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‘War and Gold’ explains chaotic history of money

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Published : 2014-07-03 20:47
Updated : 2014-07-03 20:47

One of my souvenirs is a note from the Reserve Bank of Zimbabwe. I paid a vendor in Victoria Falls $3 for it, and that was more than it was worth. Its value to me is in the impressive pledge on the note: “I promise to pay the bearer on demand TWENTY BILLION DOLLARS.”

When your national currency is rooted in such paper promises, inflation and chaos are sure to follow.

This is the lesson taught in “War and Gold” by Kwasi Kwarteng, a son of Ghanaian parents who is a historian, hedge fund analyst and Conservative member of Britain’s Parliament. Kwarteng does not mention the fiscal follies of Zimbabwe’s President Robert Mugabe. His eye is fixed on the West, where abandoning gold to finance war and government largesse has repeatedly meant surrendering order and sound money.
“War and Gold: A 500-Year History of Empires, Adventures, and Debt” is written by Kwashi Kwarteng.

“War and Gold” is a well-written history of money ― particularly in the last 100 years ― rather than a history of the interplay of its title subjects. It is a reach, for example, to tie the consequences of war into the big credit crashes of 1929 and 2008.

Kwarteng is not a gold bug. He does not think it feasible to return to a gold standard anywhere outside of China, where doing so would dramatically raise the value of the yuan and destroy China’s export-led growth model. Like his colleagues in the austerity-minded British government, though, Kwarteng clearly yearns for the discipline of balanced budgets and strict control over the growth of the money supply.

He begins with the Spanish Conquest. Spain plundered the Americas for gold and silver to finance wars across its empire. This flood of precious metal into Europe meant inflation: Increase the money supply and prices will soar. John Maynard Keynes described it as “profit inflation,” where manufacturers bought materials early, held their stocks for months and then sold in a high-price climate. Profit inflation created a prosperous merchant class in several corners of Europe ― though not in Spain, which squandered its riches on war.

Later, Western governments looked to gold to provide value and reference to their paper currencies.

World War I disrupted the gold standard. None of the belligerents could afford to finance their share of this cataclysm without leaving the gold standard, borrowing massively and printing paper money. Germany went from 2 billion marks in circulation at the start of the war to 49.6 billion marks five years later. To pay its debts and war reparations, a defeated Germany in the early 1920s resorted to inflation of the sort recently practiced in Zimbabwe.

Kwarteng’s book germinated as he looked over the causes of the 2008 financial crash, and this examination takes up the bulk of “War and Gold.”

Kwarteng is withering in his criticism of President Lyndon Johnson’s “guns and butter” in the 1960s, when the Democrat’s Vietnam War and Great Society were financed by borrowing. But the seeds of the 2008 near-collapse of international finance were planted when a Republican president ended the $35-an-ounce link between the dollar and gold.

“Richard Nixon’s closing of the ‘gold window’... had profound consequences,” he writes. “Paper money indisputably contributed to an excess of credit creation and directly to the crisis of 2008, as the mountain of credit turned into an avalanche of bankruptcy.”

Kwarteng says the GOP’s insistence on tax cuts and the Democrats’ refusal to reduce welfare spending put both parties in the position of making circular arguments to the effect that “deficits don’t matter.” Federal Reserve Chairman Alan Greenspan’s understanding of federal budget surpluses in 2001 was “utterly wrong.”

It’s refreshing to read such a concise and cutting book, even if it is not entirely convincing.

By Jim Landers

(The Dallas Morning News)

(MCT Information Services)

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