Currency Wars_ The Making of the Next Global Crisis - James Rickards [41]
The combination of a final round of devaluations, pledges to maintain new parities and resumption of gold sales might have worked to launch a new era of monetary stability based on gold. But it was a case of too little, too late. The economic destruction wrought by Versailles reparations and Weimar hyperinflation had given rise in Germany to the corporatist, racist Nazi party, which came to power in early 1933. In Japan, a military clique adhering to a twentieth-century version of the feudal code of Bushido had taken control of the Japanese government and launched a series of military invasions and conquests throughout East Asia. By 1942, large parts of the world were at war in an existential struggle between the Allied and Axis powers. Devaluations and struggles over war debts and reparations left over from World War I were forgotten. The next time international monetary issues were revisited, in 1944, the world would be a far different place.
In the end, the flaws of both the 1925 gold exchange standard and U.S. monetary policy from 1928 to 1931 were too much for the global monetary system to bear. Devaluing countries such as France and Germany gained a trade advantage over those who did not devalue. Countries such as England, which had tried to return to the prewar gold standard, suffered massive unemployment and deflation, and countries such as the United States, which had massive gold inflows, failed to live up to their international responsibilities by actually tightening credit conditions during a time when they should have been loosening.
The extent to which these imbalances and misguided policies contributed to the Great Depression have been debated ever since. It is certainly the case that the failure of the gold exchange standard has led many economists today to generally discredit the use of gold in international finance. Yet it seems at least fair to ask whether the problem was gold itself or the price of gold, which stemmed from a nostalgic desire for a prewar peg, combined with undervalued currencies and misguided interest rate policies, that really doomed the system. Perhaps a more pure form of gold standard, rather than the hybrid gold exchange standard, and a more realistic gold price, equivalent to $50 per ounce in 1925, would have proved less deflationary and more enduring. We will never know. What followed after 1936 was not a continuation of a currency war but the bloodiest real war in history.
CHAPTER 5
Currency War II (1967–1987)
“The dollar is our currency, but it’s your problem.”
U.S. Treasury Secretary John Connally
to foreign finance ministers, 1971
“I don’t give a shit about the lira.”
President Richard M. Nixon, 1972
As World War II wound down, the major Allied economic powers, led by the United States and England, planned for a new world monetary order intended to avoid the mistakes of Versailles and the interwar period. These plans were given final shape at the Bretton Woods Conference held in New Hampshire in July 1944. The result was a set of rules, norms and institutions that shaped the international monetary system for the next three decades.
The Bretton Woods era, 1944 to 1973, while punctuated by several recessions, was on the whole a period of currency stability, low inflation, low unemployment, high growth and rising real incomes. This period was, in almost every respect, the opposite of the CWI period, 1921–1936. Under Bretton Woods, the international monetary system was anchored to gold through a U.S. dollar freely convertible into gold by trading partners