only way to follow the example set by his [ Pobierz całość w formacie PDF ]