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Fascinating history - completely relevant for today
on 16 January 2012
Liaquat Ahamed (a NY money manager) won the FT Business Book of the Year Award 2009 with this - his first book - and deservedly so.
There are lots of parallels with the recent financial crisis (although Ahamed actually wrote the book before the crisis broke). Points of interest are:
World War 1 saddled the Europeans with Debt. The Germans owed money to the French and Brits ("reparations") while the Brits and French owned money to the Americans (who kindly lent us money so we could buy weapons from them). These debts soured international relations for 20 years: the French and Brits wouldn't reduce the reparations due from Germany, unless the Americans agreed to reduce their demands on them.
There were 3 different approaches to dealing with the hang-over of debt.
1. Inflation: Germany did this in the 1920s, it led to hyperinflation, but reduced the value of their currency, making the reparations easier to pay (in theory only, because the Allies soon wised up and demanded something of value - e.g. the French invaded the Ruhr district of Germany to get coal).
2. Devaluation: The French devalued their currency against gold: thus reducing the value of their debt obligations. In the 1920s, this was seen as a dishonourable thing to do: tantamount to defaulting on your debt.
3. Deflation: The Brits simply did their best to pay off their debts, viewing the French and German responses as dishonourable.
The gold-standard took a breather in WW1, but countries rejoined as soon as they could afterwards. The French rejoined at a much lower rate, which allowed them to accumulate huge gold reserves (capital account surplus) and run current account surpluses to try to export their way to growth. Pretty much the current Chinese strategy.
The Brits (largely for the sake of honour, rather than economics) rejoined the gold-standard at their pre-war rate (which was too high, in retrospect), and suffered the results of an overvalued exchange rate: a drain of gold reserves, slow growth, and deflation.
The problems with the French accumulation of gold and undervalued currency soured international relations for a decade or more between the wars: but the French persisted, as they saw accumulation of gold as imperative security for themselves, having been ravaged by WW1.
Policy Response to Banking Crisis and Great Depression.
Keynes' was a lonely voice arguing for fast government reaction to the 1929 crash and subsequent banking failures. The orthodoxy of the day was to let banks go bust (particularly those deemed insolvent), and to try to balance the budget. To bail-out foolish banks and not to balance the books was seen as reckless, ungentlemanly behaviour. The author takes the view (and I think most would agree with the benefit of hindsight) that this policy response made the crisis far worse than it needs to have been - and explains why the response to the 2008 crisis was so vigorous, in contrast to 1929-2932.
By 1944 (now Lord) Keynes' had been proven right on virtually all counts, and he and White (the US lead negotiator, and later discovered to be Soviet-spy) drew up the Bretton-Woods agreement. Keynes wanted a World Bank, and while did not want fixed exchange rates (he was a fierce critic of the UK's return to the gold standard), he wanted a system where current account balances were brought into balance ( ie the French couldn't run persistent surpluses has they had in the 20s). But the Americans, fearing that they would be the runners of persistent current account surpluses after WW2 was over (as they'd be the only ones left standing - which turned out to be true) watered down Keynes' proposals.
All in all, a fascinating book.