Letters by a modern St. Ferdinand III about cults

 Churchill called Keynes, the tweed wearing 'economist' or mystic the, 'most able opponent of the return to the Gold Standard'. True enough. Keynes was also the most dominant voice of anti-reality embedded in the cult of demand management and the creation of fiat currency. Inimical more than rational. Churchill's tenure as Chancellor of the UK from 1924-1929, is usually presented as a less than favourable demonstration of his grasp, or lack of it, of finances. This criticism is undoubtedly true in some respects. Churchill's strength was in the crass business of politics and geo-political affairs. He was not a financial literate. He did have the good common-sense to ignore Keynes however.

Churchill's rule over British treasury affairs is not however, a desultory epoch, nor one devoid of good design and ideas. It was the era of the 'roaring' 20's in which the global economy took off from 1924 – 29 thanks mainly to the American bail-out of the German banking system [will this happen again?], an ease in tariffs and taxation, and the flowing of capital into trade and job creation; not to mention consumer inventions. The post-World War I malaise, social instability, high unemployment, and the burden of war repayments was finally put to rest in 1923, in part even for Germany, thanks mainly due to American governmental and banking monies liquifying the international political-economy.

Churchill took over at a good time, and this fact is usually missed out by historians focused on this period. One of the great disappointments of most Churchilliana is the complete lack of political-economic perspective. One rarely reads about the mundane factors of micro and macro economics and the conditions of life. How did people live? What jobs were prevalent? What changes in the economy and in social mores were being undertaken? How 'biased' was the media? What politic theologies were being forwarded? Technology, capital flows, trade balances, income growth or decline, economic health or contraction; all of these and plenty more impress themselves upon all politicians. Yet I can't remember reading one volume in the mansion of Churchilliana which layers on the reality of the political-economy to any of his positions or at times, even his political positions. Maybe my memory is bad, but it surely is true that most approaches to polemics miss these essential points.

The roaring 20's was maybe not so uproarious as our history books tell us, but the 5 years before the Great Depression do seem to be a period of development and general improvement. Much of this was due to the return to gold – another factor missed in most history books. The return to the Gold Standard had its origins in the instability of the immediate post war period, and the 19^th century orthodox economic attitude that mono-metallic currency bases were mandatory for sound money management. Nothing since 1919 has refuted this iron law of currency value. Between 1921 and 1925 the American and British governments co-jointly planned the return of Western currencies to a gold standard. The pros and cons were debated and the ill-effects well known, but there was an almost unanimous agreement that a fixed exchange rate, where a certain amount of gold would support a certain quantity of paper money circulation, was necessary. Today of course the opposite consensus exists. Fiat currencies de-racinated from any metallic exchange is now the accepted 'wisdom' of most economists.

When Churchill came to his Chancellorship position in 1924 the return to gold was already a fait accompli – a fact not mentioned in most texts on the subject. The civil service as well as the Conservative government of the time both agreed to this unalterable fact. It is inconceivable that Churchill would have risked a veto on this policy, a decision which would have left him high and dry within his party, and open to a barrage of professional and media criticism. In 1924 the cult of Keynes had not reached critical mass, and diseased the profession of economic analysis. Printing colored paper un-moored to a metal was not yet a received 'truth'.

In the 19^th century the gold standard helped inaugurate an increase in world trade by a factor of 10. British and American power was of course a mandatory corollary to allow this fantastic increase in wealth to occur. The gold standard did function in the main quite wonderfully. Itwas a natural working system, arising from the need to have an independent source of wealth calculation, medium of exchange and security. Banks held gold reserves and would issue a paper guarantee that would allow a depositor to exchange money for gold in the marketplace. Central banks began doing the same and over time this IOU would become a national currency paper.

Importantly the amount of money in circulation, issue by a central bank, was limited by the amount of gold reserves. This idea does not exist today, which is why the U$ has devalued 96% since 1913 in real terms, especially degrading in value since the end of the fixed exchange regime in 1971. If a central bank in 1926 printed too much money and caused inflation, a citizen would go to a bank and exchange the paper notes for gold. The metal would be drained out of the system and the central bank would have to cut the money supply in order to repair its holdings of gold. Today no such obstruction exists for modern central banks.

Constant fixed exchanges also stabilized and improved trade since they were founded upon gold. If a central bank kept printing money, the rise in local prices due to inflation would decrease exports. People would go abroad in search of cheaper imports and assets. This would subtract gold from the domestic system eventually forcing a change in policy. Likewise if a state received a lot of gold from abroad, it could print more money against this asset base, thus revaluing domestic prices upwards which would make foreign goods more affordable. Gold would eventually lead to a sort of equilibrium, since excessively bad policy would lead to financial ruin and long before then, the system would likely recalibrate and force policy changes. Unlike today therefore, countries in 1926 could not 'print deficits' forever and use their exchange rates to 'bail out' bad monetary policy.

Bank of England Chairman Montagu knew his history, and the fact that the British imperial system took off after 1821 when it returned to the gold standard [and slew the inflation from the Napoleonic wars], was well known to him. In 1922 at a conference in Genoa, Montagu and others brokered a deal to return to the gold standard. Payments in gold back bills of exchange at pre-war exchange rates were agreed upon for the main trading nations. Those of the second rank would use the bills of exchange from first world states in trade. It was hoped that the 2 tiered system would lubricate international commerce.

Thus was the world when Churchill became Chancellor. In 1923 unemployment was at 12% and many inefficient heavy industries were in trouble particularly in the north of England in coal, mining and textiles. The first world war had stimulated an excess in production in these industries, far outstripping peace time demand and export opportunity. There was little that one could do to 'save' these industries except hand them welfare and subsidy cheques – an ineffective and over the longer term, deleterious policy still in vogue today. Unionization was rampant [reaching a peak oddly during World War II]; to about 35 % of the workforce or some 8 million people. Unions had no interest in shuttering businesses, decreasing wages, or more imports and competition.

There was little doubt that in the short term the unions, ineffective businesses, poorly run manufacturing and industrial concerns, and archaic textile production would all suffer. Churchill asked experts from both 'groups' including gold-standard 'deniers', to make their case so he could comprehend the impact of returning to gold on January 1 1926, as per the deal at Genoa and the agreement reached between the Americans and British during the period 1921 to 1925. Proponents knew that returning to the standard would be 'hellish', but felt that the pain would produce longer term gains in efficiency, new industrialization, trade, and stability. Keynes as almost the lone dissenter, opined that only government could manufacture prosperity, by increasing the money supply, stoking inflation, subsidizing jobs; and limiting import competition. He was obsessed with full employment and believe in the mystic power of government ot 'protect' not only jobs, but also wage levels and to manage both. Keynesian theology had already converted many on the Continent to its religion of demand management and during 1923-5 many Euro economies were implementing and feeling the negative effects of the Keynes cult and its diktat. These failures were known to Churchill. Keynes ignored the reality that British economic weakness was structural, riven by heavily protected industrial centers which were failing; high wages; poor to non-existent productivity in many sectors; and bloated unions. Printing money would not solve these structural issues.

Based on the available information Churchill made the right decision. On April 28 1925 he announced or reconfirmed, the move to a gold standard on January 1 1926. It was the proper policy choice, and one that was not politically popular with many in the working 'class'. The easier and more 'political' decision would have been to follow Keynes, print money, 'support' full employment and centralize the management of wages. To Churchill's credit he rejected this path. There certainly was pain involved in the transition. But the pain was structural, and an economy can only overcome systemic weakness with real policies which unravel rigidities in labour, capital, unions and government. Printing money, and engaging in the mysticism of 'managing demand', does nothing but add to debt, future taxes, near term and even longer term inflation, increase wages and further rigidify labour and capital markets, both of which eventually come under government regulation. The roaring 20s was built in part, on the stability of gold, not of Keynesianism. The 'Great Depression' had little to do with this system, but much to do with government interference, beggar thy neighbour tariffs and trade reduction, massive taxation, and unsound monetary policy.