Certain readers have suggested that your correspondent's comparison of post Civil-War U.S. and post millenium China is, to put it kindly, all wet. They agree that the countries had similar explosions of industrial growth in these two periods; countries that were important but not major economies became, in a decade and a half, the leaders in annual accumulations of wealth throughout the world. But, to think there is not even the remotest comparison between what happened in the last third of the 19th century and what is happening now regarding international money and credit is nonsense.

I can't disagree with the readers' description of what happened 150 years ago. We all think that the broad adoption of the gold standard after 1875 was the response of both Europe and the Americas to the collapse of the gigantic (mostly real estate) credit bubble that developed in the 1860s and early 1870s on both sides of the Atlantic . The cascade of bank failures that is wrongly described as the Panic of 1873 brought the world's banks and national Treasuries to agree that they would all use gold coin specie as units of account and that all their exchanges of credit would be cleared using a single gold standard for all borrowers' and lenders' currencies.

That is, my kind readers point out, precisely the opposite of what is now happening. International exchanges of credit are now cleared using the foreign exchange markets' valuations of the respective monies. While central banks and national Treasuries continue to hold gold bullion as assets, there is no legal obligation of any country to convert their legal tender to specie. So, there is no reason for China or any other country to adopt a physical gold standard as the exchange price for their currency. That would not fix the price of the yuan for the rest of the world; it would only substitute fluctuations of the price of bullion for the managed variations in the official exchange rate of the currency.

But, say the readers, if the United States were to adopt the gold standard, it would be a different matter. The dollar is already a reference currency in open markets for commodities, and U.S. Treasury debts are held as official banking reserves by central banks, even China's. Guaranteeing an exchange rate for gold coin would produce the very golden fetters that Keynes found intolerable; whenever buyers of Treasuries found the rates unattractive or the Treasury's borrowing excessive, they could use the gold exchange guarantee to push back. That was, say the readers, precisely what happened after the end of the Franco-Prussian War. The U.K., France and the U.S. all ended any hint of bi-metallism; and, to its great surprise, Germany had to abandon silver and accept gold as the measure of its domestic currency. No individual Treasury could stand out against the international market's independent assessment of the soundness of its credit.

This was not at all what the believers in unlimited sovereign authority had wanted, and they did their best to find a way around the limitations on state spending that had resulted. The Germans adopted social insurance as a way to stretch the Empire's budget - money for guns and cavalry horses and ship building now, promises to pay pensions later. The British embraced imperial bimetallism - gold for foreign trade, silver for India and China and East Africa. But, in trade among themselves and with America, the books actually had to be cleared; and any country that defaulted lost its credit overnight (Argentina).

My readers are right. For China to establish the yuan as an open currency, it would have to join an already established international gold standard. Fat chance.





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