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Saturday, July 27, 2013

1931 for the Euro, Part II



February 25, 2010 by · Leave a Comment 

By Adrian Ash, GoldSeek

It wasn’t called the “irrevocable exchange rate” for nothing…

PRICING YOUR money in gold – in a world where everyone else does the same, and at fixed exchange rates, too – makes for a big problem if the welfare state begins gobbling up more wealth, year after year, than it earns in taxation.

“No [social] safety nets were allowed. If the gold stock was flowing outward [thanks to the currency falling on the international exchanges], interest rates had to rise to attract foreign funds and the domestic economy had to be suppressed to curtail imports.”

So wrote Peter Bernstein of the Gold Standard in The Power of Gold. Glued back together after the cataclysm of World War I, this informal yet tightly rule-bound system cracked and finally shattered for good in the 1930s. But “even when countries went off gold,” as Princeton professor Paul Krugman wrote in late 2009, “the prevailing mentality made them reluctant to cut [interest] rates.” Or rather, it made them reluctant to cut the cost of money below zero, as he would advise. Because with the monthly in- and out-flow of gold bullion from the foreign exchanges for so long measuring the credit extended by foreign and domestic wealth, government policy naturally leant towards deflation.

Defending the value of cash, rather than inflating it away, gives creditors confidence. And that, paradoxically, is the only way to finance deficit spending long term. The alternative, at least to the mind of 1931 policy-makers, wasGermany’s 2.7 million per cent Weimar inflation of 10 years before.

“Whether we returned to the Gold Standard [after WWI] too early or not is debatable, but it is no longer a matter of more than academic interest,” wrote Edward Peacock, King George V’s own financial advisor, a director of Baring Bank, and a likely-looking successor as Bank of England governor, on 1st August.

“To go off the Gold Standard, for a nation that depends so much upon its credit, would be a major disaster.”

Read more….

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