Tag Archives: UK

The EU – Creaking at 60

The title of this blog is the title of the Economist Special Report last week. The title refers, of course, to the 60th anniversary of the Treaty of Rome, the founding of the EU at its source, being celebrated by EU members, less the U.K., last week. Oddly the U.K. is still a member but since she wants out, political correctness prevents Albion from upstaging proceedings.

The Economist special report is really good. It is well balanced and actually concludes that Europe needs a multi-speed system to respect all the differing political and economic challenges across the EU. What is irksome though is that while a two-speed or multi-speed approach has been proposed before, why is it now that the Economist has finally woken up to reporting it and making it the basis of its views regarding the success of the EU?

It is as if the Economist has woken up just in time to see the final deck chair arrangement on the titanic. Correctly the special report calls out the weakness and fallacy of the EU’s monetary policies for all members and now current monetary union is flawed. We all knew this a while ago. If this had been addressed perhaps the U.K. vote for Brexit might never have happened!

But ignoring my cryptic criticism, the article is very up to date and very down to earth. It’s just a shame that it took Brexit and the near break up of the EU, and continuing mess in Greece and Italy to come to the conclusion we needed four years ago.

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My Top 5 Biggest New Year Risks to the Global Economy

In order or scale, priority and impact, here are my picks for the five most critical trigger-points that may impact, negatively, a return to ‘old normal’. Currently we stand at the edifice of a new normal, the great stagflation, but the anti-establishment and populist changes taking place seem to suggest a knew-jerk reaction by nations fed up with socialist dressed-up-as-market politics that have led the West for 20 years.

  1. China’s economy stagnates or crashes. Debt levels are above EM levels and are now among the largest, approaching the incredulous Japanese levels. This dynamic is not sustainable for a nation whose currency is not a reserve currency. However the economy is the world second largest even without the development and emergence of whole swathes of other sectors such as healthcare and leisure, which may offset contracting first world growth over the next year or two. So the risk is there and there is no clear leaning one way or the other, yet. But debt is growing faster than these new sectors; exchange reserves at $3bn are limited (though huge), and currency value management is not market-bases. So greater risk is with the downside. China’s growth flags, currency sinks, counterbalancing US growth and confidence, creating a massive imbalance in the global economy. Europe watches on as global GDP sinks under its own debt weight. KPI’s to avoid/watch out for: China GDP falls to or below 4.5%; China’s debt load surpasses 300% of GDP.
  2. Trump quits after 18 months due to intractable political limitations that prevent policy changes he seeks related to healthcare, regulatory complexity, tax reform and trade. Trump’s political rhetoric is being replaced with solid business-based policy. However not all such policies have ever been tested at a national level and scale. Some efforts will fall foul to physical, social and political limitations. This may prove frustrating for Trump. As growth will return short term, such medium term frustration will lead Trump to claim, “My policies worked, see? But now the system has reached its limit and there is nothing I can do until the country agrees with me to shut down the whole government system! Since they are not ready, yet, I am ‘outa here’ until they are!” Markets crash, interest rates balloon, inflation rages all within a year. World economy sinks into the abyss. KPI’s to avoid/watch out for: US GDP 1H 2017 reaches 4.5% but Congressional conflict leads to policy deadlock ; vacancy in position at Whitehouse. 
  3. Emerging Marker currency crisis as massed capital investment is siphoned away towards a resurgent US economy and dominant dollar, as well as a stable and even growing China economy. This situation is already underway. The risk is that what is currently a reasonably ordered trend becomes a financial route. This is possible since the financial markets are starved of yield due to the collective policies of central banks to keep interest rates very low for too long and for the build up in their massive balance sheets. If the trend becomes a torrent, EM’s will have to yank up interest rates far beyond what their local economics can support and economic disaster will follow. This will ferment more political instability and drive increased destabilizing ebonies to ruin. Though the US may be growing well, compared to its peers, it’s the imbalance they tips the ship over. KPI’s to avoid/watch out for: dollar index, the weighted value against basket of currencies, surpasses 115. It is currently at 103.33, which is a 14 year high; EM interest rate differential balloons.
  4. Hard Brexit forced through by intransigent Europeans who think the EU experiment is more about political union than economic liberalism. A new trade deal, legal framework and social contract can be negotiated within a two year window. But only if politicians and civil servants want it too. Continental politicians however, under the strain from populist pressures, will equate intransigence over Brexit negotiations with an improved politicos standing with their electorates. Fool for them as this will actually create the opposite response for such behavior will simply worsen the economic climate. The lack of any sign of return to old normal will lead to political paralysis and the clock will time-out. Hard Brexit will be forced upon a supplicant Britian. Europe and UK economies will tank; currency wars will wage; global trade will collapse further. This will not sunk the global economy short term but will act as a dead weight slowing its resurgence down. KPI’s to avoid/watch out for: no agreement at end of two year period lost triggering of Article 50. 
  5. Latin or Indian debt or economic crisis. Much like with other EM’s, growing sectors of significant size around the world may blow up- India being the best example. India’s growth is different to China. It is more integrated socially and politically with the west, but it’s corruption levels are far greater than what one can see or observe in China. It is possible that local economic difficulties, hard to observe today, may trigger a collapse in confidence that leads to a destabilizing debt or currency crisis. Brazil’s economy is certainly in the dock currently; Argentina is struggling. India’s economy looks like paradise right now but the growth across the country is extremely uneven- you only have to look at public sector infrastructure investment. So should two such countries suffer local difficulties, the combination may result in significant risk to the global financial system. KPI’s to avoid/watch out for: two simultaneous financial/debt crisis afflicting EM or India.

These are my top 5 risks the global economy faces in 2017. I hope I am wide of the mark, in a positive way. I left Japan off the top 5 list yet their economy remains anathema to growth. The Japanese market invented the whole new normal cycle with a anaemic growth, massive debt, low inflation, and demographic contraction. And Japan has an amazing debt load that refuses to spook investors. Things may yet have a Japanese tinge before the year end. Does Japan, along with the US, lead the global economy back to the old normal!
What potential risks do you see?

Britain to Lead Second-Tier EU?

I suggested some weeks ago (see Brexit: Mainly the Right Decision for Mostly the Wrong Reasons?) during the Brexit campaign, rather tongue in cheek, that Britain should take the opportunity to lead the formation of an EU II. The idea was simple: develop another EU commitment but one that resolves the issues that dog the current EU. These issues stem from an unelected body that writes laws and a need for statist and deeper integration. Well I am pleased to report that the idea is not all that crazy.

In Tuesday’s US print edition of the Financial Times there is a Comment piece by Foreign Affairs correspondent Gideon Rachman. The title of the article is, “A two-tier model to revive Europe“. In a nutshell his suggestion is for Britain and a number of other counties to form a tier of the EU that supports those parts of the EU model that don’t require unelected (or elected) officials to write laws from superstate or ever closer integration. This second-tier EU might be more liberal, free-trade oriented, and so enjoy single market but avoid the politically challenging work related to political and financial integration.

It’s a great suggestion. However Rachman highlights how some in Europe seek to penalize the UK for seeking to leave. This is the craziest and nuttiest thing going. As my late father would say, this is an example of, “cutting their nose off to spite their face”. Any penalty to the UK will first hurt the UK economy then the EU’s economy. Why would such politicians do this? Such politicians should be forced to resign and retire due to negligence.  But the chances of a two-tier Europe is interesting; but will those countries focused on the inner-tier really let others enjoy the benefit of free trade without the penalty of deeper integration?   Maybe…

Post Brexit Blues

While in the UK last week, on vacation with friends, I was lambasted by groups that were in the ‘remain’ as well as ‘leave’ camps. I myself had started as a ‘remain’ back in the early spring, but a week in London in March changed all that, after talking with many including some business people from Italy and Austria.  But the news from the UK is now jaundiced and suggesting difficult times ahead. The pound has suffered hugely since the Brexit vote, sinking to 30-year low against the dollar. It has gone from about $1.46 just before the vote to now $1.30.  I wrote this blog on the flight home to the US, landing to find that the pound had dropped again to $1.28.

The FTSE also took a big hit but it has since recovered. The bad news is that, according to reports, some business actions and conditions are changing even before the UK government starts the official application to exit the EU. Some banks are talking of moving headquarter staff to mainland Europe. More troubling some insurance and construction firms are already changing behavior. In Tuesday’s UK print edition of the Daily Telegraph, there was an article, “Standard Life Halts Trading at Property Fund after Exit Rush“. The report explores the impact of massive withdrawals from property investment portfolios. In summary, long term investment strategies related to construction in the UK are suffering a lack of confidence. 

Economically the UK is in a strong position. It does not suffer from as many of mainland Europe’s issues. It is even now at liberty to remove other EU restrictions and after Brexit is complete, it no longer will be held back in setting policy by 27 other independent groups.  But confidence is the issue here, along with ignorance. There is little material that really proves the UK economy will be worse off as a result of Brexit. Another story in the same print edition of the Day Telegraph reports that the German finance minster (Wolfgang Schäuble) was asked by David Cameron to weigh in on the Brexit ‘remain’ vote with comments emphasizing economic disruption. The press had thought the such comments were based on fact independently developed and facial: they were not.  

On a hugely positive note two other articles highlight really interesting points. One (see Never mind Brexit, real hope is in UKs soaring company start-up rate) suggests that the number of start-ups is running at historically high levels. This is a little known analytic that suggests that economic renewal is improving and this operates as a future driver for growth. Alas the same analytic in the US is in the doldrums and government policy is not targeting to improve this goal.

At the same time a report by S&P addresses (see Weaker pound to cushion the shocks of Brexit, predicts S&P) some of the pointless scaremongering that was created during the run-up to the vote.  The new article projects solid economic growth and a safe passage for the UK economy post Brexit, assuming a calm, rational set of trade and economic actions.  Finally some sensible reporting; no ‘end of the road’ reports now. It is just a matter of time before more of such reports are understood.

The U.K. print edition of the Financial Times offered some other interesting angles too. Some the ‘Remain’ camp won’t find all that comforting. Firstly in, “German employers warn against ‘punishing’ the UK“, the head of Germany’s employers body BDI was reported as saying that negotiations regarding trade between the EU and the UK should not penalize the UK. This is sage advice given that the UK is Germany’s largest export market behind the US and France. Equally Germany is the UKs largest export martlet outside of the US. Even Angela Merkel, the German chancellor, recently said that the UK should be given time to determine when it wants to kick off the official two year divorce process.

A second article, “EU Budget: British Breakaway to spark wider disputes on financing“, demonstrates that clear fact that the UK is a net contributor to the EU, to the tune of about £10bn (real, 2015).  As such, post execution of Brexit, the U.K. will have more money to spend on its own priorities and the EU will need to cut back spending unless it seeks to fill the gap made by the UK’s leaving by increased contributions from its remaining members.

The final FT article I spied calls out an unintended consequence of Brexit that may have long term impacts on global security and power. And this is not from the point of view of an aged and retired empire but from the point of view of tipping points. The article is called, “Tokyo fears Brussels Will Lift China Arms Ban after Brexit.”  This is a most interesting twist on Brexit not discussed in the press.

Britain is today a sizable advanced economy, globally connected financially (legacy, thanks to the pound being a past reserve currency), economically (due to being heavily reliant on trade), and politically (due in part to the export and use of the English language, common and business law and democratic practices). However some of the trappings of its empire led to some unique positions around the world. In 1920 Britain was allied with Japan, with stronger naval ties than with the US. This was partly as a defense mechanism from the UK perspective; post WWI the UK had lost its financial ability to project itself globally and was increasingly reliant on the benefit of others (e.g. US) and less so on its own asses. This was also partly a reflection of Japanese goals; it was seeking to emulate the success of the British Empire, founded on naval power, and was keen to learn from its erstwhile far-away neighbor the art of modern empire building. The alliance gave Japan credibility politically and militarily. The Washington Naval treaty of 1921 put paid to this alliance as the US forced Britain to relinquish the Anglo-Sino alliance in order to buy the support for the curtailment of expensive navel construction, at a time when no nation could really afford anyway.

But as it stands today the UK plays a key spoiling role in global politics, with a heavily nuanced and balanced position. The FT article highlights how Japan fears that with the British gone from EU diplomatic and political debate, the moderating position the UK too will fall away and views less acceptable to Japan, such as the EU selling arms to China, might now be in the ascendancy. This is a most interesting side-show that may have longer term security repercussions. Britain’s ties with China are improving, and its relations with Japan are long and very positive. Britain is again in a unique position.

If you wanted to read more about the UK-Japan connection, read Leo Lewis’s Short View for July 5. In his column he explains how the Nikkie 225 average is being hit for six by Brexit, perhaps more so than any other stock market index. He explores the relationship Japan has with the U.K. and why that leads the Japanese market to its painful conclusions.

But the reality is that no one knows what’s going to happen. Hence confidence and talking the economy up is critical right now. Astute confidence will help drive the pound up and hence reduce the losses experienced with the ‘leave’ vote.  As I said before, with Brexit re are no real winners.  But the UK has a great opportunity here…

Brexit: Mainly the Right Decision for Mostly the Wrong Reasons?

The title of this blog captures how I would summarize Brexit, the U.K. Referendum to leave the European Union. After watching the story unfold intently from afar, the visiting and immersing myself in local dialog over the last three weeks, the tittle of this blog captures the essence of the situation.

The reality is much worse, again for the wrong reasons. Let’s first look at the decision.

  • Technically the process and the method by which the UK will leave the EU has not even started and won’t until October.
  • How the divorce will shape up will be subject to protracted negotiation. Clause 50 has never been tested. Also the UK is a large economy, with several advantages, namely its own currency and exchange rate (to buffer any risks) and the city of London financial center.
  • There are numerous related dominoes that make scenario planning more useful than predicting one single outcome. This includes the foolish attempt by the leader of the SNP who wants to turn Brexit, a UK referendum, into something about Scotland.  

Now let’s look at the pre-Brexit political, or should I say marketing, spin:

  • Neither those for Remain or Leave debated honestly. They could not even agree common terms of reference; how much money the UK gave to the EU versus how much was given back in terms of subsidies, could not be agreed. 
  • There was significant scaremongering from the Remain campaign, led by the generally liberal or progressive establishment, supported by economic groups including the IMF. Yet a minority of smart investors who have continually beaten the pundits like the IMF identified great opportunity for the UK. One wonders if much of the ‘economic advice’ was more political than practical. No act by the EU to penalize the UK would be countenanced long since a) it penalizes both sides, and b) the very arguments used by the EU for open, friendly, collaboration would be exposed for what they really are- unelected dictatorial bureaucrats.
  • The Leave campaign led their supporters in the belief that immigration would stop with a vote for Brexit, as if humanitarian aid were an EU and not a national or moral concern.  There are significant immigration challenges for all countries; remaining or leaving the EU is not central to the real issue.  

The bottom line is therefore the Brexit vote was more an emotional vote, and nor a rational vote.

Finally let’s look at the post-Brexit situation on the ground. In no particular order:

  • The leader of the Scottish National Party wants to reposition the UK referendum as if it was a Scottish referendum. Since the majority of scots voted ‘remain’, and since the UK voted ‘leave’, surely it means Scotland is being forced against its wishes? Utter rubbish. London also voted to ‘remain’- does London cede from the Union?
  • The Prime Minister, David Cameron, is to step down. This is a great shame as he is a good negotiator and politician. He has fallen in his own sword, a rare political act these days. By comparison, the socialist leader of the Labour Party, equally culpable in losing the ‘remain’ vote, has no idea where his sword is. I am not so sure he has one. But 24 hours later he is being stalked by his own resigning front and back benchers.
  • The pound has taken a beating. This was to be expected. It will recover soon, though it may take time. The recovery against the euro will be dependent on the stability of the euro, not the fragility of the U.K. economy. Spanish and other elections in the next 12-24 months will sort this out.
  • U.K. stocks took a beating but already they are recovering, whereas continental markets are suffering more pressure. This is a leading indicator of sentiment that will again show up in currency values in the next year or so. 

And to top it all off you have to understand the irony of Brexit. In the 1960s France vetoed the UK (twice!) and prevented it from joining the Common Market. And this was only 20 odd years after the close collaboration during the Second World War. De Gaulle felt that the UK’s demands for joining would weaken France’s position, and they would have. The result was that aspects of the Common Market and EEC developed without direct UK input and one could argue therefore that the groundwork of the EU was therefore weakened, and the UK never felt central to the initiative.  This was to haunt the experiment as Britain never really forgave France this veto.

More recently dissatisfaction with ever closer European integration was rejected. Initially countries would vote “no” and reject the the EU Constitution changes. Then those same countries were pressured to re-vote in order to get a “yes”. Finally the Dutch and French rejected the Constitution and it was killed off. However the EU continued. Fifty years after De Gaulle’s unfortunately selfish veto hobbled Europe, it is the UK that triggers what could be the straw that breaks the EU. Fair play, and what irony.

The divorce won’t be clean. There will be much acrimony and hard, complex negotiation. The City of London will be diminished initially, until the cracks in euro fracture and break open.  The U.K. economy will reflect increased short-term uncertainty across the global economy, yet will bounce back towards more positive UK growth within a year. Again, as the euro struggles, so the pound will benefit.  

But in truth no one wins with Brexit. The U.K. will suffer more short term; europe, the EU and euro zone in the longer term.  Everyone will be poorer for Brexit. The reality is that we need a rethink for how Europe wants to live and work together. An unelected bureaucracy is not the answer. We need a new model. The real valuable question is not what happens to the EU now; the visionary question should be “who will document, discuss and lead the ideal EU II framework?”   Let’s demand our moribund politicians work for us and work for a future, not argue over the trappings of an idea that died years ago.

A “Yes” to Brexit Leads to the Demise of the EU and the Euro

I am torn regarding the Brexit vote.  I have to admit I am a Brit, but I am not able to vote as I have been living outside the country for 20 years.  But my history, my background, is English, UK, and European.  But I remain torn.  Even a few months ago I was in the pro-Europe camp since I felt that by being inside the EU we (the UK) could help improve the system, the experiment.  But I was conflicted as I also believe that the Euro is fatally flawed.  The economic imbalances across the Euro zone will only get resolved with full political and monetary union, and that is not on the cards.  Thus the recent Greek crisis is just the first of many.  So why be “inside” as the Titanic struggles?  

I than had breakfast in London a few weeks ago with a work colleague who had concluded that the Euro was going to fall, and as such, why should the UK stay “in” and get dragged down with it?  This breakfast changed my thinking and I was converted to the anti-Europe camp.  Thus for the last month or two I have felt like a politician having flipped-flopped my position.  Well I am now just wrapping up another week in London and my exposure to TV, radio, press and local feeling related to Brexit is brethtaking.  I have been glued to the news channels to suck up all the information I can.  It’s not good news.

It is clear that for many locals, rational evaluation of the data is not part of the analysis.  Worse, even if that is possible, data on both sides of the argument don’t align, and so neither camp can understand the other.  The U.K. is a net contributor to Europe yet if the UK leaves, certain groups will lose EU subsidies.  Why can’t those contributions, once destined for Europe, be rediretcted to UK interests?  It seems the the vote will likely come down to emotion and politics, and feelings pointed toward perceptions of immigration issues, not fact and economics.  As I sit here wiriting this blog, the chances of a “yes” vote for Brexit are very real. Even the risky pollsters suggest, from day to day, that it could go either way.

Interestingly I had dinner last night with some visiting Austrians . This was a dinner meeting after a long day at Summit.  The conversation was wide and general but for a few minutes I turned the discussion toward Brexit.  I wanted to hear their thoughts.  We did not talk about Brexit for lomg.  Almost nonchalantly, the Austrians said (and I am not paraphrasing much here), “Well, if the UK votes to leave, the EU and the Euro are dead of course,” and with that they moved the conversation on. There was no hesitation, there was no open debate. It seems such things have already been analyzed and are already well past, so now it’s just a matter of waiting for the decision (or the hangman). I found this most disturbing.

Once I got back to my hotel my mind was racing and I was having difficulty getting to sleep.  I had to write down what I was thinking, and what I was thinking concerned what could take place should Britain vote to leave the EU.  Here are some of those thoughts: here is a potential time line of events:

  • Since Britain was able to re-negotiate its relationshop with the EU as part of the preperation for the referendum, it won’t take long for other countries to seek to re-negotiate their position. Greece has tried to do this financially and failed. They will try again. Italy might very well do the same. Portugal is a possibility. By the way, did you know (seperately) that there are a number of (mostly) eastern european countries on the waiting-list to join the Euro – all (I think its 6 or so countries?) are on ‘hold’ right now as they don’t want to jump in (to what might be a sinking ship).
  • A renegotiation will be refused by Germany and/or France for the same reason that they will feel that it is giving in and appeasing the fringe and thus weakening the role of the EU.
  • A refusal to permit any more renegotiation will trigger a demand for a  referundum in those countries where relations with the EU are fraught: again Greece, Italy, possibly Spain, Portugal. Even Ireland, now growing very well and fully recovered after the crisis, may seek “out” since they are now being dragged down by the EU’s slow growth.
  • There won’t be one referendum – there will be several. The EU will begin to unravel and the Euro will fall.
  • Sometime before this, countries will have to put in place emergency plans to prepare for the reintroduction of national currencies, perhaps preceded by a desperate last-chance lock down of a single currency and political union by Germany and France (which has no practical chance of actually taking place). The mere hint that countries are considering plans for their own currency will precipitate a faster collapse of the Euro.
  • The ECB will be shut down. Interest rate policy will devolve to soverign states as currencies start to trade.

And this is ignoring all the political and social fall-out that comes about from a “yes” vote for Brexit.

Lastly I was confonted by another counter argument that should Britain vote “yes” to leave, then Scotland will quickly seek to leave the UK and join the EU.  I am not so sure that they will have time to complete such a desire.  Why w0uld Scotland seek to join what essentially is a club teetering on the edge of collapse?  It may not be apparent for three months or more, but surely a Brexit will precipice the collapse of the EU, or at least a long period of confusion and reordering of the EU experiment.

My week in the UK has certainly added more complexity to my thinking.  My heart says the UK should stay, my mind says the UK should leave.  Emotional ties and the hope of unity pushes me to want to remain in Europe; cold analysis of the incomplete political and monetary union tells me that the expriment cannot survive and being “inside” when it collapses will cost the UK more.  And it’s not like anyone wants the Euro to fail – it’s that the terms of reference have shifted from a free trade zone and common citizen-enablement policy towards political union and centralized (even unelected) control  (which was never a real possibility).  

I am nervous for what may happen.  I don’t think anyone knows.  Who would have believed that the UK, late to the EU table (thanks to France), might in fact be an early trigger for its possible demise?

 

Book Review: British Monetary Policy 1924-1931, D.E.Moggridge, 1972.

Book Review: British Monetary Policy 1924-1931, D.E.Moggridge, 1972. Cambridge University Press.
The subtitle for this book is the intriguing, “The Norman Conquest of $4.86” and I had a devil of a time finding a copy. I managed to find a good condition second hand copy. And mighty glad I am. The subtitle refers to Montagu Norman, the Governor of the Bank of England during the period in which theBritain “returned to gold” in 1925 at the now infamous pre-war level exchange rate of $4.86. The book provides insight into the thinking of leading financial policy makers, in the UK and the US, as those countries sought to re-establish exchange rate and price stability in the post-war period.

The writing of Moggridge is easy to follow, and the analysis provides the reader with a confident understanding of what lead to essentially, a bad decision, executed effectively, at a time when the ability to execute was enfeebled with incomplete and sometimes erroneous tools. The personalities involved and relationship between Norman and also Benjamin Strong, the Chairman of the Federal Reserve Bank of New York, are covered in detail and you get the feeling that personal relationships (and in this case, common understanding and close collaboration) played a key role in helping the two countries manage what was indeed a complex and troubled period.

The conclusion one reaches after reading the book goes like this: Political energy was organized around the assumption that Britain needed to reassert the pre-war price level to gold. If Britain did not, it would lose political face, and being the presumptive center of the global trade network (it was before the War), the result might lead to an unwarranted and harmful run on the pound. This was to be avoided for a number of reasons; the UK was in dire need of economic recovery due to the costs of WWI, it’s gold reserves were low, especially compared to its war debts to the US; the economy and particularly global trade was depressed and in need of support.   

At the same time the US economy was beginning to grow toward the dominant role in the world that we take for granted today. But in 1924 the UK still dominated the globe financially in terms of trade settled in sterling and as a source of long term capital funding. This could not continue, and the U.K. needed the help of the US in order to ‘re-establish’ sterling in order to support a stable exchange. 

Equally there was belief that Germany needed to be stabilized first, since it was the source of the entire reparations and related (or unrelated in the eyes of Congress) war debt issue. If Germany’s return to gold could be sustained, then other currencies would have a chance. This was of course where the Dawes plan comes into play as the chiefly the US, supported by the UK, France and others, provided funding to help Germany and European reconstruction.  

The U.K. also suffered two other misconceptions that only hindsight can clear up. First, political and financial leaders assumed France (and other nations, for that matter) would follow the UK’s move and most likely seek to establish the franc’s exchange rate along similar, pre-war levels. This was not to the case. France, seeing the difficulties that the UK attracted by rejoining gold at its pre-war level (i.e. over valued), decided against this and chose a more competitive (i.e. lower) rate in order to improve its economic position specifically via a vis the UK. Thus France took advantage of the situation.  This led to real issues in maintenance of the gold standard.

The second issue concerned the rate itself. The tools, analysis and instruments used by the leaders setting the policy were ineffective, incomplete, and positively embarrassing if we look at the tools used by those in power today. Basic analytic insight was often not even sought after as banking officials set policy more by intuition than insight. Moggridge nicely captures the point that Keynes was actually doing some analysis that did suggest that, with the prices and inflation as they were, the pre-war exchange rate of $4.86 would result in sterling being overvalued by 10% or more. However, the intuition of the majority, and specifically Norman, was that either, perhaps automagically, prices in in the US would fall in order to help level the playing field, or the UK economy would deflate of its own accord without too much hardship for workers and firms. The result was most interesting.

The book suggests that on the whole the return to gold was mechanically successful. This is a fair point, but as the book summarizes at the end, the realty was not so comfortable as policy makers thought it would be. The flow of gold fluctuated between the US, UK, and France, and back again, and the result was that social and economic struggles and strife in the UK were costly.  

More to the point, the over valuing of sterling meant that yes, the return to gold was successful, but the UK did not rebuild the economic and financial strength it needed to return to its formal position. It never could have done this economically, but even its financial reserves were in no fit state to help weather the storm that came in 1931. Congress’s refusal to accommodate the Treary of Versailles, and thus not accepting (until too late) the link between German reparations and the debts owed to it by its main allies, cannot gloss over the valuable assistance from Strong in helping Britain return to gold.  However, their was no real hope that this could be sustained.  The roots of the Norman Conquest of $4.86 can be found in the Irreconcilables conquest of Congress in 1920.

Well Recommended: 9 out of 10.