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November 26, 2008

Jubilee, 1935
by Adrian Ash

"With John Maynard Keynes feted by governments once more, would you dare to guess how desperate things must become before a true revolution in policy becomes possible...?"

THE SUN SHONE BRIGHTLY on London for the silver jubilee of King George V as if to spite him. For it rarely smiled on his reign.

Although cheering crowds thronged the streets on May 6th 1935, his 25 years on the imperial throne, said the Archbishop of Canterbury in his commemorative address at St.Paul's Cathedral, marked a quarter-century "of almost unbroken anxiety and strain". Only the prime minister, Ramsay MacDonald, and the elected House of Commons would dissent before the orations were done, claiming they were also "years of happy prosperity...of resolute achievement."

Perhaps MacDonald was thinking of his own achievements, such as becoming the first-ever Labour prime minister (not once, but twice!), or reducing the crushing reparations demanded of Germany after World War One. Or ordering the Admirality to stop improving its defenses at Singapore. Or signing an arms-limitation treaty with both the United States and Japan. Or championing the world Disarmament Conference at Geneva in 1932, only to watch Nazi Germany quit the League of Nations altogether in 1933.

Either way, MacDonald - like the King himself - would be dead within two years, ignorant of the devastation yet to come. And with one-in-five working men out of a job that bright spring morning in 1935, and with "fear and preparation for war again astir in the world" as George V put it on his jubilee, both the monarch and his subjects felt there was little to celebrate.

First embittered political wrangling - culminating in the People's Budget of 1911 - had brought the welfare state kicking and screaming into British life, law and tax rates. Then came the Great War, "the fiercest ordeal which the nation has ever been summoned to face," as Canterbury called it, the "most desolating war in history," according to the House of Lords' address.

Only further hardships followed, however, starting with the epidemic of Spanish Flu in 1919 and worsening into "the economic destruction which [was] inheritance to our generation," in the words of MacDonald, who confessed that the economic and industrial problems before him were "baffling". And "beyond the seas, there [were] other, perhaps even greater, changes," admitted the Lords; "free institutions have sprung into being and have flourished throughout your Empire...[marking] the growth of your self-governing Dominions."

All told, concluded the House of Commons, "Your Majesty's reign has seen profound changes in world conditions, and the consequent emergence of complex and unfamiliar problems." George himself, replying to parliament's praise on May 9th, laid out the devastation he ruled over.

And there, ghastly as any corpse thrown up by the plough-shares of north-eastern France, lay the Gold Standard.

"In the aftermath of war," said the King, "in a world exhausted by its ordeals and impoverished by its destruction, we set ourselves to resume our normal ways, to recreate the structure of our industry and commerce..."

The Bank of England's infamous "Norman Conquest" of 1926 - when the British Pound went back onto the Gold Standard at the old pre-war exchange rate after a deliberate policy of deflation in prices and wages - worked to squash credit and lending, spending and growth. Led by the Bank's governor, Montagu Norman, the return to gold over-valued the sharply inflated Pound against its competing currencies, forcing the depression in both exports and domestic demand to continue, even spreading across Empire, seeping into world trade just as the United States' credit bubble reached its peak.

By 1929, the volume of British exports still remained below 1913 levels. By value, British exports had gained nothing after the Bank of England achieved its aim.

"We were treading unfamiliar and broken ground," continued George V, four years after Britain finally abandoned the Gold Standard for good...or worse. The loss of honor, esteem and pride was sharply felt, but "there had been far-reaching changes, especially in economic conditions. Everywhere a feeling of uncertainty and lack of confidence hung like a shadow over human endeavour."

The Gold Standard, in other words - that "normal way" of structuring finance and business - would no longer fit. Returning the British Pound Sterling to its familiar position as the king-pin of world currencies seemed to weaken the economy, not rebuild it.

And now? It's hard to imagine the length and depth of devastation which brought about such a turn in Britain's monetary policy. A full quarter-century of constant strife had hollowed out its manufacturing base; the collapse of world trade during the 1930s then decimated the City of London's power as a commercial center, too. The end of gold had also required the record inflation - and untold slaughter - of the First World War, let alone the peace-time inflation needed to fund "Homes Fit for Heroes" in its wake.

That's why the present chatter about "tearing up the rule-book" in government policy, allowing a surge in government debt to finance make-work programs and tax-funded loans - direct to consumers and business - means so little. At this stage, at least.

So far in this crisis, starting in August 2007, economic policy both in Europe and the US - as in Japan - has simply followed the normal ways long-prevailing:

"Tax, spend and borrow...for tomorrow they vote."

That most "post-war" of men - and the man who built the post-WWII settlement forcing the rest of the world to accept US Dollars in lieu of gold at Bretton Woods - John Maynard Keynes "suddenly appears to be back in fashion," notes the US writer and self-proclaimed conservative Christopher Chantrill.

The father of the international Dollar Standard, and an economist whose doctrine of tax, spend and borrow was hardly dented by the soaring inflation it caused in the late 1970s, "Keynes was born in a world where government spending was under 20% of GDP," Chantrill goes on - and he should know, having nailed together the British data from Treasury reports and forecasts, ONS data, NBER articles and guesswork relating to local authority receipts at the excellent UKpublicspending.co.uk.

"Keynes studied in one of the largest conflicts the world had ever seen, when government spending was on average 25% of GDP...wrote his works in a world where government spending was 25% of GDP and during the largest conflict the world has ever seen, when spending went over 60%, but after the war went down to 35%."

Don't those numbers seem quaint today? Can you imagine a world - mired in depression - where government spending could double to 50% of gross domestic product!

And dare you guess just how desperate things must become before a true revolution in economic policy even becomes possible?

Adrian Ash
BullionVault.com

Head of research at BullionVault.com, the fastest growing gold bullion service online, Adrian Ash is also City correspondent for The Daily Reckoning in London, and a regular contributor to MoneyWeek magazine.

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