“The narrative proceeds…to John Law, the 18th-century Scotsman who, as banker to the French court, gave quantitative easing a try 300 years before Ben Bernanke ran with the idea. Lots of paper credit is the thing, Law contended. Who needed gold? The experiment ended with exploding asset bubbles…
…governments printed currency and levied taxes to fight wars….Customarily, sound finance resumed with the peace. What’s new is that, starting about 1919, the taxing and inflating has kept right on going even after the shooting stopped…. the dollar commands but 1/1,300th of an ounce of gold today, as compared with the 1/20th of an ounce on the eve of World War I…. Money has become an instrument of public policy. Central banks create it with a tap, or snap, to effect desired economic and financial outcomes. They use it in attempts to raise the rate of inflation or the level of the stock market or the numbers of employed workers. They use it to make broke banks solvent. They are goals that, if achieved, are bought at the expense of the integrity of money itself….If the printing press (or computer keypad) seems an improbable means to lasting prosperity, it is because it has never worked before….Since year-end 2007, the Federal Reserve has created more than $3 trillion from the thinnest of air. Over the same span of years, America’s public debt has jumped to $17.6 trillion from $9.2 trillion.”, James Grant, excerpt from WSJ review of “War and Gold”
Book Review: ‘War and Gold’ by Kwasi Kwarteng
Why gold? Because it’s money, or used to be money, and will likely one day be money again.
By James Grant
In the past 12 months alone, the world’s top five central banks have conjured up $1.4 trillion. They called it into existence as a sorcerer might summon the spirits. No wand, no printing press was required; taps on a keyboard did the heavy lifting.
“War and Gold” is a chronicle of fiscal ruination and redemption, with the emphasis on the former. In ages past, observes the historian and politician Kwasi Kwarteng, governments printed currency and levied taxes to fight wars. Now they materialize the money on computer screens to jolt their underachieving and overindebted economies back to life (so far without notable success). Customarily, sound finance resumed with the peace. What’s new is that, starting about 1919, the taxing and inflating has kept right on going even after the shooting stopped.
Money is as old a story as the historian cares to make it. Mr. Kwarteng begins his chronicle with the 16th-century Spaniards, who ripped gold and silver from the hands of the Incas and Aztecs and hauled it back to Seville, making that inland port “one of the great financial centers of the world.” “It is no accident,” the author relates, “that four of the most widely performed operas of the modern era— Mozart’s The Marriage of Figaro and Don Giovanni, Rossini’s Barber of Seville and Bizet’s Carmen—are set in this city.”
The narrative proceeds from the conquistadors to John Law, the 18th-century Scotsman who, as banker to the French court, gave quantitative easing a try 300 years before Ben Bernanke ran with the idea. Lots of paper credit is the thing, Law contended. Who needed gold? The experiment ended with exploding asset bubbles. Mr. Kwarteng next shifts his focus to America and France in the Age of Revolution (both sets of revolutionaries overdid the money printing) and on to Britain at the high noon of empire and back to America for the Gilded Age.
The author concludes his tale—”A 500-Year History of Empires, Adventures, and Debt,” as the subtitle has it—with chapters on the oil-soaked 1970s, Ronald Reagan and Margaret Thatcher, the dawn of the euro, the great Japan levitation, the even more spectacular China levitation, the millennial debt spree and the sorrows of 2007-09.
Are you waiting for the punchline? Mr. Kwarteng arrives at the not especially gob-smacking conclusion that gold may appeal to any who doubt the institution of paper money. Not that the doubters have much practical standing, he suggests: “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.” And that is that.
Exasperatingly, the author, a University of Cambridge Ph.D. in history and a British parliamentarian, refuses to render historical judgment. He doesn’t exactly decry the world’s descent into “too big to fail” banking, occult-style central banking and tiny, government-issued interest rates. Neither does he precisely support those offenses against wholesome finance. He is neither for the dematerialized, non-gold dollar nor against it. He is a monetary Hamlet.
He does, at least, ask: “Why gold?” I would answer: “Because it’s money, or used to be money, and will likely one day become money again.” The value of gold is inherent, not conferred by governments. Its supply tends to grow by 1% to 2% a year, in line with growth in world population. It is nice to look at and self-evidently valuable. It is indestructible, hard to find and hard to claw out of the earth. You have to explain the meaning of bitcoin. With gold, it’s comprehension at first sight.
Shelley wrote lines of poetry to protest the deflation that attended Britain’s return to the gold standard after the Napoleonic wars. Mr. Kwarteng quotes them: “Let the Ghost of Gold / Take from Toil a thousandfold / More than e’er its substance could / In the tyrannies of old.” The author seems to agree with the poet. I myself hold the gold standard blameless. The source of the postwar depression was rather the decision of the British government to return to the level of prices and wages that prevailed before the war, a decision it enforced through monetary means (that is, by reimposing the prewar exchange rate). It was an error that Britain repeated after World War I.
The classical gold standard, in service roughly from 1815 to 1914, was certainly imperfect. What it did deliver was long-term price stability. What the politics of the gold-standard era delivered was modest levels of government borrowing. What the British bankers of the gold-standard era delivered (with the rare exception) was solvency.
The author lightly praises these achievements. I would have been fulsome. If Victorian finance had a “latent fragility,” as Mr. Kwarteng contends, so does the finance of most eras. It falls to the reader to decide what to make of the interesting historical facts that Mr. Kwarteng sprinkles on his pages. For instance: “At least four out of eight Governors of the Bank of England between 1833 and 1847 . . . suffered the humiliation of personal bankruptcy.”
I would say that this fact speaks well of the Victorians and of their central bank. The Janet Yellens of that time had day jobs, in the course of which they took commercial and financial risks. More than taking risks, the gentlemen personally bore them. How much better ordered our finances would be if the personnel of the Federal Open Market Committee had a more intimate understanding of success and failure in the workaday world. Out of the 10 voting members on the 2014 FOMC, only four have substantial professional experience outside academe or government.
Progress is the rule, the Whig theory of history teaches, but the old Whigs never met the new bankers. Ordinary people live longer and Olympians run faster than they did a century ago, but no such improvement is evident in our monetary and banking affairs. On the contrary, the dollar commands but 1/1,300th of an ounce of gold today, as compared with the 1/20th of an ounce on the eve of World War I. As for banking, the dismal record of 2007-09 would seem inexplicable to the financial leaders of the Model T era. One of these ancients, Comptroller of the Currency John Skelton Williams, predicted in 1920 that bank failures would soon be unimaginable. In 2008, it was solvency you almost couldn’t imagine.
Mr. Kwarteng rightly observes that human monetary arrangements oscillate between “order and chaos.” If order characterized the gold standard, which he allows, then our present-day setup must be counted chaotic.
The nature of 21st-century money alone would seem to make it so. Undefined, literally insubstantial, the dollar is no longer a weight or a measure, as it was until the Nixon administration stopped converting dollars to gold at a fixed rate in 1971. Money has become an instrument of public policy. Central banks create it with a tap, or snap, to effect desired economic and financial outcomes. They use it in attempts to raise the rate of inflation or the level of the stock market or the numbers of employed workers. They use it to make broke banks solvent.
They are goals that, if achieved, are bought at the expense of the integrity of money itself. Seeing that the monetary mandarins are forever inclined to pull chestnuts from fires, the bankers and the speculators continue to play with matches. Then, too, the up-tempo emission of weightless dollars sows well-founded doubts about the buying power of money. Sooner or later, once-trusting consumers may choose to stockpile merchandise rather than to save George Washingtons. If the printing press (or computer keypad) seems an improbable means to lasting prosperity, it is because it has never worked before.
Since year-end 2007, the Federal Reserve has created more than $3 trillion from the thinnest of air. Over the same span of years, America’s public debt has jumped to $17.6 trillion from $9.2 trillion. “It is perhaps timely to reflect,” Mr. Kwarteng comments, “that paper money was almost always a wartime expedient, introduced as a means of extraordinary financing in extraordinary times.” No longer. Paper money is what the politicians and central bankers wheel out to address the failures of finance—failures chargeable to prior episodes of inflation and overlending.
Mr. Kwarteng, a heroic reader, has compiled a wonderful bibliography and gathered a colorful grouping of monetary characters to people his chapters. Among my favorites is the indomitable Francis W. Hirst (1873-1953), an editor of the Economist who had no truck with John Maynard Keynes, that astringent, Cambridge-educated champion of the state and its latter-day wampum.
The author gives away his politics in his reverential quoting of Keynes and in his characterization of a certain senior U.S. Treasury official during the administration of George W. Bush. “A committed free-market Republican,” quoth Mr. Kwarteng, “he was reluctant to approve any measures which could in any way be interpreted as constituting excessive government interference.” How much bigger might the bank bailout have been if Hank Paulson had not been so selflessly devoted to the ideals of the free market?
—Mr. Grant is the editor of Grant’s Interest Rate Observer. His history of the self-healing slump of 1920-21, “The Forgotten Depression,” will be published in November.