John Maynard Keynes
William Rees-Mogg, the Conservative savant and editor of the London Times between 1967 and 1981, still writes a column for it. In a recent column (July 20) he has expressed a nostalgia for the gold standard, arguing that the “bubbles” whose collapse has brought the world economy to financial crisis and recession were promoted through monetary policies that would have been impossible under the gold standard. The gold standard, under which leading currencies were convertible into gold at fixed prices, imposed a discipline on each country, with regard to both its fiscal and monetary policies. Governments were constrained to follow the principle of “sound finance” by balancing their budgets; and central banks were constrained to prevent excessive increases in money supply and hence the maintenance of perennially low interest rates, because money supply in each country was linked to the amount of gold in the central bank’s till: in the United States of America, for instance, the Federal Reserve was legally required to have 40 per cent gold backing for its demand notes.
Under these circumstances, Rees-Mogg argues, there was a discipline on governments which disappeared when countries went off the gold standard, under the influence of Keynesianism inter alia, though Keynes himself, while opposed to the gold standard, obviously thought that the world could not do completely without some standard. He was an architect of the post-war Bretton Woods system under which the US dollar was linked to gold (at $35 per ounce of gold), though other currencies, while not convertible to gold, had fixed exchange rates against the dollar, which could be adjusted, in the case of countries with persistent balance of payments problems, with the approval of the International Monetary Fund. With the collapse of the Bretton Woods system, even that residual link between currencies and gold, and hence the discipline that followed from it, are gone. And as an example of indiscipline he cites the fact that Bill Clinton, when he was the US president, actually had a White House committee for promoting “bubbles”.
It should be instructive here to recall why Keynes was opposed to the gold standard. His argument precisely was that the “discipline” of the gold standard left governments with no instruments whatsoever “to mitigate economic distress at home”, that is, to overcome persistent unemployment. The only way they could do so, therefore, was by forcing their country’s wares on other unwilling countries. International trade under the gold standard became “a desperate expedient to maintain employment at home by forcing sales on foreign markets and restricting purchases”, which, if successful, merely shifted “the problem of unemployment to the neighbour which is worsted in the struggle”. Keynes saw this “competitive struggle for markets” as a powerful economic reason for wars in the 19th century, and believed that if governments could have adequate policy instruments to stimulate employment at home, for which they needed to get out of the so-called “discipline” of the “Gold Standard”, then a period of peace was likely to ensue. In short, he saw the “discipline” of the gold standard as something that doomed participant countries, in the absence of coercive capture of foreign markets, to stagnation, unemployment and economic distress.
While Keynes’s theoretical argument appears unexceptionable, his reading of 19th-century history is incorrect. The heyday of the gold standard, roughly between the middle of the 19th century and the World War I, was, contrary to his claim, a remarkably peaceful period in the history of capitalism. Between the end of the Crimean War (and of other contemporaneous conflicts all over the world, including India’s great rebellion) and the onset of the World War I, that is, for a period of over half a century, there were no major wars among capitalist powers. (I am leaving aside here the wars of German and Italian unification which were of a different genre in any case). This period is precisely what has been called the period of the “Long Boom”. Notwithstanding Keynes’s theoretical insights into the implications of the gold standard, we thus have a paradoxical situation where there is an absence of major wars among capitalist powers for coercive annexation of markets, and yet the maintenance of a Long Boom under the gold standard itself.
How could capitalism experience such a long boom under the gold standard, even when there were no wars among them for the coercive annexation of markets? The answer lies in the nature of the colonial arrangement. And contrary to Keynes’s assertion, there was remarkable mutual accommodation among the capitalist powers on access to markets, rather than a competitive struggle for markets. Such accommodation meant that even those powers which did not have significant colonies became nonetheless indirect beneficiaries of Britain’s access to colonial markets.
The arrangement was as follows. Britain had a current account deficit vis-à-vis continental Europe and the US, the newly industrializing countries of that time, in the late 19th century. The British market, in other words, was open to them, and since the newly-industrializing countries were cheaper producers of most industrial goods than Britain (which was often seen as paying the “penalty of an early start” because it was constrained to use less up-to-date equipment), they outcompeted British goods in its own market. But this posed no problems for Britain since it exported its own goods, especially textiles, to the compulsorily open colonial and semi-colonial markets, like India and China, where these goods displaced domestic artisan producers (the so-called “de-industrialization”). Colonies like India in turn exported primary commodities and developed large export surpluses vis-à-vis continental Europe and the US, which Britain used not only for settling its own deficits vis-à-vis these countries but also for making capital exports to the temperate regions of white settlement. The export surplus from India vis-à-vis these regions was counted not as India’s, but was used to finance Britain’s deficits vis-à-vis them and also Britain’s capital exports, because the de-industrialization-causing British exports to India, and invisible charges or the “drain of wealth” from India, were set off against this export surplus.
This arrangement implied that the newly-industrializing countries of the time were not constrained for markets, which would have been the case if Britain did not have access to colonial markets “on tap”, and instead had to go protectionist. The access to British colonial markets therefore not only helped Britain balance its payments, and even make capital exports (through the additional resources obtained from the “drain” as well), but also helped other capitalist powers find markets in Britain itself. The latter were indirect beneficiaries of British colonies.
The fact that the gold standard neither caused large unemployment nor gave rise to wars in quest of markets during the Long Boom was because of this colonial arrangement. The efficacy of this arrangement however declined in the period after the World War I, because of Japanese competition in Asian markets and also because some space perforce had to be given by British imperialism to the domestic capitalists in the colonies.
Although Keynes never recognized this role of colonialism, he was nonetheless shrewd enough to sense that the world had changed decisively in the period after the World War I, and that capitalism had to use new, hitherto-unused, instruments for maintaining employment in the metropolitan economies. His The Economic Consequences of the Peace suggests such an understanding, and his argument for freeing capitalist governments from the “discipline” of the gold standard so that they could intervene through policy measures to alleviate unemployment was based on this understanding.
The virtues that Rees-Mogg sees in the gold standard were really not of the gold standard. They were founded upon the system of colonialism. In its absence the gold standard would have produced precisely the results, namely stagnation and large-scale unemployment, together with wars to overcome such economic distress that Keynes had discussed. We have in short a case here of mistaken causation!
By the same token, in the contemporary world when colonial markets are no longer significant, and State intervention in “demand management”, as suggested by Keynes and practised during the decades of the so-called “Golden Age of capitalism”, is being thwarted by the insistence of finance capital on “sound finance” (now interpreted no longer as balancing the budget but having a fiscal deficit that is less than 3 per cent of the gross domestic product), and in extreme cases on “austerity”, a remaining possible stimulus for growth is through the generation of “economic bubbles”. Their collapse exposes the system to acute crises; but in their absence the system would be mired in quasi-stagnation. It is not Clinton therefore who is at fault but capitalism.