The Reigning Error


The Reigning Error: The Crisis of World Inflation, by William Rees-Mogg, London: Hamish Hamilton, 1974, 112 pp., $8.50 (Available by mail from National Committee for Monetary Reform, 1524 Hillary, New Orleans, LA 70118.)

So you think inflation is bad in this country? In 1913, one ounce of gold would get you $20.67. Today, it would fetch some $180, an 8.71 inflation rate. In 1913, one ounce of gold would also have brought you £ 3 17§ 10½d, or in new pence, £ 3.89. Today, that ounce of gold would bring you £78.26 (£ 78 5§ 3½d). This represents a 20.01 fold inflation!

On May 1, 1974, The Times published an essay by its editor, William Rees-Moss, in which he called for a return to the gold standard. He said, in part,

Paper money is only as good as the men who control it, and they are under constant pressures to print more of it. Gold exists in limited and finite quantity, and it is added to by new production in limited and reasonably predictable quantity. The value of paper money is therefore precisely the value of a politician's promise, as high or low as you put that; the value of gold, or a contractual right to gold, is protected by the inability of politicians to manufacture it.

This caused a furor in the land of John Maynard Keynes, as one would expect. So Mr. Rees-Mogg followed it up with the present volume. It is short: only 112 pages, including a reprint of the article of last May. It is somewhat polemical: obviously Mr. Rees-Mogg attaches quite a bit of emotion to his arguments. It argues, in part, from a Friedmanite economic position rather than an Austrian position. It even accepts a Keynesian error, the multiplier effect. The last two are minor defectsindeed, one can give the book to Friedmanite rabid antigold standard people (such as Prof. Friedman). And the polemics, far from obscuring logical argument, only serve to make it more lively.

The first of five chapters, "Prometheus Unbound," sets a philosophical base for later arguments. For example, as a prelude for a later observation that governments today prefer short term benefits with postponed ruin to short term discomforts with long term benefits, he writes,

In the classic periods of history, from Socrates to Mr. Asquith, the formation of opinion, both in the city and in the village, was dominated by the quiet and precise conversation of informed and serious men. In this century it has increasingly been dominated by the power of dissemination of noisy and ignorant men.

(And one suspects that an editor of The Times would know.)

The main thrust of the chapter is to develop the concept of ordinate vs. inordinate, or, in other words, the natural vs. the unnatural. Thus, the ordinate is energy concentrated by discipline, such as the energy of individuals concentrated by the Constitution of the United States, or the energy of atomic fusion concentrated by the magnetic bottle to provide power.

The inordinate is the energy of men let loose on the world, such as Hitler, or uncontrolled atomic fusion: the hydrogen bomb. The ordinate includes the energies of people harnessed by a stable monetary system; the inordinate is the energy of money let loose in inflation.

The next chapter is "The Assize of Money," which simply means the gold standard on the witness stand. The device allows the author to present the reader with a dialogue between an inquirer and a defender of the gold standard. Thus, we learn Rees-Mogg's definition of inflation:

JEFFERYS. Pray tell the court what do you mean by this word "inflation?"

PRISONER. By inflation, I mean bad money, that is money which does not hold its value.

JEFFERYS. If money does not hold its value, what then?

PRISONER. Prices rise.…

JEFFERYS. I see you make out a respectable classical ancestry for this modern bastardy. What then caused the inflations?

PRISONER. The same thing as caused all inflations, too much money.

In the chapter, Rees-Mogg turns for authority to both modern and 19th century writers. He refers to Milton Friedman's collaboration with Anna Schwartz, A Monetary History of the United States, and to the technical banking publication, The Bank Credit Analyst. He also refers the reader to Andrew Dickson White's classic book, Fiat Money Inflation in France.

The next chapter's title, "Rotten Herrings and Revolution," is taken from a description of Paris during the hyperinflation, as reported in The Times of August 17, 1795. The chapter is devoted to a correlation between inflations and revolutions and the rises of dictatorships. The historical record is quite clear: the biggest beneficiaries of inflations are dictators, whether they are left-wing (such as Lenin) or right-wing (such as the present government in Chile).

Because inflation is inordinate, it generates chaos and encourages lawlessness. One example of this lawlessness should serve as a warning, both to Inland Revenue and to the Internal Revenue,

There is also a growing problem of tax avoidance (lawful) and tax evasion (direct cheating). In the 1970's we have already seen a Prime Minister of France and a President of the United States run into serious political trouble because of the accusation that they had minimised their tax payments. In Britain a generation ago there was a consensus that taxes ought to be paid willingly as a contribution to the proper cost of running the state; a generation of very high taxation has watered this down to a consensus that taxes legally due should be paid; already there is a fringe of outright illegality, and there must be reason to fear that another few years of inflation and high taxation would destroy the average Englishman's law-abiding attitude toward his taxes, and with it a substantial part of the taxing capacity of the government.


The next chapter is "The Case For Gold," and Rees-Mogg starts out by saying, "The argument that convinced me of the case for gold was that it worked." Indeed, it did. Rees-Mogg presents us with a table showing an index of prices from 1661, at the time of the Restoration of Charles II, to 1973. The record is clear. Using 1661 as the base, with an index of 100, we find that the most stable prices occurred during the periods from 1661 to 1797 and from 1921 until 1914. From 1797 until 1821 and from 1914 until the present, Britain was off the gold coin standard. Between the two world wars, Britain was on a gold bullion standard, under which the minimum gold one could get for one's paper was a 400 ounce bar. From 1945 until 1968, Britain was on a dollar standard, where one could exchange one's sterling for dollars, and the dollars for gold (again, in 400 ounce lots). After 1968, the dollar was inconvertible entirely, and so was the pound.

An examination of the table is clear: When Britain was on the gold coin standard, the prices were the most stable. In 1661, the index was 100. In 1914, it was 91. Under the wartime inconvertibility, the index rose to 270 in 1920. With deflation and Churchill's attempt to return to the gold standard at the old price of £ 3 17§ 10½d an ounce, prices plummeted to 85 in 1933. 1939 saw war and a price index of 113. 1945 saw a price index of 195. From there, prices rose more or less steadily to 404 in 1967. Last year, the index stood at 595. Not only was the period of the gold coin standard the most stable, but the further Britain has moved away from it, the faster inflation has continued.

In the chapter, Rees-Mogg covers many of the arguments which surround the gold standard, both for and against it. We have heard them all at one time or another, and it is refreshing for us to read Rees-Mogg's way of handling each one. Again, he unfortunately picks up Milton Friedman's prescription that the supply of money should increase at a fixed rate each year (he calls for 3½ percent). The fact that he is calling for inflation even by his own definition apparently escapes him.

The idea of a gold standard money which, by the design of the monetary authority, is expanded at a set percentage each year (whether by 1 percent or 50 percent or whatever) is contradictory. The essential feature of a gold standard is that it places the question of expanding or contracting the money supply solely in the hands of the market, and therefore entirely outside the hands of the monetary authorities. Under a gold standard, there may be periods in which the quantity of monetary gold decreases as less gold is mined than is consumed industrially or worn away in use. This, of course, runs against Professor Friedman's prescription, and in turn shows why the monetary authorities in the U.S.A. so vehemently oppose any form of gold standard: it takes them out of the realm of being authorities and makes of them caretakers and executors of the market's decisions.

This contradiction is a flaw in the book, and it is unfortunate. It is, to everyone except a specialist in the field, an extremely fine point, so I recommend the book in spite of the contradiction. The arguments given in favor of the gold standard are well worth presenting, and the fact that they are presented in a lively manner is an added plus.

Charles Curley is the author of The Coming Profit In Gold, and is a founding member of the National Committee to Legalize Gold. [See "Profile," this issue]