Currency Wars_ The Making of the Next Global Crisis - James Rickards [29]
Calculation of the reparations and agreement on a mechanism by which reparations would be paid was a nearly impossible task. France, Belgium and England wanted to base reparations on actual war damages, while the United States was more inclined to consider Germany’s ability to pay. The German statistics, however, were abysmal and no reliable calculation of their ability to pay could be made. The assessment of damages was also impossible in the short run. Many areas were barely accessible, let alone amenable to some sort of appraisal of needed reconstruction.
The Allies argued as much among themselves as they did with German representatives about whether reparations should be limited to actual damages, which favored France and Belgium, or should include purely financial costs such as pensions and soldiers’ salaries, which would favor England. In the end, no exact amount of reparations was specified in the Treaty of Versailles. This was the result of the technical impossibility of calculating a number and the political impossibility of agreeing to one. Any figure high enough to enjoy domestic approval in England and France might have been too high for the Germans to agree to and vice versa. American admonitions for moderation and practicality were largely ignored. Domestic politics triumphed over international economic needs. Instead of a specific number, expert panels were empowered to continue studying the question and make specific findings in the years ahead, which would form the basis for actual reparations. This bought time, but the hard issues on reparations were put off only to become entangled during the 1920s with the gold exchange standard and efforts to restart the international monetary system. Reparations were like an albatross hung around the neck of the international financial system for the next fifteen years.
Conclusion
By 1921, the table was set for the first modern currency war. The classical gold standard had acted as an intellectual magnet, a monetary North Star that framed the debate over what kind of system was needed in the 1920s to restart international capital flows and world trade. World War I and the Treaty of Versailles introduced a new element, not predominant in the gold standard age, of massive, interlocking and unpayable sovereign debts, which imposed an insurmountable obstacle to normalized capital flows. The creation of the Federal Reserve System and the role of the New York Fed in particular heralded the arrival of the United States on the international monetary scene as the dominant player and not just another participant. The potential for the Fed to reliquify the system through its own money printing efforts was just coming into full view. By the early 1920s, nostalgic affection for the prewar classical gold standard, tension over unpayable reparations and uncertainty about the money power of the Federal Reserve all conditioned the creation of a new international monetary system and the course of Currency War I.
CHAPTER 4
Currency War I (1921–1936)
“There is hardly a part of the United States where men are not aware that secret private purposes and interests have been running the government.”
President Woodrow Wilson
Currency War I began in spectacular fashion in 1921 in the shadow of World War I and wound down to an inconclusive end in 1936. The war was fought in many rounds and on five continents and has great resonance for the twenty-first century. Germany moved first in 1921 with a hyperinflation designed initially to improve competitiveness and then taken to absurd lengths to destroy an economy weighed down by the burden of war reparations. France moved next in 1925 by devaluing the franc before returning to the gold standard,