Category: Book Quotes of the Day

But while the bubble lasted, it was the people who were the least informed who were the ones making the most money. As the New York Times described it, “The old-timers, who usually play the market by note, are behind the times and wrong,” while the “new crop of speculators who play entirely by ear are right.”

It was Maynard Keynes who had first articulated the political dimension to exchange rate policy in the Tract, back in 1923: “The level of the franc is going to be settled, not by speculation or the balance of trade, or even the outcome of the Ruhr adventure, but by the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier.”

Sir John Bradbury kept pressing the point that the virtue of the gold standard was that it was “knave-proof. It could not be rigged for political… reasons.” Returning to the gold standard would prevent Britain from “living in a fool’s paradise of false prosperity.”

He was acutely aware that British prices were still 10 percent too high, and that further deflation to cut them would bring further hardship. But he had become increasingly convinced that the British needed to be pushed into making the big decision–force majeure, he called it. The shock therapy of forcing Britain to compete in world markets, while painful, would bring about the neccessary realignment in prices more efficiently than a long drawn–out policy of protracted tight credit.

The Americans recognized that if Britain did go back to gold, it was imperative that the link not snap at the first signs of trouble. Otherwise, the credibility of the whole system might be called into question, throwing all the world’s currencies into turmoil.

So great was the Rothschild mystique that the economist J.A. Hobson, echoing a widely shared opinion, wrote in 1902 that no great war could be “undertaken by any European state… if the house of Rothschild and its connections set their face against it.”

Convinced that finance had become war by other means, officials resorted to military analogies. Prime Minister Poincaré declared in the National Assembly that he had in his possession a secret document outlining a “plan for an offensive against the franc,” which Stresemann was supposed to have circulated to a conclave of German bankers at the Hotel Adlon. The “attack” was to be “launched” from Amsterdam, where German business houses had allegedly accumulated a reserve fund of 13 billion francs. It was reported in a U.S. newspaper that the Lutheran pastors of America had received a letter suggesting that they urge their flock to dump francs in order to “assist in bringing France to its knees.” The French were then, and would remain for many decades, obsessed with the specter of foreign speculators.

But more than anything else it was Keynes’s ability to strip away the surface of monetary phenomena and reveal some of its deeper realities and its connections to the society at large that has made the Tract such an enduring classic. For example, by tracing through the consequences of rising prices on different classes in a stylized picture of the economy–what economists today might call a model–he showed that inflation was much more than simply prices going up, but also a subtle mechanism for transferring wealth between social groups–from savers, creditors, and wage earners to the government, debtors, and businessmen.

While gold was the international currency par excellence, the pound sterling was viewed as its closest substitute, and most trading nations–the United States, Russia, Japan, India, Argentina–even kept part of their cash reserves in sterling deposits in London. The pound had a special status in the gold standard constellation and its devaluation would have rocked the financial world.

There were essentially only two ways to restore the past balance between the value of gold reserves and the total money supply. One was to put the whole process of inflation into reverse and deflate the monetary bubble by actually contracting the amount of currency in circulation. This was the path of redemption. But it was painful. For it inescapably involved a period of dramatically tight credit and high interest rates, a move that was almost bound to lead to recession and unemployment, at least until prices were forced down.

The alternative was to accept that past mistakes were now irreversible, and reestablish monetary balance with a sweep of the pen by reducing the value of the domestic currency in terms of gold–in other words, formally devalue the currency.

Only on reparations did Germany seem able to fight back. It discovered what every large debtor at some point discovers: that when one owes a large amount of money, threatening to default can give one the upper hand.