Gold and Value

When a group of aspirant 'scientists' developed modern Economics, between 1860 and 1875, they were not able to dream up any alternative to the monetary system that was endorsed by the precursor Science of Political Economy. So in tandem with their normative [and highly imaginative] concept of 'perfect' results being achieved by the free operation of their theory of supply-and-demand, they accepted the definition of money as a special commodity, recognised and often managed by the state, that served the functions of:
          a medium of exchange
          a means  of making deferred payments
          a measure of value
          a store of value.
In retrospect, these attributes only applied to money that was based on a Gold Standard; and by coincidence the spread of Economics through the world's universities was accompanied by the spread of the gold standard. Between 1870 and 1914 a succession of countries adopted the principle that the national currency was pegged to gold, so that at the start of the first world war a British Pound or a US Dollar was defined in terms of equivalence to gold: so-many dollars for one ounce of gold, so many pounds to an ounce of gold. Anyone who held pound notes could go to the Bank of England and demand [and receive] gold - in the form of sovereign coins, which were legal tender; and similar rules applied in the USA and Russia and France and most other advanced economies. Just a few states maintained a 'silver standard'; and a few, mostly the imperial possessions of western states, had a gold-exchange standard that seemed to work but no Economist clearly understood it until a bright young man presented a brief, brisk and profound account of how it worked: this was the serendipitous first publication by John Maynard Keynes.

It was serendipitous because within just a few months of the start of the war all the combatant European countries had to abandon the 'Old Gold Standard' and move uncertainly each to their own gold-exchange standard.   Britain had the one global expert on the subject, and Keynes was drawn into the centre of the government to lead a new way of managing the unprecedented amount of payments that passed through the Exchequer to pay for the war. He recognised at once that the massive creation of paper money made any return to the old system impossible: and that the attempt to equal the inflation of the money supply with the issue of government bonds that were notionally equivalent to gold reserves was pure fantasy. The idea that war-loan would be redeemed in the postwar world by payments of gold-standard money was absurd: but it was built into the unprecedented system of war propaganda which most government ministers allowed themselves to believe. The United States kept its gold standard, and required its allies to pay gold-standard money or gold-standard guaranteed bonds [denominated in dollars] for the supplies that they necessarily bought from the USA.

Thus at the end of the war the victorious allies recognised their obligations to pay each other immense sums of 'money'. To make this easier for them, they demanded vast reparations from Germany, and those payments were written in to the Treaty of Versailles. The Austro-Hungarian monarchy had collapsed into a significant number of separate new countries that acknowledged no obligation for the debts or other obligations of the former empire: so no reparations could be expected from there. The collapse of the Russian monarchy also meant that the massive holding of Russian state and corporate debt, that were due to be serviced in gold-standard roubles or pounds, had become worthless. Thus most of the load was dumped on Germany, which was obliged to deliver gold, coal, steel and other commodities free of charge, principally to France and Belgium, so that the 'victors' could meet their obligations to their own people and to foreigners in gold-standard money . Keynes had been taken to the negotiations as an economic adviser, and he resigned in exasperation when it was clear that even if Lloyd George understood Keynes's advice the Prime Minister would not act on it. Keynes came home and set out his objections in the prophetic tract on The Economic Consequences of the Peace. As the inflation that Keynes had predicted to be inevitable gathered pace in the ensuing years, the government forged ahead with its plan to restore the monetary system and in 1925 Winston Churchill as Chancellor of the Exchequer proudly announced the 'restoration of the Gold Standard' [which was in fact a variant of the gold-exchange standard]. Keynes published his reckoning of the inevitable Economic Consequences of Mr Churchill and pressed on with his main work; which resulted in 1929 in the publication of the Treatise on Money.

Since then 'money' issued by governments has gone through many redefinitions, has been subject to massive manipulation, and has been subjected to assorted 'analyses' by various schools of Economists whose only common link is to have been wrong in their predictions and disastrous when they have become policy advisers. Their 'profession' has avoided open acceptance of Keynes's Treatise; and the International Monetary Fund - of which Keynes was one of the founders - has still not adopted his concept that world financial stability can only be achieved if they create a global reserve currency [bancor] to which national currencies relate in a disciplined order. Exactly a century has been lost since Keynes wrote on Indian Currency and Finance and there is still no sign of his plain solutions being adopted.

In a world of ill-managed currencies, reckless debt creation and the inevitable consequential inflation, it is obvious that money is NOT a 'measure of value'. After the default of Greece we are all reminded that money is NOT a stable means of making deferred payments; and it would be a very poor joke for anyone to suggest that money is a 'store of value'. It is a 'medium of exchange' simply and solely because the law demands that prices are quoted and debts are denominated and settled in the national currency. Money is used because it has to be used: it is an imposition of the incompetent state, and the one certainty is that it loses purchasing-power: the longer you keep it [whether as banknotes or on deposit] it looses 'value'.

In future blogs I will develop this simple story that Keynes's genius is better appreciated when he is recognised as an authority on money, instead of being misrepresented as an inflation-inducing proponent of 'big government'. Over the recent past hundreds of millions of lives in the postindustrial countries have been conducted under a massive cloud of monetary delusions in an environment of debt; a system that is becoming unsustainable. Keynes warned what would happen if such fantasies were pursued: it is now sensible to return to what he wrote, on the record, and to understand his theories in the context of the pre-Economics science of Political Economy on which he built.