Origins of Federal Reserve,
From Hoover to Roosevelt,
New Deal and International Monetary System
excerpted from the book
A History of Money and Banking
in the United States
the Colonial Era to World War
II
by Murray N. Rothbard
Ludwig von Mises Institute, 2002,
hardcover
p183
The Federal Reserve Act of December 23, 1913, was part and parcel
of the wave of Progressive legislation, on local, state, and federal
levels of government, that began about 1900. Progressivism was
a bipartisan movement which, in the course of the first two decades
of the twentieth century, transformed the American economy and
society from one of roughly laissez-faire to one of centralized
statism.
Until the 1960s, historians had established
the myth that Progressivism was a virtual uprising of workers
and farmers who, guided by a new generation of altruistic experts
and intellectuals, surmounted fierce big business opposition in
order to curb, regulate, and control what had been a system of
accelerating monopoly in the late nineteenth century. A generation
of research and scholarship, however, has now exploded that myth
for all parts of the American polity, and it has become all too
clear that the truth is the reverse of this well-worn fable. In
contrast, what actually happened was that business became increasingly
competitive during the late nineteenth century, and that various
big-business interests, led by the powerful financial house of
J.P. Morgan and Company, had tried desperately to establish successful
cartels on the free market.
... It became clear to [the] big-business
interests that the only way to establish a cartelized economy,
an economy that would ensure their continued economic dominance
and high profits, would be to use the powers of government to
establish and maintain cartels by coercion. In other words, to
transform the economy from roughly laissez-faire to centralized
and coordinated statism.
p184
Monopoly had always been defined, in the popular parlance and
among economists, as "grants of exclusive privilege"
by the government. It was now simply redefined as "big business"
or business competitive practices, such as price-cutting, so that
regulatory commissions, from the Interstate Commerce Commission
to the Federal Trade Commission to state insurance commissions,
were lobbied for and staffed by big-business men from the regulated
industry, all done in the name of curbing "big business monopoly"
on the free market. In that way, the regulatory commissions could
subsidize, restrict, and cartelize in the name of "opposing
monopoly.
... For this intellectual shell game,
the cartelists needed the support of the nation's intellectuals,
the class of professional opinion-molders in society. The Morgans
needed a smoke screen of ideology, setting forth the rationale
and the apologetics for the New Order. Again, fortunately for
them, the intellectuals were ready and eager for the new alliance.
The enormous growth of intellectuals, academics, social scientists,
technocrats, engineers, social workers, physicians, and occupational
"guilds" of all types in the late nineteenth century
led most of these groups to organize for a far greater share of
the pie than they could possibly achieve on the free market. These
intellectuals needed the State to license, restrict, and cartelize
their occupations, so as to raise the incomes for the fortunate
people already in these fields. In return for their serving as
apologists for the new statism, the State was prepared to offer
not only cartelized occupations, but also ever increasing and
cushier jobs in the bureaucracy to plan and propagandize for the
newly statized society. And the intellectuals were ready for it,
having learned in graduate schools in Germany the glories of statism
and organicist socialism, of a harmonious "middle way"
between dog-eat-dog laissez-faire on the one hand and proletarian
Marxism on the other. Instead, big government, staffed by intellectuals
and technocrats, steered by big business and aided by unions organizing
a subservient labor force, would impose a cooperative commonwealth
for the alleged benefit of all.
p186
The most interventionary of the Civil War actions was in the vital
field of money and banking. The approach toward hard money and
free banking that had been achieved during the 1840s and 1850s
was swept away by two pernicious inflationist measures of the
wartime Republican administration. One was fiat money greenbacks,
which depreciated by half by the middle of the Civil War, and
were finally replaced by the gold standard after urgent pressure
by hard-money Democrats, but not until 1879, some 14 full years
after the end of the war. A second, and more lasting, intervention
was the National Banking Acts of 1863, 1864, and 1865, which destroyed
the issue of bank notes by state-chartered (or "state")
banks by a prohibitory tax, and then monopolized the issue of
bank notes in the hands of a few large, federally chartered "national
banks," mainly centered on Wall Street. In a typical cartelization,
national banks were compelled by law to accept each other's notes
and demand deposits at par, negating the process by which the
free market had previously been discounting the notes and deposits
of shaky and inflationary banks.
In this way, the Wall Street-federal government
establishment was able to control the banking system, and inflate-the
supply of notes and deposits in a coordinated manner.
p187
The complaints of the big banks were summed up in one word: "inelasticity."
The national banking system, they charged, did not provide for
the proper "elasticity" of the money supply; that is,
the banks were not able to expand money and credit as much as
they wished, particularly in times of recession. In short, the
national banking system did not provide sufficient room for inflationary
expansions of credit by the nation's banks.
p208
The years shortly before and after 1900 proved to be the beginnings
of the drive toward the establishment of a Federal Reserve System.
It was also the origin of the gold-exchange standard, the fateful
system imposed upon the world by the British in the 1920s and
by the United States after World War II at Bretton Woods. Even
more than the case of a gold standard with a central bank, the
gold-exchange standard establishes a system, in the name of gold,
which in reality manages to install coordinated international
inflationary paper money. The idea was to replace a genuine gold
standard, in which each country (or, domestically, each bank)
maintains its reserves in gold, by a pseudo-gold standard in which
the central bank of the client country maintains its reserves
in some key or base currency, say pounds or dollars. Thus, during
the 1920s, most countries maintained their reserves in pounds,
and only Britain purported to redeem pounds in gold. This meant
that these other countries were really on a pound rather than
a gold standard, although they were able, at least temporarily,
to acquire the prestige of gold. It also meant that when Britain
inflated pounds, there was no danger of losing gold to these other
countries, who, quite the contrary, happily inflated their own
currencies on top of their expanding balances in pounds sterling.
Thus, there was generated an unstable, inflationary system - all
in the name of gold - in which client states pyramided their own
inflation on top of Great Britain's. The system was eventually
bound to collapse, as did the gold-exchange standard in the Great
Depression and Bretton Woods by the late 1960s. In addition, the
close ties based on pounds and then dollars meant that the key
or base country was able to exert a form of economic imperialism,
joined by its common paper and pseudo-gold inflation, upon the
client states using the key money.
p210
Charles Conant set forth the theory of surplus capital in his
History of Modern Banks of Issue (1896) and developed it in subsequent
essays. The existence of fixed capital and modern technology,
Conant claimed, invalidated Say's Law and the concept of equilibrium,
and led to chronic "oversavings," which he defined as
savings in excess of profitable investment outlets, in the developed
Western capitalist world. Business cycles, opined Conant, were
inherent in the unregulated activity of modern industrial capitalism.
Hence the importance of government-encouraged monopolies and cartels
to stabilize markets and the business cycle, and in particular
the necessity of economic imperialism to force open profitable
outlets abroad for American and other Western surplus capital.
The United States's bold venture into
an imperialist war against Spain in 1898 galvanized the energies
of Conant and other theoreticians of imperialism. Conant responded
with his call for imperialism in "The Economic Basis of Imperialism"
in the September 1898 North American Review, and in other essays
collected in The United States in the Orient: The Nature of the
Economic Problem and published in 1900. S.J. Chapman, a distinguished
British economist, accurately summed Conant's argument as follows:
(1) "In all advanced countries there has been such excessive
saving that no profitable investment for capital remains,"
(2) since all countries do not practice a policy of commercial
freedom, "America must be prepared to use force if necessary"
to open up profitable investment outlets abroad, and (3) the United
States possesses an advantage in the coming struggle, since the
organization of many of its industries "in the form of trusts
will assist it greatly in the fight for commercial supremacy."
The war successfully won, Conant was particularly
enthusiastic about the United States keeping the Philippines,
the gateway to the great potential Asian market. The United States,
he opined, should not be held back by "an abstract theory"
to adopt "extreme conclusions" on applying the doctrines
of the Founding Fathers on the importance of the consent of the
governed. The Founding Fathers, he declared, surely meant that
self-government could only apply to those competent to exercise
it, a requirement that clearly did not apply to the backward people
of the Philippines. After all, Conant wrote, "Only by the
firm hand of the responsible governing races... can the assurance
of uninterrupted progress be conveyed to the tropical and undeveloped
countries. "
Conant also was bold enough to derive
important domestic conclusions from his enthusiasm for imperialism.
Domestic society, he claimed, would have to be transformed to
make the nation as "efficient" as possible. Efficiency,
in particular, meant centralized concentration of power. "Concentration
of power, in order to permit prompt and efficient action, will
be an almost essential factor in the struggle for world empire."
In particular, it was important for the United States to learn
from the magnificent centralization of power and purpose in Czarist
Russia. The government of the United States would require "a
degree of harmony and symmetry which will permit the direction
of the whole power of the state toward definite and intelligent
policies." The U.S. Constitution would have to be amended
to permit a form of czarist absolutism, or at the very least an
enormously expanded executive power in foreign affairs.
An interesting case study of business
opinion energized and 1 converted by the lure of imperialism was
the Boston weekly, the U.S Investor. Before the outbreak of war
with Spain in 1898, the U.S. denounced the idea of war as a disaster
to business. But after the United States launched its war, and
Commodore Dewey seized Manila Bay, the Investor totally changed
its tune. Now it hailed the war as excellent for business, and
as bringing about recovery from the previous recession. Soon the
Investor was happily advocating a policy of "imperialism"
to make U.S. prosperity permanent. Imperialism conveyed marvelous
benefits to the country. At home, a big army and navy would be
valuable in curbing the tendency of democracy to enjoy "a
too great freedom from restraint, both of action and of thought."
The Investor added that "European experience demonstrates
that the army and navy are admirably adopted to inculcate orderly
habits of thought and action."
But an even more important benefit from
a policy of permanent imperialism is economic. To keep "capital
... at work," stern necessity requires that "an enlarged
field for its product must be discovered." Specifically,
"a new field" had to be found for selling the growing
flood of goods produced by the advanced nations, and for investment
of their savings at profitable rates. The Investor exulted in
the fact that this new "field lies ready for occupancy. It
is to be found among the semi-civilized and barbarian races,"
in particular the beckoning country of China.
... To the [Boston Weekly U.S.] Investor,
the way out was clear:
The logical path to be pursued is that
of the development of the natural riches of the tropical countries.
These countries are now peopled by races incapable on their own
initiative of extracting its full riches from their own soil ....
This will be attained in some cases by the mere stimulus of government
and direction by men of the temperate zones; but it will be attained
also by the application of modern machinery and methods of culture
to the agricultural and mineral resources of the undeveloped countries.
p272
The money supply in the United States leveled off by the end of
1928, and remained more or less constant from then on. This ending
of the massive credit expansion boom made a recession inevitable,
and sure enough, the American economy began to turn down in July
1929. Feverish attempts to keep the stock market boom going, however,
managed to boost stock prices while the economic fundamentals
were turning sour, leading to the famous stock market crash of
October 24.
This crash was an event for which Herbert
Hoover was ready. For a decade, Herbert Hoover had urged that
the United States break its age-old policy of not intervening
in cyclical recessions. During the postwar 1920-1921 recession,
Hoover, as secretary of commerce, had unsuccessfully urged President
Harding to intervene massively in the recession, to "do something"
to cure the depression, in particular to expand credit and to
engage in a massive public-works program. Although the United
States got out of the recession on its own, without massive intervention,
Hoover vowed that next time it would be different. In late 1928,
after he was elected president, Hoover presented a public works
scheme, the "Hoover Plan" for "permanent prosperity...
... When the stock market crash came in
October 1929, therefore, President Hoover was ready for massive
intervention to attempt to raise wage rates, expand credit, and
embark on public works.
... The major opponent of this new statist
dogma was Secretary o the Treasury Mellon, who, though one of
the leaders in pushing the boom, now at least saw the importance
of liquidating the malinvestments, inflated costs, prices, and
wage rates of the inflationary boom. Mellon, indeed, correctly
cited the successful application of such a laissez-faire policy
in previous recessions and crises. But Hoover overrode Mellon,
with the support of Treasury Undersecretary Ogden Mills.
If Hoover stood ready to impose an expansionist
and interventionist New Deal, Morgan man George L. Harrison, head
of the New York Fed and major power in the Federal Reserve, was
all the more ready to inflate. During the week of the crash, the
last week of October, the Fed doubled its holdings of government
securities, adding $150 million to bank reserves, as well as discounting
$200 million more for member banks. The idea was to prevent liquidation
of the bloated stock market, and to permit the New York City banks
to take over the loans to stockbrokers that the nonbank lenders
were liquidating. As a result, member banks of the Federal Reserve
expanded their deposits by $1.8 billion-a phenomenal monetary
expansion of nearly 10 percent in one week! Of this increase,
$1.6 billion were increased deposits of the New York City banks.
In addition, Harrison drove down interest rates, lowering its
discount rates to banks from 6 percent to 4.5 percent in a few
weeks...
... By mid-November, the great stock break
was over, and the market, artificially buoyed and stimulated by
expanding credit, began to move upward again.
p275
... the Fed tried its best to inflate a great deal more, but its
expansionary policy was partially thwarted by increasing caution
and by withdrawal of money from the banking system by the general
public.
Here we see, at the very beginning of
the Hoover era, the spuriousness of the monetarist legend that
the Federal Reserve was responsible for the great contraction
of money from 1929 to 1933. On the contrary, the Fed and the administration
tried their best to inflate, efforts foiled by the good sense,
and by the increasing distrust of the banking system, of the American
people.
p277
Late 1930 was perhaps the last stand of the laissez-faire-,] sound-money
liquidationists. Professor H. Parker Willis, a tireless critic
of the Fed's inflationism and credit expansion, attacked the current
easy money policy of the Fed in an editorial in the New York Journal
of Commerce.' Willis pointed out that the Fed's easy-money policy
was actually bringing about the rash of bank failures, because
of the banks' "inability to liquidate" their unsound
loans and assets. Willis noted that the country was suffering
from frozen wasteful malinvestments in plants, buildings, and
other capital, and maintained that the depression could only be
cured when these unsound credit positions were allowed to liquidate.
p290
[Herbert] Hoover and his associates rationalized this power as
being a temporary necessity to handle an emergency, supposedly
much like World War I, when the prototype of the RFC had been
established. Thus, Hoover repeatedly spoke of fighting the depression
as the equivalent of fighting a war:
We are engaged in a fight upon a hundred
fronts just as positive, just as definite, and requiring just
as greatly the moral courage, the organized action, the unity
of strength, and the L sense of devotion in every community as
in war.
Eugene Meyer spoke repeatedly in military
metaphors, and Secretary Mills spoke of the "great war against
depression being fought on many fronts," especially the "long
battle... to carry our financial structure through the worldwide
collapse."
And so too did business and financial
leaders rationalize their hasty embrace of collectivism in the
Reconstruction Finance Corporation [RFC]. An illuminating article
in the Magazine of Wall Street [1932] summarizing the congressional
debate over the RFC bill, noted that big business, "always
complaining of public intervention in economic matters,"
was now beating the drums for intervention, the RFC being supported
by big bankers, industrialists, and railroad presidents. The article
added:
The answer made by [RFC bill] representatives
of business to the charge of socialism is that in all great emergencies,
war for example, governments have always thrown themselves into
the breach, because only they can organize and mobilize the whole
strength of the nation. In war every country becomes practically
a dictatorship and every man's resources are at its command; the
country is now in an equally great emergency.
The RFC certainly paid off for these favored
business groups. The excuse for the secrecy was that public confidence
would be weakened if the identity of the shaky business or bank
receiving RFC loans became widely known. But of course these institutions,
precisely because they were in weak and unsound shape, deserved
to lose public confidence, and the sooner the better both for
the public and for the health of the economy, which required the
rapid liquidation of unsound investments and institutions. During
the first five months of operation, from February to June 1932,
the RFC made $1 billion of loans, of which 60 percent went to
banks and 25 percent to railroads.
p292
While Democrats in Congress had their way after August [1932]
in forcing the RFC to report to Congress on its loans, President
Hoover had his way in finally persuading Congress to transform
the RFC into a bold, "positive" agency empowered to
make new loans, to engage in capital loans, to finance sales of
agriculture at home and abroad, and to make loans to states and
cities, instead of being merely an agency defending indebted banks
and railroads. This amendment to the RFC Act, the Emergency Relief
and Construction Act of 1932, passed Congress at the end of Jul
and increased the RFC's authorized capital to $3.4 billion. Eugene
Meyer, suffering from exhaustion, persuaded Hoover to include,
in the amended bill, the separation of the ex officio members
from the RFC. But Meyer's double-duty work was greatly appreciated
by Felix Frankfurter, soon to be one of the major gurus of the
Roosevelt New Deal. Frankfurter telegraphed Meyer's wife that
"Gene . . . has been the only brave and effective leader
in [the Hoover] administration in dealing with depression."
Free-market financial writer John T. had
a very different assessment of the year of the Hoover-Meyer Reconstruction
Finance Corporation. Flynn pointed out that RFC loans only prolonged
the depression by maintaining the level of debt. Income "must
be freed for purchasing by the extinguishment of excessive debts
.... Any attempt to... save the weaker debtors necessarily prolongs
the depression." Railroads should not be hampered from going
into the "inevitable curative process" of bankruptcy.
In the meantime, Eugene Meyer was promoting
more inflationary damage as governor of the Federal Reserve. Meyer
managed to persuade both Hoover and Virginia conservative Carter
Glass, leading Democrat on the Senate Banking Committee, to push
through the Glass-Steagall Act at the end of February, which allowed
the Fed to use U.S. government securities in addition to gold
as collateral for Federal Reserve notes, which were of course
still redeemable in gold. This act enabled the Federal Reserve
to greatly expand credit and to lower interest rates. The Fed
promptly went into an enormous binge of buying government securities,
unprecedented at the time. The Fed purchased $1.1 billion of government
securities from the end of February to the end of July, raising
its holdings to $1.8 billion. Part of the reason for these vast
open market operations was to help finance the then-huge federal
deficit of $3 billion during fiscal year 1932.
Thus, we see the grave error of the familiar
Milton Friedman-monetarist myth that the Federal Reserve either
deliberately contracted the money supply after 1931 or at least
passively allowed such contraction. The Fed, under Meyer, did
its mightiest to inflate the money supply-yet despite its efforts,
total bank reserves only rose by $212 million, while the total
money supply fell by $3 billion. How could this be?
The answer to the mystery is that the
inflationary policies of Hoover and Meyer proved to be counterproductive.
American citizens lost confidence in the banks and demanded cash-Federal
Reserve notes-for their deposits (currency in circulation rising
by $122 million by the end of July), while foreigners lost confidence
in the dollar and demanded gold (the gold stock in the United
States falling by $380 million in this period). In addition, the
banks, for the first time, did not fully lend out their new reserves,
and accumulated excess reserves-these excess reserves rising to
10 percent of total reserves by mid-year. A common explanation
claims that business, during a depression, lowered its demand
for loans, so that pumping new reserves into the banks was only
"pushing on a string." But this popular view overlooks
the fact that banks can always use their excess reserves to buy
existing securities; they don't have to wait for new loan requests.
Why didn't they do so? Because the banks were whipsawed between
two forces. On the one hand, bank failures had increased dramatically
during the depression. Whereas during the 1920s, in a typical
year 700 banks failed, with deposits totaling $170 million, since
the depression struck, 17,000 banks had been failing per year,
with a total of $1.08 billion in deposits. This increase in bank
failures could give any bank pause, especially since all the banks
knew in their hearts that, as fractional reserve banks, none of
them could withstand determined and massive runs upon them by
their depositors. Second, just at a time when bank loans were
becoming risky, the cheap-money policy of the Fed had driven down
interest returns from bank loans, thus weakening banks' incentive
to bear risk. Hence the piling up of excess reserves. The more
that Hoover and the Fed tried to inflate, the more worried the
market and the public became about the dollar, the more gold flowed
out of the banks, and the more deposits were redeemed for cash.
Professor Seymour Harris, writing at the
time and years before he became one of America's leading Keynesians,
concluded perceptively that the hard-money critics of the Hoover
administration might have been right, and that it might be that
the Fed's heavy open market purchases of government securities
from 1930 to 1932 "retarded the process of liquidation and
reduction of costs, and therefore have accentuated the depression."
Herbert Hoover, of course, reacted quite
differently to the abject failure of his inflationist program.
Instead of blaming himself, he blamed the banks and the public.
The banks were to blame by piling up excess reserves instead of
making dangerous loans. By late May, Hoover was "disturbed
at the apparent lack of cooperation of the commercial banks of
the country in the credit expansion drive." Eugene Meyer's
successor at the RFC, former Ohio Democratic Senator Atlee Pomerene,
denounced the laggard banks bitterly: "I measure my words,
the bank that is 75 percent liquid or more and refuses to make
loans when proper security is offered, under present circumstances,
is a parasite on the community." Hoover also went to the
length of getting Treasury Secretary Ogden Mills to organize bankers
and businessmen to lend or borrow the surplus credit piled up
in the banks. Mills established a committee in New York City on
May 19 headed by Owen D. Young, chairman of the board of Morgan's
General Electric Corporation, and the Young Committee tried to
organize a cartel to support bond prices, but the committee, despite
its distinguished personnel, failed dismally to form a cartel
that could defeat market forces. The idea died quickly.
Not content with denouncing the banks,
President Hoover also railed against the public for cashing in
bank deposits for cash or gold. Stung by the public's redeeming
$800 million of bank deposits for cash during 1931, Hoover organized
a hue and cry against "traitorous hoarding." On February
3, 1932, Hoover established a new Citizens' Reconstruction Organization
(CRO) headed by Colonel Frank Knox of Chicago. The cry went up
from the CRO that the hoarder is unpatriotic because he restricts
and destroys credit. (That is, by trying to redeem their own property
and by trying to get the banks to redeem their false and misleading
promises, the hoarders were exposing the unsound nature of the
bank credit system.) On February 6, top-level anti-hoarding patriots
met to coordinate the drive; they included General Charles Dawes,
Eugene Meyer, Secretary of Commerce Robert P. Lamont, and Treasury
Secretary Ogden Mills. A month later, Hoover delivered a public
address on the evils of hoarding: "the battle front today
is against the hoarding of currency," which prevents money
from going into active circulation and thereby lifting us out
of the depression.
President Hoover later took credit for
this propaganda drive putting a check on hoarding, and it is true
that cash in circulation reached a peak of $5.44 billion in July
1932, not rising above that until the culminating bank crisis
in February 1933. But if true, so much the worse, for that means
that bank liquidation was postponed for a year until the final
banking crisis of l933.
p476
Whether and to what extent German economic nationalism was a cause
for the American drive toward war, one point is certain: that,
even before official American entry into the war, one of America's
principal war aims was to reconstruct an international monetary
order.
... just as the United States was to use
World War II to replace British imperialism with its own far-flung
empire, so in the monetary sphere, the United States was now to
move in and take over, with the pound no less subordinate than
all the other major currencies. It was truly a triumphant "dollar
imperialism" to parallel the imperial American thrust in
the political sphere.
p478
Even before American entry into the war, U.S. economic war aims
were well-defined and rather brutally simple: they hinged on a
determined assault upon the 1930s system of economic and monetary
nationalism, so as to promote American exports, investments, and
financial dealings overseas-in short, the Open Door" for
American commerce.
p486
The Bretton Woods agreement established the framework for the
international monetary system down to the early 1970s. A new and
more restricted international dollar-gold exchange standard had
replaced the collapsed dollar-pound-gold-exchange standard of
the 1920s. During the early postwar years, the system worked quite
successfully within its own terms, and the American banking community
completely abandoned its opposition. With European currencies
inflated and overvalued, and European economies exhausted, the
undervalued dollar was the strongest and "hardest" of
world currencies, a world "dollar shortage" prevailed,
and the dollar could base itself upon the vast stock of gold in
the United States, much of which had fled from war and devastation
abroad. But in the early 1950s, the world economic balance began
slowly but emphatically to change. For while the United States,
influenced by Keynesian economics, proceeded blithely to inflate
the dollar, seemingly relieved of the limits imposed by the classical
gold standard, several European countries began to move in the
opposite direction. Under the revived influence of conservative,
free-market, and hard-money-oriented economists in such countries
as West Germany, France, Italy, and Switzerland, these newly recovered
countries began to achieve prosperity with far less inflated currencies.
Hence, these currencies became ever stronger and "harder
while the dollar became softer increasingly inflated.
The continuing inflation of the dollar
began to have two important consequences: (1) the dollar was increasingly
overvalued in relation to gold; and (2) the dollar was also increasingly
overvalued in relation to the West German mark, the French and
Swiss francs, the Japanese yen, and other hard money currencies.
The result was a chronic and continuing deficit in the American
balance of payments, beginning in the early 1950s and persisting
ever since. The consequence of the chronic deficit was a continuing
outflow of gold abroad and a heavy piling up of dollar claims
in the central banks of the hard-money countries. Since 1960 the
foreign short-term claims to American gold have therefore become
increasingly greater than the U.S. gold supply. In short, just
as inflation in England and the United States during the 1920s
led finally to the breakdown of the international monetary order,
so has inflation in the postwar key country, the United States,
led to increasing strains and fissures in the triumphant dollar-order
of the post-World War II world. It has become increasingly evident
that an ever more inflated and overvalued dollar cannot continue
as the permanently secure base of the world monetary system.
p488
The fundamental overvaluation of the ever more inflated dollar.
In the spring of 1971, a new monetary crisis finally led to a
massive revaluation of the hard currencies. If the United States
stubbornly refused to lose face by raising the price of gold or
by otherwise devaluing the dollar down to its genuine value in
the world market, then the harder currencies, such as West Germany,
Switzerland, and the Netherlands, found themselves reluctantly
forced to raise the value of their currencies.
p489
There are several possible monetary systems that might replace
the present deteriorating order. The new system desired by the
Keynesian economists and by the American government would be a
massive extension of "paper gold" to demonetize gold
completely and replace it with a new monetary unit (such as the
Keynesian "bancor") and a paper currency issued by a
new world reserve bank. If this were achieved, then the new American-dominated
world reserve bank would be able to inflate any currencies indefinitely,
and allow inflating currencies to pay for any and all deficits
ad infinitum. While such a scheme, embodied in the Triffin Plan,
the Bernstein Plan, and others, is now the American dream, it
has met determined opposition by the hard-money countries, and
it remains doubtful that the United States will be able to force
these countries to go along with the plan.
The other logical alternative is the Rueff
Plan, of returning to the classical gold standard after a massive
increase in the world price of gold. But this too is unlikely,
especially over powerful American opposition. Barring acceptance
of a new world currency, the Americans would be content to keep
inflating and simply force the hard-money countries to keep appreciating
their exchange rates, but again it is doubtful that German, French,
Swiss, and other exporters will be content to keep crippling themselves
in order to subsidize dollar inflation. Perhaps the most likely
prognosis is the formation of a new hard-money European currency
bloc, which might eventually be strong enough to challenge the
dollar, politically as well as economically.
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