(Times & Spectator) Lawson: It all went wrong when we left gold standard
Riaz K Tayob
Submitted by cpowell on 06:02PM ET Monday, October 13, 2008. Section:
Daily Dispatches
By Dominic Lawson
The Independent, London
Tuesday, October 14, 2008
http://www.independent.co.uk/opinion/commentators/dominic-lawson/dominic...
My nearby market town of Lewes has started issuing its own pound notes:
Tom Paine's portrait is on one side, Lewes Castle on the other. The
Bullion Vault, a London gold broker, reports "phenomenal interest" in
its product. The multi-millionaire media magnate Felix Dennis tells the
Financial Times that he has followed the instructions of his financial
adviser to "buy gold. Physical bits, small bits, so when you need to get
a sandwich you can take it down the shop and take 300 sandwiches away;
God help me, in a vault here in London, I have huge quantities of small
bits of gold."
We should not assume from this that the pound sterling is about to go
the way of the Zimbabwean dollar. Lewes has ever been a contrary place;
the Bullion Vault is obviously talking up its own business; Felix Dennis
is highly impulsive.
Yet these are also straws in the wind, or rather a howling gale. When
Governments spend vast sums of money to shore up the banking system, you
just know that it would be all too convenient for it to let inflation
erode the national debt incurred in the process. Even before these
gigantic expenditures, Britain's true level of national debt, according
to the economist Liam Halligan -- the Government won't give the real
figure including off-balance sheet liabilities -- is over L1,300
billion. This is equivalent to L50,000 per household. Perhaps Gordon
Brown might call it "imprudence with a purpose" -- he dumped Prudence
some time ago, although he kept on telling everyone that they were still
an item.
In America, the situation is much the same, only, as you would expect,
bigger. Last Saturday, the digital display in New York showing the
current level of national debt did not have enough digits to show the
real number, after it breached the $10 trillion mark
($10,150,603,734,720 to be precise). Per American household this works
out as $86,023 (L£49,747); so Mr Brown, in this respect at least, isin
no position to lecture George W. Bush on economics.
There is, however, a small band of men and women --– long insulted as
fanatics or even fantasists by the political mainstream -- who can now
say: "We told you so." I am not referring to the Communist Party of
Great Britain (Marxist-Leninist). No, I'm talking about the followers of
the great Austrian economist Ludwig von Mises (1881-1973). in his 1912
work, "The Theory of Money and Credit," Mises declared that the
corruption and distortion of money by the state and bankers, usually to
pay for wars, was the principal cause both of inflation and -- to coin a
phrase -- boom and bust.
As the chief economic advisor to the Austrian government in the 1920s,
Mises put his theories into practice and slowed down inflation in his
native country (which, as a Jew, he later fled). He used his "cycle"
theory to forecast that the "New Era" of apparently permanent prosperity
in the 1920s was illusory, and that it would end in runs on banks and
depression: The Wall Street crash of 1929 was exactly what Mises had
predicted.
Mises believed that any currency which was not backed by gold was
powerless to resist the depredations of governments and bankers addicted
to the possibilities of limitless credit. Until the past few weeks, this
has been seen as a bizarrely old-fashioned and eccentric outlook; but I
would not be surprised if many young people -- who have hitherto been
comfortable with the idea of money as something which can just exist in
the ether, travelling through the digital highway -- now wonder whether
anything of intrinsic value lies behind it all.
As far as Mises was concerned, even money made of paper, if it had
nothing behind it other than the good word of politicians and central
bankers, was inherently unsound; he lived just long enough to see the
United States of America --– where he ended his days -- break
decisively with the international Gold Standard.
Up until August 1971, the owner of dollars could, at least
theoretically, exchange them for gold. That month France, to which the
US owed about $3 billion as part of the financing of the Vietnam War,
demanded that the dollar debt be repaid in gold. Unfortunately, there
was no longer enough in the vaults of Fort Knox. Apparently there exists
a tape of Richard Nixon saying: "Screw the French!" America immediately
came off the gold standard, after which there was no theoretical limit
to its ability to print money and -- according to the followers of Mises
-- the age of high inflation was under way.
John Maynard Keynes, rather than Ludwig von Mises, is the economist
whose name is being invoked on the airwaves in Britain. In his own day
too Keynes obliterated Mises; it became fashionable to believe that
Roosevelt's New Deal was a kind of successful rudimentary application of
Keynesianism.
Yet Roosevelt's policy of massive intervention by the state to prop up
wage rates and inflate credit gets a much better press than it ever
deserved. Consider this: In September 1931 the US unemployment rate was
17.4 per cent and the Dow Jones industrial Average stood at 140. By
January 1938, unemployment was still at 17.4 per cent, and the Dow
Average had dropped to 121.
Mises' followers insist that the present problems in the economies of
the West have not been caused by laissez-faire, but by the opposite:
politically sensitive central bankers so desperate to prevent any stock
market slump that they cut interest rates to a level which turbo-charged
the debt markets. So when George Osborne, as he did yesterday, declares
that "laissez-faire is dead", the Mises-ites -- one of whom is the
libertarian presidential candidate, Congressman Ron Paul -- would
protest that such a policy was never tried in the first place.
Yesterday I spoke to one of the leading academic figures in that
movement, Professor Thorsten Polleit of the Frankfurt School of Finance.
The professor is less enthusiastic than the stock market about the
British Government's injection of taxpayers' money into the weakest
banks. He points out that by standing behind those banks, but giving no
general guarantees, the Government is encouraging savers to pull all
their money out of well-run smaller institutions and switch it into
badly run bigger banks.
The Government will insist that it is no time to be debating economic
theories and the origins of this crisis -- that we should simply do what
we can to inject confidence back into the system. Professor Polleit sees
it differently: "A proper diagnosis is necessary before you know the
right remedy. Your Government -- and others -- are dealing with the
symptoms but not the causes." As any doctor will tell you, that is not
in the patient's long-term interest.
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Dominic Lawson is a columnist for The Independent and a former editor of
The Spectator magazine and the Sunday Telegraph newspaper.