Is the bailout working? Well, that depends. It may or may not be working to keep our economy out of a depression and keep our failing financial institutions from collapse. But, if Jonathan Ruffer is right, it’s probably working to create the next massive economic shock: worldwide currency collapse and crippling inflation.
Events unfolding today are almost exactly similar to the backcloth of the 1930s. This is not such a surprise, since there are not many variables to a deleveraging process. There are, however, many different policy responses to it. The Great Depression is America’s equivalent of our Battle of the Somme: an event too horrible to contemplate. It was not until a generation after the event that Milton Friedman established what is now the accepted causology of the disaster. He asserted as its true cause a failure by the Federal Reserve to take the necessary action to combat the destructive forces. This failure, he thought, stemmed from a moral infantilism, and an almost complete lack of imagination by the authorities — and it is true that period newsreel films of Herbert Hoover and Ramsay MacDonald reinforce this explanation. Dr Bernanke, the chairman of the Federal Reserve, has made it his life’s work to study this failure, and he vowed to Milton Friedman on the latter’s 90th birthday that it would ‘never happen again’.
The Americans allowed a depression to develop in the 1930s because they were afraid of the consequences of losing the principles of sound money. In an effort to avoid a re-run of the 1930s, the Western world is imposing the opposite, equally unbalanced and intemperate solution. We might thereby avoid a depression — but the bad stuff which follows currency compromise will crash down upon us with great vigour. This is the one and only one, and probably last, shock that the credit crunch has yet to impose on a still unsuspecting world.
It is instructive to see today’s crisis in the light of a 1930s mindset. When Britain left the gold standard in July 1914, there had been a sharp theological debate between the smart alecs, led by Maynard Keynes, who thought that paper currencies were the ‘frictionless’ way forward. The greybeards would have none of it. Human beings could not be trusted; too many trees would mean too much paper and valueless currencies. A century later, we can see that the smart alecs were right. The world has survived and thrived under a paper regime. But the greybeards were right, too. Within 15 years, the currencies of Russia, Germany and Austria were worthless. France’s had dropped in the eight years up to 1926 by 86 per cent, Portugal’s was down by 93 per cent and by 1930 only six had held steady against the ‘gold exchange’ dollar of 1918. The rules were understood by all. If you were going to have an inconvertible currency, you had to behave impeccably: deficits were dangerous and there must be no growth in the money supply.