Tuesday, 19 June 2012

He's talking about Britain's exit from the Gold Standard

"To this day sterling's reputation has not recovered from the blow it unwillingly received under the policy adopted in September 1931. And this policy became a "pattern" not only for the British but for many other Treasury chiefs. At first, the damage was moderated by a general understanding that a banker's bankruptcy is "excusable" when his debtors leave him in the lurch. Excusable or not, the result was a violent shock not only to the prestige of England but to the reputation of the whole privately managed system of international finance based on gold.

The downfall of the gold standard became the wellspring of an intentional legend which might be described as the "Keynesian trap." It has become a dogma that it was the 1925 return to sterling's pre-1914 parity that necessitated the subsequent devaluation, if not the Great Depression, altogether. As far as this writer is aware, no one has made any attempt to demonstrate the logical or causal "mechanism" which could connect the abandonment of the gold standard in 1931 with the return to gold in 1925 other than that the one followed the other after a six and a half years' interval!-post hoc ergo propter hoc. Since the burden of proof should rest on proponents of this thesis, a few questions may be pertinent.

1) Would the choice in 1925 of a lower parity to gold, or of no parity at all, have strengthened the British balance of payments beyond providing "monetary" reliefl49 Suffice it to recall that by, or before, the end of 1926 British prices were generally adjusted to theAmerican level.

2) By what mysterious interplay of forces did sterling's return to the old parity bring about a world-wide crisis? How did it promote or provoke the domestic overindebtedness in the United States and the excessive capital flow to Germany-or the illiquidity of German banks and the overproduction of prime commodities? Patently, the purpose of the "Keynesian trap" is to divert attention from the errors, mischiefs, misjudgments, and maladjustments, both public and private; which accumulated and were compounded during the seventeen-year period beginning with the inflationary financing of the war and the world-wide disruptions it brought about.

3) If a chief obstacle to restoring a "healthy" British trade balance was the obstructionism of organized labor, as has been pointed out, how would this obstacle have been removed by returning to a sterling of a lower parity, or of none at all?

Sterling's departure from gold was greeted with sarcasm by Britain's enemies and with enthusiasm by a broad sector of the AngloAmerican economic "intelligentsia." Keynes, who at the moment, oddly enough, was opposed to devaluation, became the hero of the day. Had he not opposed the return to gold in 1925, almost singlehandedly? He was vindicated; the event demonstrating, allegedly, that a postwar gold standard was doomed from the outset. In reality, nothing of. the sort had been established."

Melchior Palyi: 'The Twilight of Gold'. pg 272

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