War and Gold: A 500-Year history of Empires, Adventures, and Debt

Kwasi Kwarteng “War and Gold: A 500-Year history of Empires, Adventures, and Debt” Public Affairs, 2014, 359 pp.

The author, Kwarteng, is a Cambridge-educated historian, currently a Conservative MP, proposes, "The need to pay for wars was the principal engine for the creation of modern finance."  He examines the past 500 years of history that places the need and search for gold at the center of recent global history.  The first four centuries are quickly disposed of in the first 70 or so pages. 

My Notes:

Pg. 1:  War and Gold attempts to tell a narrative story about the history of money from the time of the Spanish conquistadors and their discovery of the New World.  The author chose this as the starting point because he agrees with the view of John Maynard Keynes that ‘the modern age opened…with the accumulation of capital which began in the sixteenth century.’  This was a result of the stimulus provided by the treasure of gold and silver which Spain brought into the Old world from the New World. 

Pg. 2:  It is a premise of this book that government finance, the need to accumulate treasure, whether by conquest, by borrowing or by taxation, provides a powerful impetus behind developments in society.  It is fiscal policy—the character of a government’s spending and taxation—that provides the context for monetary policy.  Fiscal policies clearly have an additional significance in times of war but in the modern welfare state government spending plays just as central a role in the lives of most citizens. 

Pg. 3:  The gold standard itself a symbol of permanence and immutability, was developed after the relative chaos generated by the paper currencies of the American and French Revolutions, and the suspension of gold payments by the Bank of England.

Pg. 18:  The Spanish Crown share of the profits from the mineral wealth of the New World took the form of a tax of 20% imposed on every ounce of gold and silver which came into Seville, the only permissible entry port into Europe. 

Pg. 37:  Both the South Sea Bubble and John Law’s Mississippi system (in the 1700’s) can be easily categorized.  Behind all the drama of the bubbles, both companies represented an early attempt to solve the problem of government indebtedness.  By substituting equity, or shares, in a company for government debt, it was hoped that a lower interest rate could be achieved on the debt, while giving the equity investor a prospect of capital appreciation. 

Pg. 71:  During the US Civil war, the Union started issuing greenbacks at the beginning of 1862, a paper currency which would sustain its war effort.  Like the French in the Revolutionary wars, like the British against Napoleon, the Union government issued paper money to defeat an enemy in war. 

Pg. 72:  In terms of financial management, the US Civil War, as in so many arenas, was the defining period of US history.  Before the war, America had neither a national currency nor, after the dissolution of the Second Bank of the United States, a national banking system. 

The national debt of the US had stood at US $65 million in 1860.  By 1866 it had reached US $2,678 million.

Pg. 76:  The key feature of the American currency system between 1865 and 1879 was that there was no convertibility to gold. 

Pg. 108:  From the American perspective, it is difficult to see WWI as anything other than an economic success.  New York had established itself as a leading international financial center, and new markets had been established for American agricultural and industrial products.  America’s banking system had been secured by the establishment of a central bank, the Federal Reserve. 

Pg. 118:  On 28 April 1925 Winston Churchill, the Chancellor of the Exchequer, announced Britians return to gold at the old exchange rate of US$4.86 for one pound.  This decision he would later regard as the greatest mistake of his life.  The rate effectively priced British exports out of the international market.  A reduction in wages was required to keep down production costs. 

Pg. 123:  In June 1929, the Young Plan, under which Germany’s debts were reduced by 75 percent was adopted. 

Pg. 137:  The Keynesian Revolution merely gave an intellectual garb to the practical conclusions of statesmen eager to do something about the depression.  The techniques employed were not that different to the expedients employed in the wars of previous centuries.  

Pg. 140:  The Bretton Woods Agreement of 1944 did, to a certain extent, preserve the fetish of gold worship.  Now, instead of each currency being directly convertible to gold, currencies would be pegged to the dollar, which remained convertible to gold at $35 an ounce.  The International Monetary Fund was created to stabilize the exchange rates set up by Bretton Woods and the World Bank was created to be largely a development bank.

Pg. 186:  The 1948 Soviet blockade and the ensuing Berlin Airlift, more than any other event, perhaps marked the definitive start of the Cold War. 

Pg. 214:  Richard M. Nixon in August of 1971 substantially altered the course of monetary history when gold was effectively demonetized.  This was the final break with gold.

Pg. 226:  The demise of Bretton Woods led to the beginning of the modern period, in which currencies, unpegged to any gold value, freely floated in value against each other, like any other commodity.  The official gold price was now a meaningless anachronism, as the gold price soared hitting US$850 an ounce in January 1980, as Soviet tanks rolled into Afghanistan.

Pg. 234:  Milton Friedman’s idea of monetarism was a prescription for a stable monetary framework achieved by setting a target for the growth of the money supply.  It was an attempt to recover the certainty of the gold standard in a world of floating currencies. 

Pg. 238:  In October 1979 the Fed’s discount rate had risen to 14.5 percent.  1981 saw the highest interest rates in American history.  Until mid-October, banks kept their basic loan rate at 19 percent.  Bank interest rates peaked at over 20 percent and the yield on long-term bonds climbed to over 15 percent.  It was only in the summer of 1982 that Volcker reduced the discount rate.

Pg. 248:  Ronald Reagan’s presidency was anchored in the fundamental themes of lower taxes, deregulation, and ‘peace through strength.’  Yet, by 1988, despite having vehemently denounced government spending in his ascent to the highest office, Reagan left the US with an enormous national debt.  The national debt had almost tripled from just over $700 billion to more than $2 trillion at the end of fiscal year 1988.  Yet the battle against inflation had been largely won and was at 3.6 percent. 

Pg. 282:  China abandoned doctrinaire Communism as an economic philosophy in 1978.  It was in this year that Deng Xiaoping finally seized the reins of power in China and began a process which continued to propel that country in the early twenty-first century.  China’s path to success was dictated by the state, their success is a triumph of mercantilism.  Mercantilism was a term used to describe the economic policies of European countries in the sixteenth to eighteenth centuries.  Despite Adam Smith, mercantilism, with its emphasis on exports, has remained widely practiced in the modern world.  Very simply put, mercantilism was a system which sought to boost exports in order to gain gold, which would form the basis of a state’s power. 

Pg. 286:  Between 1980 and 1992 the Chinese yuan devalued by 74 percent versus the US dollar.  It was a deliberate policy to boost exports and restrain imports. 

Pg. 306:  The core of George W. Bush’s 2001 legislation was a simplification of the US tax code in which a five bracket income-tax system of 15 percent, 28 percent, 31 percent, 36 percent and 39.6 was reduced to four lower rates of 10 percent, 15 percent, 25 percent and 33 percent.

Pg. 356:  It is not only governments embarked upon an orgy of spending.  In the US, household debt rose from $665 billion in 1974 to $13 trillion in 2013, an increase of nearly twenty times in nominal terms.  Richard Nixon’s closing of the gold window had profound consequences.  Paper money indisputably contributed to an excess of credit creation and directly to the crisis of 2008, as the mountain of credit turned into an avalanche of bankruptcy.  The conclusion is that many participants in the global financial system have dug a debt hole far larger than they can reasonably expect to escape from.  This may be an unduly pessimistic judgment.  If it is, the question presents itself: what possible means of escape exist. 

Pg. 357:  There are three ways by which debts can be reduced.

1.       Outright repudiation. 

2.      Inflation

3.      Grow out of it