 The
Poet of Finance
Chris Mayer
The
Daily Reckoning
Jul 27, 2004
The Daily
Reckoning PRESENTS: Lessons from the past: Chris Mayer examines
the ideas of Jacques Rueff, the eminent French economist and
former minister of finance to Charles de Gaulle.
Jacques Rueff
was accused of being a perennial prophet of doom - a doom that
never seemed to arrive.
Rueff first
began to voice his concerns in 1961, alerting the world to the
dangers inherent in the world's monetary system, then operating
under the Bretton Woods agreement. It would take ten years before
Rueff's view was fully vindicated.
The international
community must have shivered as Reuff evoked the haunting memories
of the Great Depression. He compared the years 1958-61 to the
years 1926-29, which many could still chillingly recall as the
prelude to an economic disaster none wished to see again. As
Rueff notes, "there was the same accumulation of Anglo-Saxon
currencies in the monetary reserves of European countries, in
particular France, and the same inflation in creditor countries."
In the 1920s
we had the gold-exchange standard; in the 1960s we had Bretton
Woods. Both systems were monetary jalopies, jerry-rigged Rube
Goldberg-like contraptions that could not hold together for long.
The two convertible currencies, dollars and pounds, became reserve
currencies, effectively held by European banks as reserves instead
of gold.
Rueff uses
the example of the years after WWI, when a large influx of U.S.
and British capital flowed to Germany and France. The new liquid
funds entered these recipient countries and were held as reserves,
since they could theoretically be converted to gold. In the older
gold standard days, these dollars and pounds would find their
way back to the banks of issue and be redeemed for gold. In this
way the debt was settled. Gold was the world's money accepted
as final payment; not dollars or pounds, which were essentially
notes - promises to pay the holder in gold, which was real, as
opposed to printed paper, which was not.
In the booming
twenties this was not the case. So, France and Germany held dollars
and pounds and issued more of their currency and credit against
these dollars and pounds. In the gold-exchange standard of the
twenties, only dollars and pounds were redeemable in gold - all
other currencies were redeemable in pounds, which were in turn
redeemable in dollars. Very confusing, I know. Why the Genoa
experts recommended this is another sorry episode of political
expediency, compromise and historical accident, which we will
skip here or I may never get to my conclusion.
Such a system,
only loosely tethered to gold, allowed considerable inflation.
As Rueff noted, it was "probably one cause for the long
duration of the substantial credit inflation that preceded the
1929 crisis in the United States."
The ensuing
collapse of this pyramid scheme was to figure prominently, in
Rueff's estimation, in explaining the birth of the Great Depression.
Anyway, the
point of the comparison with the 1920s was that Rueff thought
that, mutatis mutandis, the same thing was happening again in
1960. He noted how the international community held tremendous
reserves of dollars against an ever-smaller base of gold reserves.
As in the 1920s, the U.S. was able to expand its supply of dollars
skirting the old discipline that would have shackled it under
a gold standard. No final payment was required; dollars - lots
and lots of printed dollars - were accepted as final payment.
Again, this allowed considerable inflation of dollars.
Here Rueff
gives us one of his most famous sayings, when he called this
situation circa 1960 and the situation in the 1920s as creating
a "deficit without tears." He wrote that, "it
allowed the countries in possession of a currency benefiting
from international prestige to give without taking, to lend without
borrowing, and to acquire without paying." Rueff does not
lay all this at the feet of the U.S. After all, these other creditor
countries willingly accepted U.S. notes in lieu of gold. Rather,
Rueff calls it an "unbelievable collective mistake."
The holding
of vast dollar reserves by foreign creditors puts the credit
structure of the U.S. on notice. In the days of the gold standard,
and even in the gold-exchange and Bretton Woods eras, this was
more acutely felt because the gold stock of a country was visible,
could be counted and was routinely reported. In the sixties,
Rueff noted that an uncomfortable gap was growing between the
dollars outstanding and gold in stock that backed it.
Writing in
1960, Rueff felt that if foreigners "requested payment in
gold for a substantial part of their dollar holdings, they could
really bring about a collapse of the credit structure in the
U.S." Rueff called for a return to the old gold standard.
The Le Monde
article caused a stir, and a rash of criticism followed, in which
Rueff was chided as an old-timer, applying a quaint antique analysis
to a modern problem. The gold standard was a thing of the past,
one author noted at the time, like sailing ships and oil lamps.
The new iterations
of money, though, did not represent an advance in man's understanding
of money. On the contrary, each new monetary wrinkle, each new
invention, each creative expedient only cheapened it.
We will skip
ahead a bit in Rueff's chronology to 1965.
By this time, Rueff had continued his attempts to persuade the
monetary authorities to alter their course. On February 4, 1965,
Rueff would gain something of a public victory when General de
Gaulle made his now famous speech on the need for gold as a basis
for international monetary cooperation. Rueff finally had the
ear of an important head of state; he had the ear of de Gaulle,
who would eventually refer to Rueff as the "poet of finance."
After giving
a brief history of the international monetary scene beginning
with the Genoa Conference, de Gaulle noted how the acceptance
of dollars to offset balance of payments deficits with the U.S.
lead to a situation where the U.S. was heavily in debt without
having to pay. He correctly observed how the dollar was a credit
instrument and recommended that the system be changed.
"We consider
that international exchanges must be established," proclaimed
de Gaulle, "as was the case before the great worldwide disasters,
on an unquestionable monetary basis that does not bear the mark
of any individual country."
"What
basis?" continued the French head of state, "Actually,
it is difficult to envision, in this regard, any other criterion
or any other standard than gold. Yes, gold, which does not change
in nature, which can be made either into bars, ingots, or coins,
which has no nationality, which is considered, in all places
and at all times, the immutable and fiduciary value par excellence."
Rueff pressed
on with renewed vigor and the U.S. monetary situation continued
to deteriorate with accelerating gold losses. Yet, negotiations
continued, as Rueff says, "at a snail's pace on a volcano,
which may erupt all of the sudden." While the experts dallied,
the volcano belched and smoked all around them. That a crisis
was brewing was now obvious even to the skeptics.
European nations
that had been accumulating dollars at a pace of $1-2 billion
per year began liquidating them - more than $2 billion were liquidated
inside the twelve months of 1965 alone. By 1970, there was $45
billion in dollars held by foreigners against only $11 billion
in gold stock.
At this point,
the ending was inevitable. Though there were some changes made
to the monetary structure in the waning days of dollar convertibility,
it would finally expire in the summer of 1971 when Nixon brought
the Bretton Woods agreement to an end by taking the U.S. entirely
off the gold standard.
I think there
are many ways in which Rueff's criticisms to the monetary systems
of the 20s and the 60s apply to the monetary world of today.
There are many observations that we can take from this tale and
apply to our current situation.
For one thing,
note that the inflation of money and credit was able to continue
for a long time after Rueff's initial diagnosis that a crisis
was brewing. Like any bubble, the pin is hard to find. Though
he could not point to when the crisis would break, he thought
that any number of events could trigger it - a continued weakening
of the balance of payments deficit, some banking or financial
incident, some political event, a mere shift in opinion.
Any of these
could effect the "subservience of dollar holders and induce
them to request conversion of their dollar holdings in whole
or in part, even at the risk of antagonizing the Washington authorities."
In the end,
the math simply became too stark to ignore.
Regards,
Chris Mayer
for The
Daily Reckoning
TDR Editor's
Note: Christopher W. Mayer is a veteran of the banking industry,
specifically in the area of corporate lending. A financial writer
since 1998, Christopher's essays have appeared in a wide variety
of publications, from the Mises.org Daily Article series to here
in The Daily Reckoning. He is also the author of "Capital and Crisis," a recently-launched
investment advisory for contrarian-minded financial observers.
For details, see:
Capital and
Crisis
http://www.capitalandcrisis.net/
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