WEBVTT NOTE 56. The Gold-Exchange Standard, Not Gold 1 00:00:00.000 --> 00:00:04.000 The Gold Exchange Standard, Not Gold 2 00:00:04.000 --> 00:00:16.000 The major twist, the major deformation of a genuine gold standard perpetrated by the British in the 1920s, was not the gold bullion standard, unfortunate though that was. 3 00:00:16.000 --> 00:00:25.000 The major inflationary camouflage was to return, not to a gold standard at all, but to a quote, gold exchange standard. 4 00:00:25.000 --> 00:00:31.640 In a gold exchange standard, only one country, in this case Great Britain, is on a gold standard 5 00:00:31.640 --> 00:00:37.040 in the sense that its currency is actually redeemable in gold, albeit only gold bullion 6 00:00:37.040 --> 00:00:38.720 for foreigners. 7 00:00:38.720 --> 00:00:43.560 All other European countries, even though nominally on a gold standard, were actually 8 00:00:43.560 --> 00:00:46.260 on a pound sterling standard. 9 00:00:46.260 --> 00:00:52.600 In short, a typical European country, say Ruritania, would hold as reserves for its 10 00:00:52.600 --> 00:00:59.440 Currency, not gold but British pounds sterling, in practice bills or deposits payable in sterling 11 00:00:59.440 --> 00:01:01.160 at London. 12 00:01:01.160 --> 00:01:06.480 Anyone who demanded redemption for ruritanian rurers then would receive British pounds rather 13 00:01:06.480 --> 00:01:08.120 than gold. 14 00:01:08.120 --> 00:01:13.160 The gold exchange standard then cunningly broke the classical gold standard stringent 15 00:01:13.160 --> 00:01:19.040 limits on monetary and credit expansion, not only for the other European countries but 16 00:01:19.040 --> 00:01:23.960 But also for the base or key currency country, Great Britain itself. 17 00:01:23.960 --> 00:01:28.560 Under the genuine gold standard, inflating the number of pounds in circulation would 18 00:01:28.560 --> 00:01:34.720 cause pounds to flow into the hands of other countries, which would demand gold in redemption. 19 00:01:34.720 --> 00:01:40.280 Thereby, gold would move out of British bank and currency reserves, and pressure would 20 00:01:40.280 --> 00:01:45.260 be put on Britain to end its inflation and to contract credit. 21 00:01:45.260 --> 00:01:50.140 But under the gold exchange standard, the process was very different. 22 00:01:50.140 --> 00:01:55.940 If Britain inflated the number of pounds in circulation, the result, again, was a deficit 23 00:01:55.940 --> 00:02:01.700 in the balance of trade and sterling balances piling up in the accounts of other nations. 24 00:02:01.700 --> 00:02:06.740 But now that these nations have been induced to use pounds as their reserves rather than 25 00:02:06.740 --> 00:02:12.740 gold, these nations, instead of redeeming the pounds in gold, would inflate and pyramid 26 00:02:12.740 --> 00:02:18.100 a multiple of their currency on top of their increased stock of pounds. 27 00:02:18.100 --> 00:02:23.960 Thus, instead of checking inflation, a gold exchange standard encourages all countries 28 00:02:23.960 --> 00:02:28.260 to inflate on top of their increased supply of pounds. 29 00:02:28.260 --> 00:02:33.740 Britain too is now able to quote, export her inflation to other nations without paying 30 00:02:33.740 --> 00:02:34.980 a price. 31 00:02:34.980 --> 00:02:40.960 Thus, in the name of sound money and a check against inflation, a pseudo gold standard 32 00:02:40.960 --> 00:02:47.360 was instituted, designed to induce a double inverted pyramid of inflation, all on top 33 00:02:47.360 --> 00:02:53.640 of British pounds, the whole process supported by a gold stock that does not dwindle. 34 00:02:53.640 --> 00:02:58.800 Since all other countries were sucked into the inflationary gold exchange trap, it seemed 35 00:02:58.800 --> 00:03:03.380 that the only nation Britain had to worry about was the United States, the only country 36 00:03:03.380 --> 00:03:07.120 to continue on a genuine gold standard. 37 00:03:07.120 --> 00:03:12.200 That was the reason it became so vitally important for Britain to get the United States, through 38 00:03:12.200 --> 00:03:17.520 the Morgan connection, to go along with this system and to inflate so that Britain would 39 00:03:17.520 --> 00:03:20.760 not lose gold to the United States. 40 00:03:20.760 --> 00:03:25.100 For the other nations of Europe, it became an object of British pressure and maneuvering 41 00:03:25.100 --> 00:03:31.600 to induce these countries themselves to return to a gold standard, with several vital provisions. 42 00:03:31.600 --> 00:03:37.840 a. That their currencies too be overvalued, so that British exports would not suffer, 43 00:03:37.840 --> 00:03:43.520 and British imports would not be overstimulated, in other words, so that they join Britain 44 00:03:43.520 --> 00:03:48.860 in overvaluing their currencies. b. That each of these countries adopt their 45 00:03:48.860 --> 00:03:54.540 own central bank, with the help of Britain, which would inflate their currencies in collaboration 46 00:03:54.540 --> 00:03:59.920 with the Bank of England. c. That they return, not to a genuine gold 47 00:03:59.920 --> 00:04:05.740 gold standard, but to a gold exchange standard, keeping their balances in London and refraining 48 00:04:05.740 --> 00:04:11.620 from exercising their legal rights to redeem those sterling balances in gold. 49 00:04:11.620 --> 00:04:16.700 In this way, for a few years, Britain could have its kick and eat it too. 50 00:04:16.700 --> 00:04:21.940 It could enjoy the prestige of going back to gold, going back at a highly overvalued 51 00:04:21.940 --> 00:04:29.240 pound and yet continue to pursue an inflationary, cheap money policy instead of the opposite. 52 00:04:29.240 --> 00:04:34.040 It could inflate pounds and see other countries keep their sterling balances and inflate on 53 00:04:34.040 --> 00:04:35.500 top of them. 54 00:04:35.500 --> 00:04:41.040 It could induce other countries to go back to gold at overvalued currencies and to inflate 55 00:04:41.040 --> 00:04:43.140 their money supplies. 56 00:04:43.140 --> 00:04:48.480 And it could also try to prop up its flagging exports by using cheap credit to lend money 57 00:04:48.480 --> 00:04:53.480 to European nations so that they could purchase British goods. 58 00:04:53.480 --> 00:04:59.140 Not that every country was supposed to return to gold at the overvalued pre-war par. 59 00:04:59.140 --> 00:05:05.500 The rule of thumb imposed in the 1920s was that A. Currencies, such as that of Britain 60 00:05:05.500 --> 00:05:11.740 herself, that had depreciated up to 60% from pre-war, for example, the Netherlands and 61 00:05:11.740 --> 00:05:16.620 the Scandinavian countries, would return at the pre-war par. 62 00:05:16.620 --> 00:05:22.780 B. Currencies that had depreciated from 60 to 90% were to return to gold within that 63 00:05:22.780 --> 00:05:38.780 The French franc, which had depreciated to 240 to the pound due to massive inflation, 64 00:05:38.780 --> 00:05:43.260 returned to gold at the doubled rate of 124 to the pound. 65 00:05:43.260 --> 00:05:48.980 And c, only those currencies that had been wiped out by devastating hyperinflation, like 66 00:05:48.980 --> 00:05:54.880 like Austria, Bulgaria and especially Germany were allowed to return to gold at a realistic 67 00:05:54.880 --> 00:06:00.540 rate and even they were stabilized at a little bit above their lowest point. 68 00:06:00.540 --> 00:06:05.640 As a result, virtually every European currency suffered from the requirement to raise the 69 00:06:05.640 --> 00:06:10.980 value of its currency artificially above its depreciated level. 70 00:06:10.980 --> 00:06:15.580 The gold exchange standard was not created de novo by Great Britain in the interwar 71 00:06:15.580 --> 00:06:17.120 period. 72 00:06:17.120 --> 00:06:22.600 It is true that a number of European central banks before 1914 had held foreign exchange 73 00:06:22.600 --> 00:06:27.680 reserves in addition to gold, but these were strictly limited and they were held as earning 74 00:06:27.680 --> 00:06:29.200 assets. 75 00:06:29.200 --> 00:06:34.320 These after all were privately owned central banks in need of earnings, not as instruments 76 00:06:34.320 --> 00:06:37.160 of monetary manipulation. 77 00:06:37.160 --> 00:06:42.240 But in a few cases, particularly where the pyramiding countries were from the third world, 78 00:06:42.240 --> 00:06:45.680 they did function as a gold exchange standard. 79 00:06:45.680 --> 00:06:51.200 That is, the third world currency pyramided its currency on top of a key country's reserves 80 00:06:51.200 --> 00:06:55.000 – pounds or dollars – instead of on gold. 81 00:06:55.000 --> 00:07:00.720 This system began in India after the late 1870s as a historical accident. 82 00:07:00.720 --> 00:07:06.000 The plan of the British Imperial Center was to shift India which, like many third world 83 00:07:06.000 --> 00:07:11.800 countries, had been on a silver standard, onto a seemingly sounder gold, following the 84 00:07:11.800 --> 00:07:13.400 imperial nations. 85 00:07:13.400 --> 00:07:36.400 India's reserves and pound sterling balances in London were supposed to be only a temporary transition to gold, but as in so many cases of seeming transition, the Indian gold exchange standard lingered on and received great praise for its modern inflationary potential from John Maynard Keynes, then in his first economic post at the India office. 86 00:07:36.400 --> 00:07:42.240 It was Keynes, after leaving the India office and going to Cambridge, who trumpeted the 87 00:07:42.240 --> 00:07:49.480 new form of monetary system as a quote, limping or imperfect gold standard, but as a quote, 88 00:07:49.480 --> 00:07:56.620 more scientific and economic system, end quote, which he dubbed the gold exchange standard. 89 00:07:56.620 --> 00:08:03.160 As Keynes wrote in February 1910, quote, It is cheaper to maintain a credit at one of 90 00:08:03.160 --> 00:08:07.560 of the Great Financial Centers of the World, which can be converted with great readiness 91 00:08:07.560 --> 00:08:11.440 to gold when it is required." 92 00:08:11.440 --> 00:08:16.560 In a paper delivered the following year to the Royal Economic Society, Keynes proclaimed 93 00:08:16.560 --> 00:08:23.840 that out of this new system would evolve, quote, the ideal currency of the future. 94 00:08:23.840 --> 00:08:30.680 Elaborating his views into his first book, Indian Currency and Finance, London, 1913, 95 00:08:30.680 --> 00:08:35.680 Keynes emphasized that the gold exchange standard was a notable advance because it 96 00:08:35.680 --> 00:08:41.680 economized on gold internally and internationally, thus allowing greater 97 00:08:41.680 --> 00:08:49.680 elasticity of money, a long-time code word for ability to inflate credit, in response to business needs. 98 00:08:49.680 --> 00:08:55.680 Looking beyond India, Keynes prophetically foresaw the traditional gold standard as giving way 99 00:08:55.680 --> 00:09:03.440 to a more, quote, scientific system based on one or two key reserve centers, quote, 100 00:09:03.440 --> 00:09:10.080 a preference for a tangible reserve currency, end quote, Keynes declared blithely, quote, 101 00:09:10.080 --> 00:09:15.680 is a relic of a time when governments were less trustworthy in these matters than they are now, 102 00:09:15.680 --> 00:09:22.320 end quote. He also believed that Britain was the natural center of the new reformed monetary order. 103 00:09:22.320 --> 00:09:35.320 While his book was still in proofs, Keynes was appointed a member of the Royal Commission on Indian Finance and Currency to study and make recommendations for the basic institutions of the Indian monetary system. 104 00:09:35.320 --> 00:09:46.320 Keynes dominated the commission proceedings, and while he got his way on maintaining the gold exchange standard, he was not able to convince the commission to adopt a central bank. 105 00:09:46.320 --> 00:09:55.320 However, he managed to bully it into including his annex favoring the state bank in its report, completed in early 1914. 106 00:09:55.320 --> 00:10:06.320 In addition, in his work on the commission, Keynes managed to enchant his doting mentor, Alfred Marshall, the unquestioned ruler of academic economists in Britain. 107 00:10:06.320 --> 00:10:09.760 Written While Montague Norman was the field marshal 108 00:10:09.760 --> 00:10:15.480 of the gold exchange standard of the 1920s, its major theoretician was long-time Treasury 109 00:10:15.480 --> 00:10:18.120 official Ralph Autry. 110 00:10:18.120 --> 00:10:22.760 When Autry rose to the position of Director of Financial Enquiries at the Treasury in 111 00:10:22.760 --> 00:10:29.860 1919, he delivered a speech before the British Association on, quote, the gold standard, 112 00:10:29.860 --> 00:10:34.600 the speech presage, the gold exchange standard of the 1920s. 113 00:10:34.600 --> 00:10:40.140 Autry sought not only a system of stable exchange rates as before the war, but also a monetary 114 00:10:40.140 --> 00:10:46.740 system that would stabilize the world purchasing power of gold or world price levels. 115 00:10:46.740 --> 00:10:51.840 Autry recommended international cooperation to stabilize price levels and urged the use 116 00:10:51.840 --> 00:10:57.660 of an indexed number of world prices, a proposal reminiscent of Yale professor Irving Fisher's 117 00:10:57.660 --> 00:11:04.120 suggestion for a, quote, tabular gold exchange standard made in 1911. 118 00:11:04.120 --> 00:11:10.400 In practice, such calls for price-level stabilization, which were pursued by Benjamin Strong in 119 00:11:10.400 --> 00:11:17.920 the 1920s, were really calls for price inflation to combat the dominant secular trend in a progressing 120 00:11:17.920 --> 00:11:21.720 free-market economy of falling prices. 121 00:11:21.720 --> 00:11:27.480 In the post-World War I world, this attempt at dual stabilization meant that the governments 122 00:11:27.480 --> 00:11:32.720 would have to salvage the high post-war price levels from the threat of deflation, and in 123 00:11:32.720 --> 00:11:38.600 In particular to alleviate the, quote, shortage of gold compared to the swollen totals of 124 00:11:38.600 --> 00:11:41.800 paper currencies existing in Europe. 125 00:11:41.800 --> 00:11:47.840 As Professor Eric Davis writes, quote, There had been concern in official circles that 126 00:11:47.840 --> 00:11:52.520 a return to the gold standard would be inhibited by a shortage of gold. 127 00:11:52.520 --> 00:11:56.920 Prices were much higher than before the war, and thus if there was a general return to 128 00:11:56.920 --> 00:12:00.280 the old parodies there might be insufficient gold. 129 00:12:00.280 --> 00:12:05.120 Autry picked up on the idea that the gold exchange standard could be widely introduced 130 00:12:05.120 --> 00:12:09.520 to economize on the use of gold for monetary purposes. 131 00:12:09.520 --> 00:12:14.480 Since countries would hold foreign exchange, much presumably in sterling balances, as a 132 00:12:14.480 --> 00:12:18.760 substitute for gold, there was a special advantage for Britain. 133 00:12:18.760 --> 00:12:25.760 The demand for the pound would be increased at the same time the demand for gold lessened. 134 00:12:25.760 --> 00:12:31.000 The central instrument for imposing the new gold exchange standard on Europe was the International 135 00:12:31.000 --> 00:12:37.840 Financial Conference called by the League of Nations at Genoa in the spring of 1922. 136 00:12:37.840 --> 00:12:43.600 At a previous International Financial Conference at Brussels in September 1920, the League 137 00:12:43.600 --> 00:12:48.880 had established a powerful financial and economic committee which from the very beginning was 138 00:12:48.880 --> 00:12:53.560 dominated by Montague Norman through his allies on the committee. 139 00:12:53.560 --> 00:12:58.520 Head of the committee was British Treasury official, Sir Basil Blackett, and also dominant 140 00:12:58.520 --> 00:13:04.000 on the committee were two of Norman's closest associates, Sir Otto Niemeyer and Sir Henry 141 00:13:04.000 --> 00:13:05.520 Strakusch. 142 00:13:05.520 --> 00:13:09.200 All of these men were ardent price-level stabilizationists. 143 00:13:09.200 --> 00:13:16.440 Moreover, Norman's chief advisor in international monetary affairs, Sir Charles S. Addis, was 144 00:13:16.440 --> 00:13:20.160 also a dedicated stabilizationist. 145 00:13:20.160 --> 00:13:25.820 Frauded by Norman, British Prime Minister Lloyd George successfully urged the British Cabinet 146 00:13:25.820 --> 00:13:32.760 in mid-December 1921 to call for a broad economic conference on the post-war reconstruction 147 00:13:32.760 --> 00:13:38.920 of Europe to include discussions of German reparations, Soviet-Russian reconstruction, 148 00:13:38.920 --> 00:13:42.520 the public debt and the monetary system. 149 00:13:42.520 --> 00:13:48.600 At a meeting of the Allied Supreme Council at Cannes in early January 1922, Lloyd George 150 00:13:48.600 --> 00:13:57.600 The research got the delegates to propose an all-European economic and financial conference for the reconstruction of Central and Eastern Europe. 151 00:13:57.600 --> 00:14:04.600 Promptly, the British set up an interdepartmental committee on economics and finance to prepare for the conference. 152 00:14:04.600 --> 00:14:10.600 Head of the committee was the Permanent Secretary of the Board of Trade, Sir Sidney Chapman. 153 00:14:10.600 --> 00:14:15.480 The aim of the Chapman Committee was to return to a gold standard, restore international 154 00:14:15.480 --> 00:14:20.720 credits, and establish cooperation between the various central banks. 155 00:14:20.720 --> 00:14:27.800 On March 7, 1922, the Chapman Committee issued its report for a draft agreement, which included 156 00:14:27.800 --> 00:14:34.200 currency stabilization, central bank cooperation, and adoption of a gold exchange rather than 157 00:14:34.200 --> 00:14:39.400 a straight gold standard, with each country deciding on the rate at which it would return 158 00:14:39.400 --> 00:14:41.000 to Gold. 159 00:14:41.000 --> 00:14:47.880 The European Economic Conference occurred at Genoa from April 10th to May 19th, 1922. 160 00:14:47.880 --> 00:14:53.780 The conference divided itself into several commissions, including economic and transportation 161 00:14:53.780 --> 00:14:54.960 commissions. 162 00:14:54.960 --> 00:14:59.380 The relevant commission for our concerns was the Financial Commission, headed by British 163 00:14:59.380 --> 00:15:03.140 Chancellor of the Exchequer, Sir Robert Horn. 164 00:15:03.140 --> 00:15:08.560 The Financial Commission divided itself into three subcommissions on credits, exchanges 165 00:15:08.560 --> 00:15:10.560 and Currency. 166 00:15:10.560 --> 00:15:15.360 Credit resolutions dealt with intergovernmental loans and exchanges was an attempt to eliminate 167 00:15:15.360 --> 00:15:17.640 exchange controls. 168 00:15:17.640 --> 00:15:22.120 Currency was the sub-commission dealing with the international monetary system. 169 00:15:22.120 --> 00:15:27.840 The crucial committee, however, was a large committee of experts covering all three sub-commissions 170 00:15:27.840 --> 00:15:32.880 and which actually drew up the resolutions finally passed by the conference. 171 00:15:32.880 --> 00:15:37.840 The committee of experts was appointed solely by Sir Robert Horne and it met in London during 172 00:15:37.840 --> 00:15:41.080 in the early stages of the Genoa Conference. 173 00:15:41.080 --> 00:15:46.320 This large committee, consisting of government officials and financial authorities, was headed 174 00:15:46.320 --> 00:15:49.680 by the ubiquitous Sir Basil Blackett. 175 00:15:49.680 --> 00:15:55.280 Ralph Autry drew up the Treasury plans for international money after having quote, extended 176 00:15:55.280 --> 00:16:01.500 discussions with Montague Norman and presented them to the Committee of Experts. 177 00:16:01.500 --> 00:16:06.560 After a temporary setback, the Autry plan was reintroduced and substantially passed 178 00:16:06.560 --> 00:16:11.600 in the form of 12 currency resolutions by the Financial Commission and then ratified 179 00:16:11.600 --> 00:16:15.080 by the plenary of the Genoa Conference. 180 00:16:15.080 --> 00:16:20.120 Having gotten his plan approved by the nations of Europe, Autry became the leading Fugelman 181 00:16:20.120 --> 00:16:23.460 and interpreter of the Genoa Resolutions. 182 00:16:23.460 --> 00:16:28.400 The currency resolutions of the Genoa Conference, which formed the European monetary system 183 00:16:28.400 --> 00:16:34.960 of the 1920s, called for a stable currency value in each country and for the establishment 184 00:16:34.960 --> 00:16:41.480 of Central Banks Everywhere, quote, In countries where there is no central bank of issue, one 185 00:16:41.480 --> 00:16:44.640 should be established, end quote. 186 00:16:44.640 --> 00:16:50.560 These central banks, not only in Europe, but elsewhere, particularly the United States, 187 00:16:50.560 --> 00:16:57.440 should practice, quote, continuous cooperation in order to bring about and maintain, quote, 188 00:16:57.440 --> 00:16:59.120 currency reform. 189 00:16:59.120 --> 00:17:04.200 The conference suggested an early formal meeting of central banks and an international convention 190 00:17:04.200 --> 00:17:06.760 to launch this coordination. 191 00:17:06.760 --> 00:17:11.640 The currencies of Europe should be on a common standard, which at present would have to be 192 00:17:11.640 --> 00:17:12.640 gold. 193 00:17:12.640 --> 00:17:17.560 After expressing a desire for balanced budgets in each nation, the conference declared that 194 00:17:17.560 --> 00:17:22.160 some countries would need foreign loans to attain stabilization. 195 00:17:22.160 --> 00:17:27.780 Fixing the value of the currency unit in gold was left, by the conference, to each country, 196 00:17:27.780 --> 00:17:32.440 and the resolutions were vague on the criteria to be used. 197 00:17:32.440 --> 00:17:39.040 Section 9 looked specifically to a new form of gold standard which would, quote, centralize 198 00:17:39.040 --> 00:17:45.060 and coordinate the demand for gold, and so avoid those wide fluctuations in the purchasing 199 00:17:45.060 --> 00:17:50.820 power of gold which might otherwise result from the simultaneous and competitive efforts 200 00:17:50.820 --> 00:17:56.440 of a number of countries to secure metallic reserves, end quote. 201 00:17:56.440 --> 00:18:02.540 In other words, to fix and raise price levels above the free market, and in particular to 202 00:18:02.540 --> 00:18:09.680 try to avoid redemption in gold and subsequent contraction of over-expanded paper currencies. 203 00:18:09.680 --> 00:18:12.580 Resolution 9 then became specific. 204 00:18:12.580 --> 00:18:17.960 The point was to economize, quote, the use of gold by maintaining reserves in the form 205 00:18:17.960 --> 00:18:24.060 of foreign balances, such, for example, as the gold exchange standard or an international 206 00:18:24.060 --> 00:18:32.660 Resolution 11 spelled out the gold exchange system in detail and also declares that credit 207 00:18:32.660 --> 00:18:39.020 will be regulated not only to keep the various currencies at par, but also with a view of 208 00:18:39.020 --> 00:18:46.900 preventing undue fluctuations in the purchasing power of gold, that is, the stabilizationist 209 00:18:46.900 --> 00:18:52.920 program of fixing and raising prices higher than free market levels. 210 00:18:52.920 --> 00:18:59.620 In particular, in Resolution 11, the maintenance of the currency at its gold value must be 211 00:18:59.620 --> 00:19:07.560 assured by the provision of an adequate reserve of approved assets, not necessarily gold. 212 00:19:07.560 --> 00:19:14.880 In more detail, a participating country, in addition to any gold reserve held at home, 213 00:19:14.880 --> 00:19:20.560 may maintain in any other participating country reserves of approved assets in the form of 214 00:19:20.560 --> 00:19:30.520 of Bank Balances, Bills, Short-Term Securities, or other Suitable Liquid Resources. 215 00:19:30.520 --> 00:19:36.000 The ordinary practice of a participating country will be to buy and sell exchange on other 216 00:19:36.000 --> 00:19:41.200 participating countries within a prescribed fraction of parity of exchange for its own 217 00:19:41.200 --> 00:19:44.920 currency on demand. 218 00:19:44.920 --> 00:19:51.220 The gold aspect of this scheme is covered in the clause when progress permits certain 219 00:19:51.220 --> 00:19:57.500 of the participating countries, i.e. Great Britain and the U.S. if it participates, will 220 00:19:57.500 --> 00:20:03.400 establish a free market in gold and thus become gold centers. 221 00:20:03.400 --> 00:20:09.740 The upshot the currency resolution concludes is that the convention will thus be based 222 00:20:09.740 --> 00:20:13.560 on a gold exchange standard. 223 00:20:13.560 --> 00:20:19.360 Ralph Autry's essay on behalf of the Genoa system is instructive in many ways. 224 00:20:19.360 --> 00:20:25.360 Most of it is devoted to defending the idea of coordinated central bank action, that is, 225 00:20:25.360 --> 00:20:29.760 essentially monetary expansion, to stabilize the price level. 226 00:20:29.760 --> 00:20:36.440 Autry asks the crucial question, quote, it may be asked, why is any international agreement 227 00:20:36.440 --> 00:20:39.960 on the subject of the gold standard necessary at all? 228 00:20:39.960 --> 00:20:44.560 When we have once got a currency based on commodity like gold, why should we not rely 229 00:20:44.560 --> 00:20:50.000 on free market conditions as we did before the war? 230 00:20:50.000 --> 00:20:51.360 Why indeed? 231 00:20:51.360 --> 00:20:55.640 Why can't the new pseudo-gold standard be like the old? 232 00:20:55.640 --> 00:21:00.280 Autry makes it clear that his reason is a phobia about deflation. 233 00:21:00.280 --> 00:21:06.240 The paper money stock had multiplied since 1914, and therefore their, quote, has been 234 00:21:06.240 --> 00:21:11.080 and a great fall in the commodity value of gold. 235 00:21:11.080 --> 00:21:17.280 Even in late 1922, after the price fall of the 1921 recession, the value of the gold 236 00:21:17.280 --> 00:21:26.960 dollar was only two-thirds of what it was before the war, hence the danger of a scramble 237 00:21:26.960 --> 00:21:31.640 to secure gold and a contraction of money and prices. 238 00:21:31.640 --> 00:21:34.240 But what is so terrible about deflation? 239 00:21:34.240 --> 00:21:40.000 Here, Hawtrey avoids even mentioning the wage rigidity and the unemployment insurance program 240 00:21:40.000 --> 00:21:43.400 that had changed the economic face of Britain. 241 00:21:43.400 --> 00:21:49.000 He simply points to the quote, notorious chronic state of depression which prevailed during 242 00:21:49.000 --> 00:21:56.520 the spread of the gold standard in the period 1873 to 1896, end quote. 243 00:21:56.520 --> 00:22:00.040 This is really his only horrible example. 244 00:22:00.040 --> 00:22:04.800 But in the first place, Autry is wrong in attributing falling prices during the late 245 00:22:04.800 --> 00:22:08.960 19th century to a shift from silver to gold. 246 00:22:08.960 --> 00:22:15.000 The falling prices were due to the Industrial Revolution and the phenomenal advance of productivity 247 00:22:15.000 --> 00:22:18.920 and hence a drop in price levels during this period. 248 00:22:18.920 --> 00:22:24.720 But a more important error is that Autry has made the all-too-common modern error of identifying 249 00:22:24.720 --> 00:22:28.480 falling prices with, quote, depression. 250 00:22:28.480 --> 00:22:33.320 In reality, production and living standards were progressing in Britain and the United 251 00:22:33.320 --> 00:22:36.040 States during this period. 252 00:22:36.040 --> 00:22:39.900 Costs were falling and therefore there was no squeeze on profits. 253 00:22:39.900 --> 00:22:45.280 The era of falling prices was not a quote, depression at all and was only experienced 254 00:22:45.280 --> 00:22:50.620 as such decades later by historians who failed to understand the social benefits of falling 255 00:22:50.620 --> 00:22:51.960 prices. 256 00:22:51.960 --> 00:22:57.160 Second, in his exegesis, Autry lets the cat out of the bag. 257 00:22:57.160 --> 00:23:02.940 He virtually concedes that his ideal is to abandon gold altogether and remain with only 258 00:23:02.940 --> 00:23:05.040 managed fiat money. 259 00:23:05.040 --> 00:23:10.520 Thus, in discussing the key currency countries, Autry states wistfully, 260 00:23:10.520 --> 00:23:11.520 quote, 261 00:23:11.520 --> 00:23:17.180 At the gold centers some gold reserves must be maintained, end quote. 262 00:23:17.180 --> 00:23:21.060 But if the gold standard becomes worldwide, quote, 263 00:23:21.060 --> 00:23:25.760 If all the gold standard countries adhere to it, gold will nowhere be needed as a means 264 00:23:25.760 --> 00:23:40.400 In short, Autry looked forward to dispensing with gold as a monetary metal altogether and 265 00:23:40.400 --> 00:23:44.240 to have the world solely on a fiat paper standard. 266 00:23:44.240 --> 00:23:50.520 Autry concludes his essay by conceding that there was only one defect in the Genoa resolutions, 267 00:23:50.520 --> 00:23:55.320 that there was no mention of how long it would take to return to gold. 268 00:23:55.320 --> 00:23:59.800 Even the strongest countries, he emphasized, would have to wait until their currencies 269 00:23:59.800 --> 00:24:04.460 rose on the exchange market to equal their designated rates. 270 00:24:04.460 --> 00:24:09.400 To induce a rise in pound sterling to meet the high fixed rate, Britain would either 271 00:24:09.400 --> 00:24:15.080 have to deflate, or else foreign countries, especially the United States, would have to 272 00:24:15.080 --> 00:24:18.840 inflate to correct the international discrepancy. 273 00:24:18.840 --> 00:24:25.360 Further deflation, declaimed Harvey, is out of the question. 274 00:24:25.360 --> 00:24:33.520 Therefore, the only hope was to stabilize our currency at its existing purchasing power 275 00:24:33.520 --> 00:24:38.160 and wait for the increased gold supply in the United States to lead to a substantial 276 00:24:38.160 --> 00:24:41.320 inflation in the United States. 277 00:24:41.320 --> 00:24:46.240 Like the other British leaders, Autry was pinning his faith on Uncle Sam's inflating 278 00:24:46.240 --> 00:24:59.240 Many historians have written off the Genoa Conference as a, quote, failure and dismissed its influence on the international money of the 20th century. 279 00:24:59.240 --> 00:25:09.240 It is true that the formal institutions of central bank cooperation called for at Genoa were not established, largely because of the reluctance of the United States. 280 00:25:09.240 --> 00:25:25.240 But the critical point is that Genoa triumphed anyway since Benjamin Strong was willing to perform the same tasks in informal but highly effective central bank cooperation to establish and prop up Britain's pseudo gold standard. 281 00:25:25.240 --> 00:25:31.940 Strong's reluctance stemmed from two sources, an understandable fear that isolationist and 282 00:25:31.940 --> 00:25:37.020 anti-bank sentiment would raise a firestorm against any formal collaboration with European 283 00:25:37.020 --> 00:25:42.900 central banks, especially in an America that had reacted against the formal foreign interventionism 284 00:25:42.900 --> 00:25:45.080 of the League of Nations. 285 00:25:45.080 --> 00:25:50.300 And second, Strong actually preferred the full gold standard and was queasy about the 286 00:25:50.300 --> 00:25:54.420 inflationary unsoundness of a gold exchange standard. 287 00:25:54.420 --> 00:25:58.860 But his reluctance did not prevent him from collaborating closely in support of his friend 288 00:25:58.860 --> 00:26:03.100 Montagu Norman and of their common Morgan connection. 289 00:26:03.100 --> 00:26:09.940 Their collaboration constituted, in the words of Michael Hogan, a quote, informal entente. 290 00:26:09.940 --> 00:26:16.620 Actually, what Strong preferred was close, quote, key currency collaboration between, 291 00:26:16.620 --> 00:26:22.740 say, the central banks of the United States, England and France, rather than to be outvoted 292 00:26:22.740 --> 00:26:29.140 at Formal International Conventions. In fact, after international commodity prices began 293 00:26:29.140 --> 00:26:36.580 to decline in 1926, Norman became more frantic in pursuing formal meetings of central bankers 294 00:26:36.580 --> 00:26:42.420 and more insistent on continuing and intensifying the inflationary thrust of the gold exchange 295 00:26:42.420 --> 00:26:47.660 standard. Finally, with the establishment of the Bank for International Settlements 296 00:26:47.660 --> 00:26:53.900 at Geneva in 1930, Norman at least succeeded in having regular monthly meetings of central 297 00:26:53.900 --> 00:26:55.660 bankers. 298 00:26:55.660 --> 00:27:01.120 Far from Genoa being merely a flash in the pan, the 1922 conference placed its decisive 299 00:27:01.120 --> 00:27:05.060 stamp upon the post-war monetary world. 300 00:27:05.060 --> 00:27:11.260 In the words of Professor Davis, quote, the widespread adoption of the gold exchange standard 301 00:27:11.260 --> 00:27:15.820 can be seen as the legacy of Genoa, end quote. 302 00:27:15.820 --> 00:27:20.920 Following the Genoa model, Great Britain, as we have seen, set up the gold exchange 303 00:27:20.920 --> 00:27:25.980 system by returning to its new version of gold in 1925. 304 00:27:25.980 --> 00:27:32.460 The other European countries, as well as other nations, followed, each at its own pace. 305 00:27:32.460 --> 00:27:40.100 By early 1926, some form of gold standard was established, at least de facto, in 39 306 00:27:40.100 --> 00:27:41.100 countries. 307 00:27:41.100 --> 00:27:46.820 By 1928, 43 nations were du jour on the gold standard. 308 00:27:46.820 --> 00:27:52.540 Of these, even the few allegedly on the gold bullion standard, such as France, kept most 309 00:27:52.540 --> 00:27:57.660 of their reserves in sterling balances in London, and the same is true of officially 310 00:27:57.660 --> 00:28:01.460 gold coin nations such as the Netherlands. 311 00:28:01.460 --> 00:28:06.940 Apart from the United States, the only officially gold coin countries were minor nations on 312 00:28:06.940 --> 00:28:36.940 It should be noted that Norway and Denmark, who insisted in following the Genoa path of struggling back to gold at a highly overvalued currency, suffered, like Britain, from an export depression throughout the 1920s, whereas Finland, acting on better advice, went back at a realistically devalued rate and avoided chronic depression in the 1920s. 313 00:28:36.940 --> 00:28:41.580 During This Period Throughout Europe, Great Britain, wielding 314 00:28:41.580 --> 00:28:46.620 its control of the Finance Committee of the League of Nations, engineered the stabilization 315 00:28:46.620 --> 00:28:53.740 of currencies on a gold exchange, that is, a sterling exchange standard, in Germany, 316 00:28:53.740 --> 00:29:02.420 Austria, Hungary, Estonia, Bulgaria, Greece, Belgium, Poland and Latvia. 317 00:29:02.420 --> 00:29:07.040 New central banks were established in the nations of Eastern Europe, basing themselves 318 00:29:07.040 --> 00:29:13.560 on reserves in sterling, with British supervisors and directors installed in those banks. 319 00:29:13.560 --> 00:29:19.160 Emile Moreau, the shrewd governor of the Bank of France, recorded his analysis of this British 320 00:29:19.160 --> 00:29:23.260 monetary power play in his diary, 321 00:29:23.260 --> 00:29:29.940 England, having been the first European country to re-establish a stable and secure money, 322 00:29:29.940 --> 00:29:36.940 has used that advantage to establish a basis for putting Europe under a veritable financial domination. 323 00:29:36.940 --> 00:29:42.940 The Financial Committee of the League of Nations at Geneva has been the instrument of that policy. 324 00:29:42.940 --> 00:29:51.940 The method consists of forcing every country in monetary difficulty to subject itself to the Committee at Geneva, which the British control. 325 00:29:51.940 --> 00:30:11.940 The remedies prescribed always involve the installation in the central bank of a foreign supervisor who is British or designated by the Bank of England and the deposit of a part of the reserve of the central bank at the Bank of England, which serves both to support the pound and to fortify British influence. 326 00:30:11.940 --> 00:30:18.940 To guarantee against possible failure, they are careful to secure the cooperation of the Federal Reserve Bank of New York. 327 00:30:18.940 --> 00:30:30.940 Moreover, they pass on to America the task of making some of the foreign loans, if they seem too heavy, always retaining the political advantages of these operations.