The Post-War Era

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Time Magazine

 

In What Has Government Done to Our Money? , chapter IV entitled The Monetary Breakdown of the West, monetary economist Murray Rothbard neatly sums up the devolution of a post-war monetary system doomed at inception by the adoption of the inherently flawed gold-exchange standard:

And since the United States began the post-war world with a huge stock of gold (approximately $25 billion) there was plenty of play for pyramiding dollar claims on top of it. Furthermore, the system could "work" for a while because all the world's currencies returned to the new system at their pre-World War II pars, most of which were highly overvalued in terms of their inflated and depreciated currencies. The inflated pound sterling, for example, returned at $4.86, even though it was worth far less than that in terms of purchasing power on the market. Since the dollar was artificially undervalued and most other currencies overvalued in 1945, the dollar was made scarce, and the world suffered from a so-called dollar shortage, which the American taxpayer was supposed to be obligated to make up by foreign aid. In short, the export surplus enjoyed by the undervalued American dollar was to be partly financed by the hapless American taxpayer in the form of foreign aid.

There being plenty of room for inflation before retribution could set in, the United States government embarked on its post-war policy of continual monetary inflation, a policy it has pursued merrily ever since. By the early 1950s, the continuing American inflation began to turn the tide the international trade. For while the U.S. was inflating and expanding money and credit, the major European governments, many of them influenced by "Austrian" monetary advisers, pursued a relatively "hard money" policy (e.g., West Germany, Switzerland, France, Italy). Steeply inflationist Britain was compelled by its outflow of dollars to devalue the pound to more realistic levels (for a while it was approximately $2.40). All this, combined with the increasing productivity of Europe, and later Japan, led to continuing balance of payments deficits with the United States. As the 1950s and 1960s wore on, the U.S. became more and more inflationist, both absolutely and relatively to Japan and Western Europe. But the classical gold standard check on inflation--especially American inflation--was gone. For the rules of the Bretton Woods game provided that the West European countries had to keep piling upon their reserve, and even use these dollars as a base to inflate their own currency and credit.

But as the 1950s and 1960s continued, the harder-money countries of West Europe (and Japan) became restless at being forced to pile up dollars that were now increasingly overvalued instead of undervalued. As the purchasing power and hence the true value of dollars fell, they became increasingly unwanted by foreign governments. But they were locked into a system that was more and more of a nightmare. The American reaction to the European complaints, headed by France and DeGaulle's major monetary adviser, the classical gold-standard economist Jacques Rueff, was merely scorn and brusque dismissal.

And what did Rueff have to say about the pernicious monetary disorder?  In The Age of Inflation (1964 Henry Regnery Company, Chicago, Illinois) he has much to say, throughout, about the infirmities of any gold-exchange standard.  Just consider on p. 122 – 123:

The most serious consequences of the gold-exchange standard is, however, to be found in the inherently unsound credit structure which it spawns.  President Kennedy’s message pointed out that the $17.5 billion in gold held by the United States at the end of 1960 served to cover both the $20 billion of short-term foreign holdings and demand claims on dollars and the $11.5 billion requested by the present laws and regulations to cover the domestic currency in circulation in the United States.  Now, I am not in any way implying that the existing gold stock is inadequate to ensure the stability of United States currency in present circumstances.  Besides, President Kennedy has said that the amount of gold required as backing for the currency in domestic circulation could be reduced if the existing regulations concerning the guaranty of the domestic currency were changed, and he has, in the fact, proposed that this be done.  Further support for the dollar is, moreover, available in the form of a variety of as yet untapped assets, such as large drawing margins at the International Monetary Fund and extensive foreign holding.

The proceeding remarks do not, therefore, cast any aspersions on the value of the dollar.  They merely point to the inevitable conclusion that the application of the gold exchange standard in a period of large-scale capital movements has saddled a considerable portion of the United States gold stock with an exceedingly high double mortgage.  If a substantial part of the foreign holdings of claims on dollars were cashed for gold, the credit structure of the United States would be seriously threatened.  This, of course, will not happen, but the simple fact that it could inevitably calls to mind that the depression of 1929 was a “great depression” because of the collapse of the house of cards that had been built on the gold-exchange standard.

 

Bretton Woods temporarily re-established a post-war world monetary and financial system.  But a house divided against itself — the monetization both of gold and paper — cannot stand.  And as President Lincoln said, on June 6, 1868 of another such situation “it will cease to be divided.   It will become all one thing or all the other.”  In the event, a pure exchange standard — the world dollar standard — was adopted.  America discovered the wisdom of the prophet Hosea: “they have sown the wind and they shall reap the whirlwind.”

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