Germany’s Bundesbank Had Not Sacrificed Its All for “Europe”—i.e., for Keynesian Inflationists and Centralizing Collectivists

Since 1979, the European governments have been trying to maintain a fixed exchange rate system among themselves; in the last few years, they have been trying to close the allowed bands of fluctuation—2.25 percent plus or minus the official rate—in preparation for a single European Currency Unit (ECU) that was supposed to begin at the end of 1993 and would be issued by a single European central bank.

A single European currency and central bank was sold to the world public as a giant “free trade unit,” but it actually was a giant step toward centralized government in Brussels. It was a step toward the old Keynesian dream of a world paper unit by a World Reserve Bank administered by a world government.

Fortunately, with the resistance to Maastricht, and then with the pullout of Britain from the European Currency System and the face-saving new system of very wide exchange rate bands, the ECU and the Keynesian dream lie all but dead. The world market has once against triumphed over Keynesian statism, even though the power seemed to be in the Establishment’s hands.

In the French case, there was another villain condemned by all. The German Bundesbank, worried about German inflation as a result of the mammoth subsidies to East Germany, has not been as inflationary as France would have liked. One way for France or Britain to be able to enjoy the goodies of inflation without the embarrassment of a falling currency is to try to muscle harder currencies to inflate, dragging them down to the level of the weaker currencies.

Fortunately, the Germans, even though they inflated a bit and wasted billions supporting the franc, did not inflate nearly as much as the French or British would have liked. Yet for pursuing a relatively sound monetary course, the Germans were condemned as “selfish,” for they had not sacrificed their all for “Europe”—that is, for Keynesian inflationists and centralizing collectivists.

—Murray N. Rothbard, “‘Attacking’ the Franc,” in Making Economic Sense, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 305-306.

Keynesians Harbor a Dream of a World with One Fiat Currency Issued by One World Central Bank

For a half-century, the Keynesians have harbored a Dream. They have long dreamed of a world without gold, a world rid of any restrictions upon their desire to spend and spend, inflate and inflate, elect and elect. They have achieved a world where governments and Central Banks are free to inflate without suffering the limits and restrictions of the gold standard. But they still chafe at the fact that, although national governments are free to inflate and print money, they yet find themselves limited by depreciation of their currency. If Italy, for example, issues a great many lira, the lira will depreciate in terms of other currencies, and Italians will find the prices of their imports and of foreign resources skyrocketing.

What the Keynesians have dreamed of, then, is a world with one fiat currency, the issues of that paper currency being generated and controlled by one World Central Bank. What you call the new currency unit doesn’t really matter: Keynes called his proposed unit at the Bretton Woods Conference of 1944, the “bancor”; Harry Dexter White, the U.S. Treasury negotiator at that time, called his proposed money the “unita”; and the London Economist has dubbed its suggested new world money the “phoenix.” Fiat money by any name smells as sour.

Even though the United States and its Keynesian advisers dominated the international monetary scene at the end of World War II, they could not impose the full Keynesian goal; the jealousies and conflicts of national sovereignty were too intense. So the Keynesians reluctantly had to settle for the jerry-built dollar-gold international standard at Bretton Woods, with exchange rates flexibly fixed, and with no World Central Bank at its head.

As determined men with a goal, the Keynesians did not fail from not trying. They launched the Special Drawing Right (SDR) as an attempt to replace gold as an international reserve money, but SDRs proved to be a failure. Prominent Keynesians such as Edward M. Bernstein of the International Monetary Fund and Robert Triffin of Yale, launched well-known Plans bearing their names, but these too were not adopted.

Ever since the Bretton Woods system, hailed for nearly three decades as stable and eternal, collapsed in 1971, the Keynesians have had to suffer the indignity of floating exchange rates. Ever since the accession of Keynesian James R. Baker as Secretary of Treasury in 1985, the United States has abandoned its brief commitment to a monetarist hands-off the foreign exchange market policy, and has tried to engineer a phase transformation of the international monetary system. First, fixed exchange rates would be obtained by coordinated action of the large Central Banks. This has largely been achieved, at first covertly and then openly; the leading Central Banks picked a target point or zone, for, say, the dollar, and then by buying and selling dollars, manipulated exchange rates to stay within that zone. Their main difficulty has been figuring out what target to pick, since, indeed, they have no wisdom in rate-fixing beyond that of the market. Indeed, the concept of a just exchange-rate for the dollar is just as inane as the notion of the “just price” for a particular good.

—Murray N. Rothbard, “The Keynesian Dream,” in Making Economic Sense, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2006), 315-316.

In the 1960s, Jacques Rueff Preached the Inevitable Implosion of the Dollar-Based Bretton Woods System

De Gaulle gave a famous press conference on February 4, 1965, in which he elaborated the economic logic behind his conclusion that the dollar could never act as “an impartial and international trade medium . . . it is in fact a credit instrument reserved for one state only.” De Gaulle was no economist, so it was apparent that the acuity of his analysis owed to someone schooled in the art. Though he denied being “in any degree scriptwriter to General De Gaulle,” this was unmistakably Keynes’s old intellectual sparring partner over German World War One reparations, Jacques Rueff. Rueff became, with Triffin, the most notable prophet of doom during the 1960s preaching the inevitable implosion of the dollar-based Bretton Woods system. Though the diagnosis of the two was identical, their cures could not have been more different.

Triffin harked directly back to Keynes’s “bancor” alternative to the White Plan: a new international reserve currency managed by the IMF. He suggested some bureaucratic safeguards against the potential inflationary bias of the scheme, but was otherwise satisfied simply to quote Keynes at length. Rueff, in stark contrast, advocated a return to the pre-1914 classical gold standard. He was adamant that he had “no religious belief in gold”; other commodities might in principle do as well, even if gold had history on its side. It was rather the mechanism of a genuine gold standard that was needed to ensure that global imbalances were automatically restrained by credit expansion in the surplus country and contraction in the deficit country—or put alternatively, “to prevent the home population from consuming a part of domestic production that must be made available for export” in order to counteract a payments deficit. Triffin’s (and Keynes’s) alternative of a new international reserve unit, in Rueff’s view, represented a “purely arbitrary creation of means of foreign payment”; or put more bluntly, “nothingness dressed up as currency.” It had a built-in inflationary dynamic that no bureaucracy would be able to control. For his part, Triffin believed that Rueff’s vision “impl[ied] the total surrender of national sovereignty . . . over all forms of trade and payment restrictions, and even over exchange rates. Such surrenders,” he said, were “utterly inconceivable today in favor of a mere nineteenth century laissez faire, unconcerned with national levels of employment and economic activity.”

—Benn Steil, epilogue to The Battle of Bretton Woods: John Maynard Keynes, Harry Dexter White, and the Making of a New World Order (Princeton, NJ: Princeton University Press, 2013), 334-335. 

Keynesian Economists Arrogantly Declared that We Need Not Worry about Dollar Balances Piling Up Abroad under Bretton Woods

It took a great deal of American pressure, wielding the club of Lend–Lease, to persuade the reluctant British to abandon their cherished currency bloc of the 1930s. By 1942, Hull could expect confidently that “leadership toward a new system of international relationship in trade and other economic affairs will devolve very largely upon the United States because of our great economic strength. We would assume this leadership, and the responsibility that goes with it, primarily for reasons of pure national self-interest.”

For a while, the economic and financial leaders of the United States thought that the Bretton Woods system would provide a veritable bonanza. The Fed could inflate with impunity, for it was confident that, in contrast with the classical gold standard, dollars piling up abroad would stay in foreign hands, to be used as reserves for inflationary pyramiding of currencies by foreign central banks. In that way, the United States dollar could enjoy the prestige of being backed by gold while not really being redeemable. Furthermore, U.S. inflation could be lessened by being “exported” to foreign countries. Keynesian economists in the United States arrogantly declared that we need not worry about dollar balances piling up abroad, since there was no chance of foreigners cashing them in for gold; they were stuck with the resulting inflation, and the U.S. authorities could treat the international fate of the dollar with “benign neglect.”

—Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 250.

The National and Regional Economic Warfare During the 1930s Precipitated World War II

Since only the United States remained on even a partial gold standard, while other countries moved to purely fiat standards, gold began to flow heavily into the United States, an inflow accelerated by the looming war conditions in Europe. The collapse of the shaky and inflationary British-created gold exchange standard during the depression led to a dangerous world of competing and conflicting national currencies and protectionist blocs. Each nation attempted to subsidize exports and restrict imports through competing tariffs, quotas, and currency devaluations.

The pervasive national and regional economic warfare during the 1930s played a major though neglected role in precipitating World War II. After the war was over, Secretary of State Cordell Hull made the revealing comment that

war did not break out between the United States and any country with which we had been able to negotiate a trade agreement. It is also a fact that, with very few exceptions, the countries with which we signed trade agreements joined together in resisting the Axis. The political lineup follows the economic lineup.

A primary war aim for the United States in World War II was to reconstruct the international monetary system from the conflicting currency blocs of the 1930s into a new form of international gold exchange standard. This new form of gold exchange standard, established at an international conference at Bretton Woods in 1944 by means of great American pressure, closely resembled the ill-fated British system of the 1920s. The difference is that world fiat currencies now pyramided on top of dollar reserves kept in New York instead of sterling reserves kept in London; once again, only the base country, in this case the U.S., continued to redeem its currency in gold.

—Murray N. Rothbard, The Mystery of Banking, 2nd ed. (Auburn, AL: Ludwig von Mises Institute, 2008), 249-250.

September 20, 1931 Was the Last Day of the Age of Economic Liberalism in which Great Britain Had Been Leader of the World

England betrayed not only the countries that aided the pound, but also the countries it had cajoled into adopting the gold-exchange standard in the 1920s. It also specifically betrayed those banks it had persuaded to keep huge sterling balances in London: specifically, the Netherlands Bank and the Bank of France. Indeed, on Friday, September 18, Dr. G. Vissering, head of the Netherlands Bank, phoned Monty Norman and asked him about the crisis of sterling. Vissering, who was poised to withdraw massive sterling balances from London, was assured without qualification by his old friend Norman that, England would, at all costs, remain on the gold standard. Two days later, England betrayed its word. The Netherlands Bank suffered severe losses. The Netherlands Bank was strongly criticized by the Dutch government for keeping its balances in sterling until it was too late. In its own defense, the bank quoted repeated assurances from the Bank of England about the safety of foreign funds in London. The bank made it clear that it was betrayed and deceived by the Bank of England.

The Bank of France also suffered severely from the British betrayal, losing about $95 million. Despite its misgivings, it had loyally supported the English gold-standard system by allowing sterling balances to pile up. The Bank of France sold no sterling until after England went off gold; by September 1931, it had amassed a sterling portfolio of $300 million, one-fifth of France’s monetary reserves. In fact, during the period of 1928–31, the sterling portfolio of the Bank of France was at times equal to two-thirds of the entire gold reserve of the Bank of England.

Despite Montagu Norman, who began to blame the French government for his own egregious failure, it was not the French authorities who put pressure on sterling in 1931. On the contrary, it was the shrewd private French investors and commercial banks, who, correctly sensing the weakness of sterling and the British refusal to employ orthodox measures in its support, decided to make a run on the pound in exchange for gold. The run was aggravated by the glaring fact that Britain had a chronic import deficit, and also was scarcely in a position to save the gold standard through tight money when the British government, at the end of July, projected a massive fiscal 1932–33 deficit of £120 million, the largest since 1920. Attempts in September to cut the budget were overridden by union strikes, and even by a short-lived sit-down strike by British naval personnel, which convinced foreigners that Britain would not take sufficient measures to defend the pound.

In his memoirs, the economist Moritz J. Bonn neatly summed up the significance of England’s action in September 1931:

September 20, 1931, was the end of an age. It was the last day of the age of economic liberalism in which Great Britain had been the leader of the world. . . . Now the whole edifice had crashed. The slogan “safe as the Bank of England” no longer had any meaning. The Bank of England had gone into default. For the first time in history a great creditor country had devalued its currency, and by so doing had inflicted heavy losses on all those who had trusted it.

As soon as England went off the gold standard, the pound fell by 30 percent. It is ironic that, after all the travail Britain had put the world through, the pound fell to a level, $3.40, that might have been viable if she had originally returned to gold at that rate. Twenty-five countries followed Britain off gold and onto floating, and devaluating, exchange rates. The era of the gold-exchange standard was over.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 429-431.

What the Bank of England Did VERSUS the Correct Way of Solving a Gold Standard Crisis

With the successful runs on Austria and Germany, it was clear that England would be the next to suffer a worldwide lack of confidence in its currency, including runs on gold. Sure enough, in mid-July, sterling redemption in gold became severe, and the Bank of England lost $125 million in gold in nine days in late July.

The remedy to such a situation under the classical gold standard was very clear: a sharp rise in bank rate to tighten English money and to attract gold and foreign capital to stay or flow back into England. In classical gold standard crises, the bank had raised its bank rate to 9 or 10 percent until the crises passed. And yet, so wedded was England to cheap money, that it entered the crisis in mid-July at the absurdly low bank rate of 2.5 percent, and grudgingly raised the rate only to 4.5 percent by the end of July, keeping the rate at this low level until it finally threw in the towel and, on the black Sunday of September 20, went off the very gold-exchange standard that it recently had foisted upon the rest of the world. Indeed, instead of tightening money, the Bank of England made the pound shakier still by inflating credit further. Thus, in the last two weeks of July, the Bank of England purchased nearly $115 million in government securities.

England disgracefully threw in the towel even as foreign central banks tried to prop the Bank of England up and save the gold-exchange standard. Answering Norman’s pleas, the Bank of France and the New York Fed each loaned the Bank of England $125 million on August 1, and then, later in August, another $400 million provided by a consortium of French and American bankers. All this aid was allowed to go down the drain on the altar of inflationism and a 4.5-percent bank rate.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 428-429.

In 1930 BoE Governor Montagu Norman Got His “Central Bankers’ Bank,” the Bank for International Settlements

In 1930, Montagu Norman got part of his wish to achieve a formal intercentral bank collaboration. Norman was able to push through a new “central bankers’ bank,” the Bank for International Settlements (BIS), to meet regularly at Basle, to provide clearing facilities for German reparations payments, and to provide regular facilities for meeting and cooperation. While Congress forbade the Fed from formally joining the BIS, the New York Fed and the Morgan interests worked closely with the new bank. The BIS, indeed, treated the New York Fed as if it were the central bank of the United States. Gates W. McGarrah resigned his post as chairman of the board of the New York Fed in February 1930 to assume the position of president of the BIS, and Jackson E. Reynolds, a director of the New York Fed, was chairman of the BIS’s first organizing committee. J.P. Morgan and Company unsurprisingly supplied much of the capital for the BIS. And even though there was no legislative sanction for U.S. participation in the bank, New York Fed Governor George Harrison made a “regular business trip” abroad in the fall to confer with the other central bankers, and the New York Fed extended loans to the BIS during 1931.

During 1931, many of the European banks, swollen by unsound credit expansion, met their comeuppance. In October 1929, the important Austrian bank, the Boden-Kredit-Anstalt, was headed for liquidation. Instead of allowing the bank to fold and liquidate, international finance, headed by the Rothschilds and the Morgans, bailed the bank out. The Boden bank was merged into the older and stronger Österreichische-Kredit- Anstalt, now by far the largest commercial bank in Austria, capital being provided by an international financial syndicate including J.P. Morgan and Rothschild of Vienna. Moreover, the Austrian government guaranteed some of the Boden bank’s assets.

But the now-huge Kredit-Anstalt was weakened by the merger, and, in May 1931, a run developed on the bank, led by French bankers angered by the announced customs union between Germany and Austria. Despite aid to the Kredit-Anstalt by the Bank of England, Rothschild of Vienna, and the BIS (aided by the New York Fed and other central banks), to a total of over $31 million, and the Austrian government’s guarantee of Kredit-Anstalt liabilities up to $150 million, bank runs, once launched, are irresistible, and so Austria went off the gold standard, in effect, declaring national bankruptcy in June 1931. At that point, a fierce run began on the German banks, the Bank for International Settlements again trying to shore up Germany by arranging a $100 million loan to the Reichsbank, a credit joined in by the Bank of England, the Bank of France, the New York Fed, and several other central banks. But the run on the German banks, both from the German people as well as from foreign creditors, proved devastating. By mid-July, the German banking system collapsed from internal runs, and Germany went off the gold standard.

—Murray N. Rothbard, A History of Money and Banking in the United States: The Colonial Era to World War II, ed. Joseph T. Salerno (Auburn, AL: Ludwig von Mises Institute, 2002), 426-428.