Currency Wars_ The Making of the Next Global Crisis - James Rickards [35]
It is one thing when prices drift downward over time due to innovation, scalability or other efficiencies. This might be considered “good” deflation and is familiar to any contemporary consumer who has seen prices of computers or wide-screen TVs fall year after year. It is another matter when prices are forced down by unnecessary monetary contraction, credit constraints, deleveraging, business failures, bankruptcies and mass unemployment. This may be considered “bad” deflation. This bad deflation was exactly what was required in order to return the most important currencies to their prewar parity with gold.
The choice was not as stark in the United States because, although the U.S. had expanded its money supply during World War I, it had also run trade surpluses and had greatly increased its gold reserves as a result. The ratio of paper currency to gold was not as badly out of line relative to the prewar parity as it was in England and France.
By 1923, France and Germany had both confronted the wartime inflation issue and devalued their currencies. Of the three major European powers, only England took the necessary steps to contract the paper money supply to restore the gold standard at the prewar level. This was done at the insistence of Winston Churchill, who was chancellor of the exchequer at the time. Churchill considered a return to the prewar gold parity to be both a point of honor and a healthy check on the condition of English finances. But the effect on England’s domestic economy was devastating, with a massive decline of over 50 percent in the price level, a high rate of business failures and millions of unemployed. Churchill later wrote that his policy of returning to a prewar gold parity was one of the greatest mistakes of his life. By the time massive deflation and unemployment hit the United States in 1930, England had already been living through those conditions for most of the prior decade.
The 1920s were a time of prosperity in the United States, and both the French and German economies grew strongly through the middle part of the decade. Only England lagged. If England had turned the corner on unemployment and deflation by 1928, the world as a whole might have achieved sustained global economic growth of a kind not seen since before World War I. Instead, global finance soon turned dramatically for the worse.
The start of the Great Depression is conventionally dated by economists from October 28, 1929, Black Monday, when the Dow Jones Industrial Average fell 12.8 percent in a single day. However, Germany had fallen into recession the year before and England had never fully recovered from the depression of 1920–1921. Black Monday represented the popping of a particularly prominent U.S. asset bubble in a world already struggling with the effects of deflation.
The years immediately following the 1929 U.S. stock market crash were disastrous in terms of unemployment, declining production, business failures and human suffering. From the perspective of the global financial system, however, the most dangerous phase occurred during the spring and summer of 1931. The