Devaluing Currency: The Sea Change in Monetary Thought

Chris Mayer discusses the great change in economic thought that took place in the twentieth century, when Devaluing a country’s Currency went from being an excommunicable offense to mainstream economic thinking.

IT WAS GUSTAVE Le Bon (1841-1931), the French psychologist and sociologist, who remarked that the great upheavals in human history, the great events, were less important than the subtle, but far more powerful, underlying changes in the ideas held by the masses of people.

“The true historic upheavals are not those which astonish us with their grandeur and violence,” Le Bon wrote. “The only important changes…affect ideas, conceptions, and beliefs. The memorable events of history are visible effects of the invisible changes of human thought.” The reason great events are rare, Le Bon thought, is because the collective beliefs of a people are slow to change.

These collective thoughts and ideas are the sturdy substratum of the human condition. However, they can and do shift, and these tectonic movements can cause violent quakes that permanently alter the more visible aspects of human institutions.

The 20th century was undeniably bloody and marked by extraordinary change. It can be argued that in no other century saw such radical change. One of these epochal transformations, largely unappreciated by the mass of people, was the sea change in monetary thought.

For a long time, it was financial orthodoxy that a strong nation needed a strong currency. And a strong currency was one that could be redeemed in specie — metals like gold and silver. Indeed, it was seen almost as a moral mandate, and a proud country pointed to its currency as a sign of its strength. What pride the old Germans had in the old stable mark, or the Swiss in their sturdy franc!

Though governments and their schemers had long tried to slip the shackles put upon them by hard money, they often did not escape for long, and disastrous consequences followed these wanderings from the plumb line of monetary convention (witness the adventures of John Law, for one, or the experiences of those unfortunates who held on to the old continentals issued during the American Revolution — the examples are nearly endless).

In the 20th century, though, the powers vested in governments managed to break the chains, also with disastrous consequences — destructive wars, massive inflations, and countless bankruptcies of nations, men, and businesses. However, the chief difference was that the people of the 20th century never put the chains back on, because they had finally come to believe in the theory of inflation.

Devaluing Currency: The Raven of Zurich

I was thinking of these things recently after reading Felix Somary’s memoirs, The Raven of Zurich. Originally published in German in 1960, they were published again in English in 1986. Somary was dubbed the Raven of Zurich because of his gloomy predictions. Yet he was often right. He anticipated World War I, the stock boom, the ensuing Depression, World War II, and the Cold War. He was a macro theorist and futurologist nonpareil.

He began as a banker in Vienna and then worked for various governments in several different diplomatic roles. As an old hard-money man, his memoirs give us his reflections on the devastating bonfire of paper currencies that occurred in the first half of the 20th century and whose embers still smolder today.

In the First World War, Austria and Germany financed their efforts by issuing bonds and printing money. The consequences of these actions were not widely foreseen, because, as Somary writes, “After a century of stable money, the population understood nothing about inflation.” When the war ended, the German mark began its descent. By the 1920s, the mark was totally destroyed, burned to nothingness in a now-famous episode of hyperinflation.

Somary writes that at various times, the inflation could have been stopped by choking it off at the source — by restraining the creation of money itself. There is a story, probably apocryphal, about when the great economist Ludwig von Mises was asked how to stop the depreciation of the mark. He supposedly walked with his inquirer to the place where the government was feverishly printing marks. “Make it stop,” he said. The printing of marks, of course, continued unabated. It took Rome over four centuries to destroy its currency completely; Germany and Austria managed the trick in just nine years.

Somary asks, “How often since has the same thing been repeated?” The inflation comes, people praise it, business picks up, the size of government is expanded, and entitlements swell. Debts accumulate. “It was, and remains, more popular to let things go on this way than to try to stop the inflation,” Somary observes, “hoping somehow that someone else will pay the piper.”

The 1930s, too, were a time of monetary disturbances, marked by global devaluations of the world’s major currencies. By the time Roosevelt devalued the dollar, the art of monetary manipulation had been accepted as mainstream economic dogma, or, as Somary writes, “had been elevated by venal professors to modern economic theory.”

Devaluing Currency: The Last Bastions of Hard Money

A weak currency was now seen as a sort of remedy for various economic ills. For a time, two countries held out — Holland and Switzerland. Gold flowed to these countries, the last bastions of hard money, two lonely towers built on a sound currency. The press and government officials from countries like Britain, France and America implored the last two holdouts to join in the monetary inflation. Or as Somary puts it, “The newspapers were full of the notion that the disgrace of monetary manipulation should somehow be shared.”

The Dutch guilder and the Swiss franc very soon followed suit. The Swiss franc was devalued by 30%. Somary’s words capture the reversal in monetary thinking: “Even 10 years ago, a devaluation in the case of a bank of issue with 100% gold coverage for its currency would have been termed a fraudulent declaration of bankruptcy.” Somary writes, “Nowadays, they call it ‘the theory of purchasing power.'”

What was once an unpardonable sin — the pope forgave King Philip of France for all sorts of transgressions, but he would not lift his ban of excommunication for debasing coinage — was now shrouded in academic finery and accepted in polite society. Today, there is no shame in having a sinking currency; in fact, most governments seem to compete to see who can sink their currency even lower.

In The Wall Street Journal last week, I read the headline, “Lower Dollar Is Likely to Spur Economic Growth, Fed Says.” So there you have it. Destroy your currency and spur economic growth.

So if it took Rome four centuries to destroy their currency and Germany only nine, how long before the dollar loses its place as the world’s currency of choice? There’s no telling. The dollar has already lost some 95% of its value since the creation of the Federal Reserve, but there is still no fiscal discipline in our government and no desire among the general populace to return to a 100% gold standard. It’s become accepted that this is the way things are and people cope with it as best they can.

People have become seduced with pseudoscience that passes as mainstream economic thinking. They have been duped by modern snake-oil salesmen. They have abandoned their common sense and their own experiences for the slick words and complicated formulas of the modern economists.

We began with Le Bon, and we’ll end with a note from the old French master of crowd psychology. “A pyramid far loftier than old Cheops,” Le Bon wrote, “could be raised merely with the bones of men who have been victims of the power of words and formulas.”

For Whiskey & Gunpowder,
Chris Mayer
March 9, 2005