In his new book, War and Gold, Kwasi Kwarteng likes to call that phenomenon order and chaos, and make us believe that the history of money is like an oscillation between these two conditions. Periods of momentary chaos, such as the one after the introduction of the American continental paper money or the French revolutionary assignat in the late 18th century, were followed by moments of relative order, as proven by the gold standarda monetary system in which the standard economic unit of account is based on a fixed quantity of gold.
In a similar pattern, writes Kwarteng, the relative order of the Bretton Woods system of monetary management, which lasted almost three decades, followed the disorder of the 1920s and 1930s. The post-1971 settlement, in which currencies were allowed to float freely against one another without any reference to gold, was again a period of relative chaos.
London-born Kwarteng, who worked as an analyst in financial services before becoming a member of the British parliament, takes readers on a roller-coaster ride into modern-age history, as he presents a captivating study of the present through the lens of the past. But any work of history has to have a starting point. Kwarteng begins his journey with the 16th-century Spanish conquistadors, who brought treasures of gold and silver from the New World into the Old. The single-minded influx and use of precious metals for waging international wars eventually led to higher prices, bankruptcy, and later, the end of a great era.
This cautionary episode, Kwarteng says, holds tremendous significance in the history of money, as it has been repeated many times up to the present day, causing many great nations of the world to slip into a state of economic ruin, from which many are still trying to escape. This book argues that the needs of government spending, in particular relating to war finance, are responsible for the development of what is often thought of as a narrow and specialist field, that of monetary policy.
Kwarteng began research for the book after he was partly motivated by a desire to understand the background of the financial crisis of 2008. But in doing so, he exposes a pattern of financial debt stretching back hundreds of years, from the American Revolution to the modern-day rise of China as an Asian superpower. In between, he touches upon several other turning points in the history of money, such as the American Civil War (1861-1865), the first industrial conflict in which guns, railways and capital were deployed to ensure total victory; the first World War (1914-18) in which governments resorted to paper money and borrowed unprecedented amounts to spend on armaments; German inflation, which was stoked by paper money in the early 1920s; the Wall Street crash in 1929; and, more recently, the introduction of the euro; the Greek crisis and the eventual discontent over austerity measures imposed by the Eurozone, among others. All along, Kwarteng tries to keep his offering a work of history, not a tract of economic theory. It helps that the book uses fairly basic economic concepts just like one might find in newspapers and financial journalism, and not theoretically robust definitions of money, which, the author himself admits, tend to be incoherent or too abstruse to be useful.
Kwarteng doesnt leave any doubt in the minds of critics when he writes that the book is not advocating a return to the gold standard of the pre-1914 era. It simply tries to tell the story of some of the monetary developments which have shaped governments in the last 500 years, he writes, later adding: The gold standard will never formally return, but movements in the price of gold may well suggest that investors, in their lack of faith in
paper money, have informally adopted one, he adds.