Currency Wars_ The Making of the Next Global Crisis - James Rickards [23]
Currency wars resemble most wars in the sense that they have identifiable antecedents. The three most powerful antecedents of CWI were the classical gold standard from 1870 to 1914, the creation of the Federal Reserve from 1907 to 1913, and World War I and the Treaty of Versailles from 1914 to 1919. A brief survey of these three periods helps one to understand the economic conflicts that followed.
The Classical Gold Standard—1870 to 1914
Gold has served as an international currency since at least the sixth century BC reign of King Croesus of Lydia, in what is modern-day Turkey. More recently, England established a gold-backed paper currency at a fixed exchange rate in 1717, which continued in various forms with periodic wartime suspensions until 1931. These and other monetary regimes may all go by the name “gold standard”; however, that term does not have a single defined meaning. A gold standard may include everything from the use of actual gold coins to the use of paper money backed by gold in various amounts. Historically the amount of gold backing for paper money has ranged from 20 percent up to 100 percent, and sometimes higher in rare cases where the value of official gold is greater than the money supply.
The classical gold standard of 1870 to 1914 has a unique place in the history of gold as money. It was a period of almost no inflation—in fact, a benign deflation prevailed in the more advanced economies as the result of technological innovation that increased productivity and raised living standards without increasing unemployment. This period is best understood as the first age of globalization, and it shares many characteristics with the more recent, second age of globalization that started in 1989 with the end of the Cold War.
The first age of globalization was characterized by technological improvements in communication and transportation, so that bankers in New York could speak on the phone to their partners in London and travel time between the two financial hubs could be as short as seven days. These improvements may not have been widespread, but they did facilitate global commerce and banking. Bonds issued in Argentina, underwritten in London and purchased in New York created a dense web of interconnected assets and debts of a kind quite familiar to bankers today. Behind this international growth and commerce was gold.
The classical gold standard was not devised at an international conference like its twentieth-century successors, nor was it imposed top-down by a multilateral organization. It was more like a club that member nations joined voluntarily. Once in the club, those members behaved according to well-understood rules of the game, although there was no written rulebook. Not every major nation joined, but many did, and among those who joined, capital accounts were open, free market forces prevailed, government interventions were minimal and currency exchange rates were stable against one another.
Some nations had been on a gold standard since well before 1870, including England in 1717 and the Netherlands in 1818, but it was in the period after 1870 that a flood of nations rushed to join them and the gold club took on its distinctive character. These new members included Germany and Japan in 1871, France and Spain in 1876, Austria in 1879, Argentina in 1881, Russia in 1893 and India in 1898. While the United States had been on a de facto gold standard since 1832, when it began minting one-troy-ounce gold coins worth about twenty dollars at the time, it did not legally adopt a gold standard for the conversion of paper money until the Gold Standard Act of 1900, making the United States one of the last major nations to join the classical gold system.
Economists are nearly unanimous in pointing out the beneficial economic results of this period.