by Charles Curley
Special to L. Neil Smith’s The Libertarian Enterprise
I‘ve actually had Kwasi Kwarteng’s War and Gold for quite a while. I only decided to re-read it recently because I liked the book and because I thought it might give me some insights into the newly minted British Chancellor of the Exchequer. Events, however, moved faster than I read the book. More on that at the end.
The central thesis of the book can be stated quite simply: nothing provides monetary stability as well as gold. The book is a monetary history from Pizarro’s conquest of Peru, and the effects of a flood of gold into Europe, through the classic gold standard era, up to the financial crisis of 2008, its aftermath, and the Greek fiscal crisis of 2012. Mr. Kwarteng, born of Ghanaian parents in London and educated at Trinity College, Cambridge, and Harvard, is a Keynesian, and an admirer of Keynes. It is interesting to this Rothbardian to see a Keynesian make a coherent case for gold.
Kwarteng does not expect gold to return to the central place it held during the classic gold standard era. This he defines as from the defeat of Napoleon in 1815 to the start of World War I in 1914. He details some of the impressive achievements of the gold standard. During that period. Britain’s nominal debt went from £843 million to £706 million, lower even in nominal terms. But in 1818 that figure was 250% of GDP, a Greek level of indebtedness. The 1914 figure is 25% of GDP. And the pound sterling kept or increased its purchasing power over that hundred years, a feat neither the Bank of England, the Federal Reserve, nor any other central bank has approached since. As Kwarteng points out, these feats were brought about by a regime featuring a gold convertible currency and balanced budgets. (p. 6)
Kwarteng favorably quotes George Bernard Shaw’s advice from The Intelligent Woman’s Guide to Socialism and Capitalism, “You have to choose between trusting to the natural stability of gold and the natural stability of the honesty and intelligence of the members of the government. And with due respect to those gentlemen, I advise you, as long as the capitalist system lasts, to vote for gold.” (end notes omitted) (p. 114)
Kwarteng clearly views the end of the gold standard as August 15, 1971, when Nixon closed the gold window to its last few customers, foreign governments who traded in 400 ounce bars. Arguably it could have been any of several earlier events, such as the establishment of the Federal Reserve in 1913, Britain’s failure to resume specie payment at par in the 1920s, Roosevelt’s gold confiscation, his devaluation, and several others.
It has been a slow on-going process, one step at a time. Either way, the destruction of money to the benefit of government continues. Today economists argue whether central banks’ inflation targets should be 2% (as in the end of the last century) or 4%. But either figure is arbitrary. The higher the figure, the more governments gain. You may recall the “natural stability of the honesty and intelligence of the members of the government”, and guess which figure will be selected. And then you may wonder how long before a higher figure is selected.
Kwarteng highlights the connection between war and paper money. “It is perhaps timely to reflect that paper money was almost always a wartime expedient, introduced as a means of extraordinary financing in extraordinary times.” (p 71) I conjecture that if all the governments of the world were magically to be prohibited from paper money, they would be unable to finance their modern wars. What a blessing to the world that would be! Restoring sound money wouldn’t only protect citizens from the depredations of their own governments, but from those of foreign governments as well.
Or, to turn the connection on its head, maybe if governments stopped warring so much they could stop destroying the currency. Good luck with that one.
Standing on his view of the history of money, the author delivers some well placed barbs. “Indeed, the modern advocates of ‘quantitative easing’, …, are the intellectual descendants of John Law.” (p. 29) “The Keynesian Revolution merely gave an intellectual garb to the practical conclusions of statesmen eager to ‘do something’ about the depression.” (p. 137) There are plenty more; you’ll have to find them for yourself.
Missing entirely from the book is any discussion of crypto currencies such as bitcoin. Although bitcoin began use in 2009, I doubt it was in the author’s view as he was writing the book. Even today, crypto currencies have yet to provide the stability a real currency requires. But they remain an intriguing possible alternative to paper money.
The book is divided into four parts, each subdivided into chapters. The Great Republic is the United States, which, Kwarteng remarks, was conceived not so much in liberty as in debt, hyperinflation and worthless paper money.
Gold: The Establishment of Order, c. 1500-1914
1 Sweat of the Sun
2 Rival Nations — England and France
4 Pillars of Order
5 Great Republic
6 London 1914
War: The Consequences of Armageddon, 1914-1945
7 Guns and Shells
8 Victors and Vanquished
9 World Crisis
10 Bretton Woods
Peace: The New Dollar Order, 1945-1973
11 Pax Americana
12 Weary Titans
13 Japan Incorporated
14 Imperial Retreat
Paper: The End of Gold, 1973-
15 The Impact of Oil
16 Thatcher and Reagan
17 The Creation of the Euro
18 The Rise of China
19 Delusions of Debt
20 Crises and ‘Bailouts’
Appendix: Value of Gold Stock to World GDP
Photo insert between pages
But the author’s conclusion is mildly encouraging. Gold will continue to play a role. “… [A]s the global economy expands in nominal dollar terms, even when fueled by vast quantities of credit, the value of gold, better perhaps than any currency, reflects this process most accurately. The gold standard will never formally return, but movements in the price of gold may well suggest that investors, in their lack of faith in paper money, have informally adopted one.” (p. 359)
Having read this book, I wonder what happened to Mr. Kwarteng? As part of the Truss faction’s campaign within the Conservative Party to succeed Boris Johnson as party leader and Prime Minister, Truss and Kwarteng promised a series of tax cuts, but no cuts in spending. This, of course, would lead to an even less balanced budget than Britain already had — exactly the sort of thing Kwarteng argued against in the book.
However, no-one consulted with the financial markets. Once Truss was installed as PM, and Kwarteng as Chancellor, Kwarteng announced his tax cut plan as “The Growth Plan 2022”. The media dubbed it a mini-budget. The markets rebelled. Sterling dropped to its lowest ever price in dollars. Gilts roiled, and the Bank of England started buying them (shades of quantitative easing!). Worse, Tory back benchers rebelled. Kwarteng resigned after only 38 days in office, and Truss after only 44.
In short, what happened was that Kwarteng didn’t follow his own well researched and well thought out advice. And that is a pity for several reasons.
Publisher: PublicAffairs, New York (2014)
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