Is the Conservatives’ economic trump card warranted?

Let’s roll

It is part of Conservative Party mythology that it is repeatedly elected to clean up Labour’s economic messes. Indeed, 1931, 1951, 1979, and 2010 saw Labour bequeath the Conservatives a steaming pile to deal with. The only possible exception was 1970 when, following the calamitous sterling devaluation of 1967, Roy Jenkins wielded the austerity axe and got the British government’s finances into something approaching order.

Yet, truthfully, Britain has been plagued with economic mismanagement from both sides of the Commons and Labour could make much the same complaint of the Conservatives.

In 1929 Ramsay MacDonald’s Labour took over an economy wrecked by the attempt of Stanley Baldwin’s Conservative government to peg sterling to gold at pre-World War One parity. In both 1964 and 1974 Harold Wilson inherited the messy aftermath of pre-election booms engineered by Conservative chancellors Reg Maudling and Anthony Barber respectively. In 1987 the Conservatives inherited the messy aftermath of a pre-election boom they themselves engineered.

The Conservatives’ playing of their economic competence trump card always required a fair bit of bluff.

Recent developments suggest that George Osborne might think of delving into the same old bag of Conservative chancellors’ tricks as Maudling, Barber and Lawson. This government has nailed itself to the mast of the economy. Put simply, if the economy is growing healthily come 2015 the Conservatives will win. If not they are toast.

So far it’s not looking good. News that GDP contracted by 0.3 percent in the fourth quarter of 2013 meant that the UK economy continues to flat line. This is nothing to do with so called ‘austerity’ but the entirely predictable and unavoidable consequence of a massively indebted economy trying to reduce its indebtedness.

Either way, whether the dreaded ‘triple dip’ is avoided or not, it is looking increasingly unlikely that GDP growth in 2015 will be of the magnitude necessary to bring re-election.

So with 2015 approaching, Cameron and Osborne might come to look favourably on incoming Bank of England governor Mark Carney consummating his flirtation with Nominal GDP Targeting (NGDPT).

NGDPT starts from the observation that money supply targets proved a poor rudder for monetary policy due to problems of defining the money supply and changes in velocity, and inflation targeting proved unable to prevent asset price inflation. With NGDPT the idea is that the central bank sets a path for nominal GDP growth and manipulates the money supply sufficiently to achieve it.

So, if it’s decided that nominal GDP should grow by 5 percent a year, and nominal GDP looks to be increasing above that rate, the monetary authority engages in the sale of securities so as to suck money out of the economy to get nominal GDP growth back on target.

Likewise, if nominal GDP was growing at a rate below 5 percent, the situation we are currently in, the monetary authority engages in the purchase of securities so as to pump money into the economy and get nominal GDP growth back on target.

NGDPT and the market monetarists who propose it have faith in the power of monetary policy. Austrian liquidation or Keynesian liquidity traps can be blasted out of existence with a sufficient charge of base money. Or, as Ben Bernanke put it in one of market monetarism’s foundational statements:

“the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost. By increasing the number of U.S. dollars in circulation, or even by credibly threatening to do so, the U.S. government can also reduce the value of a dollar in terms of goods and services, which is equivalent to raising the prices in dollars of those goods and services. We conclude that, under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

You can see the attraction of all this to Cameron and Osborne but will they be allowed to get away with it? The mass production of sterling dictated by NGDPT in our current predicament would, in theory, have the effect of reducing sterling’s value on the exchange markets which will make imports into Britain more expensive and Britain’s exports to everywhere else cheaper.

In practice this is exactly what has been happening. The massive expansion of its balance sheet by the Bank of England has seen sterling crash by 15 percent since 2008 which has propped up British exports (it is this avenue which wasn’t open to Ireland).

But if you devalue to boost your exports of goods and services, any increase in those exports is matched by a reduction in someone else’s. This is why the competitive devaluations of the 1930s, as countries scrambled for a share of diminishing world trade, became known as ‘beggar they neighbour’.

And it looks unlikely that our neighbours are going to let themselves be beggared by Britain’s NGDPT. The Federal Reserve continues to buy $85 billion of bonds each month. In Japan Shinzo Abe is pushing an inflation target of 2 percent in a bid to boost its flagging exports. This will come at the expense of German exports which might cause policymakers in Berlin look more kindly on François Hollande’s calls for a devaluation of the euro. The race is on to see who beggars who first.

This article originally appeared at The Commentator


The life and death of Eric Hobsbawm

Eric Hobsbawm, 1917 – 2012

In his dotage in the 1990s a respected academic historian, author of bestselling books, and lifelong Nazi was interviewed for the Times Literary Supplement about his youthful commitment to Hitler. The interviewer asked “What that comes down to is saying that had the radiant tomorrow actually been created, the loss of fifteen, twenty million people might have been justified?”

The historian replied instantly; “Yes”

Of course, that never happened but something almost identical did.

In his dotage in 1994 a respected academic historian, author of bestselling books, and lifelong Marxist was interviewed for the Times Literary Supplement about his youthful commitment to Stalin. The interviewer asked “What that comes down to is saying that had the radiant tomorrow actually been created, the loss of fifteen, twenty million people might have been justified?”

Eric Hobsbawm, who died yesterday aged 95, replied instantly; “Yes”

It is one of the great mysteries of intellectual life in the last few decades that anyone who confesses to a youthful flirtation with Nazism or fascism is shunned by polite society until a sufficiently long and intense period of penance had passed, while a youthful fondness for communism is presented as one of those harmless things we all go through, like collecting football stickers.

During the 20th century the miserable ideology of communism slaughtered millions and immiserated millions more. Between the Ukrainian famine and purges of the 1930s, the gulags, Mao’s Great Leap Forward and Cultural Revolution, and the Killing Fields of Cambodia, to the insanity of Mengistu in Ethiopia, communism was responsible for as many as 94 million deaths in the last century.

To paraphrase Montesquieu, there has never been a kingdom given to so much bloodshed as that of Marx.

And yet we don’t regard it with the same abhorrence as Nazism. Instead, the death of Eric Hobsbawm is mourned.

Ed Miliband said that this apologist for totalitarianism “cared deeply about the political direction of the country.” More, one hopes, than he cared for the millions whose deaths he excused.

For the BBC Nick Higham wrote that “Eric Hobsbawm was remarkable among historians in being proud to call himself a Marxist long after Marxism had been discredited in the West.” Hobsbawm was remarkable for no such thing. He was remarkable for his slavish devotion to the Soviet Union long after its full horror had been exposed. As Michael Moynihan wrote:

“When the bloody history of 20th-century communism intrudes upon Mr. Hobsbawm’s disquisitions, it’s quickly dismissed. Of the countries occupied by the Soviet Union after World War II—’the Second World War,’ he says with characteristic slipperiness, ‘led communist parties to power’ in Eastern and Central Europe—he explains that a ‘possible critique of the new [postwar] socialist regimes does not concern us here.’

Why did communist regimes share the characteristics of state terror, oppression and murder? ‘To answer this question is not part of the present chapter.’ Regarding the execrable pact between Nazi Germany and Stalinist Russia, which shocked many former communist sympathizers into lives of anticommunism, Mr. Hobsbawm dismisses the ‘zig-zags and turns of Comintern and Soviet policy,’ specifically the “about-turn of 1939–41,”‘which “need not detain us here'”.

In 2002 Hobsbawm wrote “To this day I notice myself treating the memory and tradition of the USSR with an indulgence and tenderness.” Imagine a historian writing that about Nazi Germany and getting a 21 gun salute from the BBC.

Hobsbawm became a Marxist while living in Germany in the early 1930s. Like many during that time he saw a straight choice between communism and Nazism. He wasn’t alone in lacking the imagination to see the alternative of liberal democracy and many embraced totalitarianism of one colour or other.

But few embraced it with Hobsbawm’s vigour. In August 1939 erstwhile foes Hitler and Stalin signed the Nazi-Soviet Pact making Nazis and communists allies until Hitler’s invasion of the Soviet Union in June 1941. Many communists severed ties with Moscow in disgust but, as Nick Cohen points out, Hobsbawm remained a loyal propagandist for Stalin which in practice meant Hitler too.

Hobsbawm traveled to the Soviet Union in 1954 but noted that “It was an interesting but also a dispiriting trip for foreign communist intellectuals for we met hardly anyone there like ourselves.” To quote Nick Cohen again,

“If he had gone to Siberia, alongside the corpses of “anti-Soviet” Ukrainians, Lithuanians, Estonians, Latvians, Chechens, Tartars and Poles, of tsarists, kulaks, Mensheviks and social revolutionaries and of merely unlucky citizens who had been denounced by malicious neighbours, or rounded up by the secret police to meet an arrest quota, Hobsbawm would have found the bodies of communist intellectuals – just like him”

In 1956 the Communist Party of Great Britain again fractured over Soviet policy, this time the brutal conquest of Hungary which left possibly 2,500 Hungarians dead. Hobsbawm supported the invasion.

Time and again Eric Hobsbawm was faced with the full scale of the horror visited by the regime he supported and time and again he remained loyal. As he wrote in 2002

“The Party . . . had the first, or more precisely the only real claim on our lives. Its demands had absolute priority. We accepted its discipline and hierarchy. We accepted the absolute obligation to follow ‘the lines’ it proposed to us, even when we disagreed with it . . . We did what it ordered us to do . . . Whatever it had ordered, we would have obeyed . . . If the Party ordered you to abandon your lover or spouse, you did so”

Hobsbawm pleaded for “historical understanding”; he isn’t hard to understand. He was a man who failed to see that the choice of one murderous regime over another was no choice at all, who lacked the humility to admit it, and who was possessed of an incredible ability to blind himself to realities, no matter how bloody, which didn’t fit his view of the world.

Hobsbawm was the Marxist version of David Irving. Why is his death any more worthy of mourning?

This article originally appeared at The Commentator

Richard Cobden’s achievements

Richard Cobden

“We are on the eve of great changes” Richard Cobden told Parliament in February 1846. He was correct. Britain stood poised to embark on a period of growth unparalleled in its history, which would, in a few short years, bring it wealth and power not seen since ancient Rome. A major reason for this was Britain’s path breaking adoption of free trade, and the man behind that as much as any other was Richard Cobden.

By the late 1830s it was apparent that the Whig government led by Earl Grey and then Viscount Melbourne had exhausted itself in the passage of the Reform Act of 1832. This had given the vote to propertied males, enfranchising many of those made rich by the Industrial Revolution. The Radical faction within the Whig Party sought a new cause with which to restore the momentum which had carried the 1832 Act and settled on repeal of the Corn Laws.

The Corn Laws was a catch all name for the thicket of tariffs which had been erected to keep foreign wheat out of Britain. Justified on the deathless grounds of ‘food security’, these laws also had the handy effect of benefiting the landowning classes, many of whom sat in the Commons and Lords as Tories.

The Corn Laws, as with any tariff, had the effect of making the product in question and associated goods more expensive. The burden of this was borne disproportionately by the members of the emerging working class in burgeoning industrial centres such as Manchester and Leeds who spent a large percentage of their incomes on food. By extension, they raised labour costs. And blocking foreign producers from selling in Britain prevented them from earning the money to buy the output of the new industries.

Out of this shared interest between workers and bosses (and other factions such as dissenting churchmen) came the Anti-Corn Law League, established in Manchester in 1838. One of its founders and leading lights was Richard Cobden.

Cobden was born the son of a poor Sussex farmer in 1804 and started his own textile printing business in 1828. It quickly became a success and in 1832 Cobden moved to Manchester, the centre of the booming British textile industry.

Immersed in the city’s Radical politics Cobden quickly became active. He was instrumental in the shift from broad based reform agitation to a single issue focus which had led to the creation of the League, noting that “the English people cannot be made to take up more than one question at a time with enthusiasm”. Throughout the campaign Cobden would hold to the principle of single minded focus on full and immediate repeal of the Corn Laws.

He became a prolific writer, and in his work he revealed the broader purpose behind the activities of the League. In Cobden’s mind free trade and peace were linked, he wrote in 1842 that “Free Trade by perfecting the intercourse and securing the dependence of countries one upon another must inevitably snatch the power from the governments to plunge their people into wars”.

With the Corn Laws Cobden and the League faced a problem of concentrated interest. While the benefits of repeal were spread across society, the costs were concentrated. Each person in Britain might benefit by a few pounds a year from repeal (though that was no small sum to impoverished workers) but those relatively few people who would be adversely affected by repeal stood to lose far more. The landowners were incentivised to act more strenuously in fighting against repeal than individual consumers were in fighting for it.

Partly because of this the League was frustrated during its first two years. Copying the tactics of the campaign for the 1832 Reform Act and the contemporary Chartists, the League attempted a strategy of mass agitation with open meetings and lectures. These suffered from frequent attacks by Chartists who resented any reforming competition, after one meeting Cobden wrote: “The Chartist leaders attacked us on the platform at the head of their deluded followers. We were nearly the victims of physical force; I lost my hat, and all but had my head split open with the leg of a stool”. The failure of this strategy left the League short of money. Attempts to petition Parliament were heavily defeated and the League members were frequently tempted away into movements for wider reform.

In 1841 Cobden convinced the League to change strategy. He wrote to a fellow member “You will perhaps smile at my venturing thus summarily to set aside all your present formidable demonstrations as useless; but I found my conviction on the present construction of the House of Commons, which forbids us hoping for success. That House must be changed before we can get justice

From now on the League would seek to make Parliament its battleground, starting with a by election in Walsall in February 1841. The Tories allied with their Chartist arch enemies in an effort to defeat the League which still came a close second. Cobden’s strategy had been a success, the Morning Chronicle noting that “one consequence of the contest at Walsall is that the Corn Laws are, and must henceforth be, throughout England, a hustings question”. With a general election approaching the Whig leaders adopted a stronger free trade stance.

The election of summer 1841 saw the Whigs defeated by Robert Peel’s Conservatives, heirs to the Tories, and seemingly dashed hopes of Corn Law repeal for the foreseeable future. But the situation was brighter than it might have appeared. The election saw a number of League members returned to Parliament including Cobden, now widely recognised as the League’s leader, who was elected MP for Stockport. Also, by the end of the year, ‘operative’ associations attached to the League, mostly consisting of working class supporters, had organised to protect League meetings from the violence of the Chartists. But perhaps more importantly, in Peel, Britain now had as Prime Minister one of the most remarkable statesmen in her history.

With Britain in economic depression Peel deliberated before finally announcing his budget in February 1842. Despite his Tory lineage, Peel recognised that the Conservatives must learn to accommodate themselves to changing circumstances if the wilder, revolutionary wing of the Chartists was to be held at bay. Given the revolutions across Europe in 1848, this was no minor threat. Peel’s Tamworth Manifesto of 1834, as close to a foundational act as the modern Conservative Party has, had been an act of reconciliation with the passage of the 1832 Reform Act.

Peel’s fiscal proposals were in this tradition, proposing a drastic tariff reduction with revenues to be made up by a new income tax. The moves were warmly welcomed by liberals and, while it represented a significant vindication of the League’s arguments, it also brought danger. As Cobden predicted “The greatest evil that could befall us would be a bona fide concession – The middle classes are a compromising set”.

After some debate about strategy (during which Cobden squashed a move to declare a general strike by factory owners) the League stepped up its propaganda. Millions of leaflets, posters, handbills, and newspapers were distributed with the aim of reaching every voter in Britain, though that was only about 600,000 people at the time.

But despite all this activity the League found it needed an event, a shift in circumstances beyond its control, to provide proof of its arguments and swing opinion behind them. That came in 1845 when the potato crop failed. Particularly in Ireland, where much of the population depended on potatoes, this caused great suffering, culminating in a famine which killed an estimated one million people.

Cheap food was needed and quickly. Faced with this unfolding catastrophe, supporters of the Corn Laws were helpless. A further vital, final, factor was Peel’s reaction. Acting on humanitarian grounds and the perennial desire of Conservative Party leaders to pick fights with their backbenchers (in this case the land owning Tories) in order to prove they are ‘different’, Peel moved for full repeal in 1845. In May 1846 repeal was passed and the Anti-Corn Law League wound itself up.

The benefits for Britain were immense and immediate. The effects of famine receded and a wider program of free trade enacted. Between 1815 and 1842 Britain’s exports edged up from £47,250,000 to £50,000,000. By 1870 they had rocketed to £200,000,000.

How had Richard Cobden and the League managed to defeat the special interests in favour of keeping the Corn Laws?

First, and most importantly, they were right. Free trade became the orthodoxy to such an extent that we can forget that while the League was working its ideas were one strand of a lively discourse. There was a long tradition of bad economics arguing for protection and Friedrich List was giving these old doctrines a new outing even as the League was campaigning.

Second, their strategy of exclusive focus on Corn Law repeal was a success. Cobden refused to be, and refused to let the League become, distracted by any other reform or campaign. This ensured that while the Chartists got nothing from a long list of demands the League actually got more than its comparatively modest aims with Britain quickly embracing free trade generally.

Third, they were tactically flexible. There were three fronts to their activities. First, were the mass meetings. These were of limited success largely owing to the competition, both ideological and physical, of the rival Chartists. The second front was education. Here the League had more success, sending literally tons of propaganda out every week. They pitched to all sections of society, sending lurid drawings of emaciated families to lowbrow readers and helping found The Economist for the highbrow. Third, and most effective, was the Parliamentary front. It was arguably the fact that the League engaged here while the Chartists didn’t that guaranteed the success of the League relative to the Chartists.

The fourth factor was, as Harold Macmillan put it, events, or, more broadly, circumstance. Without Peel’s transformation of the Tory Party into the Conservative Party and its concomitant embrace of free trade, the League would have had to wait until at least 1848 and the possible election of the Whigs who, under Lord John Russell, had finally adopted full repeal as a policy. And without the famine in Ireland it is doubtful whether either party could have carried repeal in as full a form as eventually happened.

To a large extent however, this event is not so exogenous. It could be, and was, painted as the predicted outcome of the bad policies of the Corn Laws.

As a result, when circumstances combined in 1845-1846 in the advents of Peel and the potato blight, thanks to Cobden and the League the arguments for free trade were widely enough known to be accepted as a viable possibility. The lesson is to have rigorous, well tested arguments. Pick a definite, achievable aim then work hard to spread and publicise your views until they become the ‘white noise’ of the debate. Then position yourself to take advantage of changing circumstances and move quickly when circumstances change.

When Richard Cobden died in 1865 the French foreign minister wrote that he was “in our eyes the representative of those sentiments and those cosmopolitan principles before which national frontiers and rivalries disappear; whilst essentially of his country, he was still more of his time; he knew what mutual relations could accomplish in our day for the prosperity of peoples. Cobden, if I may be permitted to say so, was an international man”.

At the end of three successful years The Cobden Centre can continue to draw on its namesakes rich example as it looks forward to furthering his goals of peace and prosperity.

This article originally appeared at The Cobden Centre

Thatcher’s achievements will long outlive the spite of Sheffield’s sons and daughters

You want a lump of cole rather than a welfare payment? 

“When Thatcher dies they’ll have to build a dance floor over her grave for all the people who want to dance on it.” When I was told this in a pub some years ago it wasn’t the sentiment that struck me but that fact that the unimaginative fellow speaking might have thought it was the first time anyone within earshot had heard that rib tickler.

I was born in Sheffield in 1980 and through family and support of an underachieving football club I retain ties to the place and its people. I have heard Sheffielders, some quite reasonable folk, say that they wish the Brighton bomb attack had succeeded; I have heard them joke frequently about Thatcher’s dementia.

One told me that if there was a God he would believe in him if Margaret Thatcher died. But, if there is a God, shouldn’t he believe in him anyway? And unless he was ascribing to Thatcher powers of immortality, her death is a certainty and, thus, so is his eventual embrace of theism.

You won’t find logic where none exists. The visceral hatred of Margaret Thatcher isn’t based on anything resembling rational thought. As one Sheffielder once put it to me “I dont understand all this stuff about GDPs, Taxes, RPI etc etc. All i know is that growing up in Sheffield in the 80s. Thatcher demolished a once proud city & left alot of its inhabitants pennyless, jobless & without hope. You can argue about stats all day. But that was the reality of it all. People loosing their, jobs, homes & pride.” (sic, sic, sic…)

That’s why people in places like Sheffield will be celebrating Margaret Thatcher’s death. There’s just one problem. It’s wrong.

For starters, feel the parochialism. Thatcher was bad for Sheffield ergo she was bad. Never mind the rest of the country. Never mind the GDP growth of 23 percent or the increase in the median wage of 25 percent during her time in office. For most people the Thatcher years were ones of prosperity. That’s why she regularly tops polls of most popular Prime Ministers.

This is not to say that this person’s view is worthless. But it is to say that an opinion formed simply by looking up and down your street might not be too useful.

Then, just how proud actually were places like Sheffield before Thatcher came along? How proud can any city be when it is, essentially, a vast welfare case getting by on the wealth transferred to it from other parts of the country?

That was the truth of the industrial situation in these areas. Take coal. Just before the First World War the mines employed more than 1 million men in 3,000 pits producing 300 million tonnes of coal annually.

By the time the industry was nationalised in 1947 700,000 men were producing just 200 million tonnes a year. To improve this situation, in 1950, the first Plan for Coal pumped £520 million into the industry to boost production to 240 million tonnes a year.

This target was never met. In 1956, the record year for post war coal production, 228 million tonnes were produced, too little to meet demand, and 17 million tonnes had to be imported. Oil, a cheaper energy source, was growing in importance, British Rail ditching coal powered steam for oil driven electricity, for example.

Jobs were lost in numbers that dwarfed anything under Thatcher. 264 pits closed between 1957 and 1963. 346,000 miners left the industry between 1963 and 1968. In 1967 alone there were 12,900 forced redundancies. Under Harold Wilson one pit closed every week.

1969 was the last year when coal accounted for more than half of Britain’s energy consumption. By 1970, when the Conservatives were elected, there were just 300 pits left – a fall of two thirds in 25 years.

By 1974 coal accounted for less than one third of energy consumption in Britain. Wilson’s incoming Labour government published a new Plan for Coal which predicted an increase in production from 110 million tonnes to 135 million tonnes a year by 1985. This was never achieved.

Margaret Thatcher’s government inherited a coal industry which had seen productivity collapse by 6 percent in five years. Nevertheless, it made attempts to rescue it. In 1981 a subsidy of £50 million was given to industries which switched from cheap oil to expensive British coal. So decrepit had the industry become that taxpayers were paying people to buy British coal.

The Thatcher government injected a further £200 million into the industry. Companies who had gone abroad to buy coal, such as the Central Electricity Generating Board, were banned from bringing it in and 3 million tonnes of coal piled up at Rotterdam at a cost to the British taxpayer of £30 million per year.

By now the industry was losing £1.2 million per day. Its interest payments amounted to £467 million for the year and the National Coal Board needed a grant of £875 million from the taxpayer.

The Monopolies and Mergers Commission found that 75 percent of British pits were losing money. The reason was obvious. By 1984 it cost £44 to mine a metric ton of British coal. America, Australia, and South Africa were selling it on the world market for £32 a metric ton.

Productivity increases had come in at 20 percent below the level set in the 1974 Plan for Coal.

Taxpayers were subsidising the mining industry to the tune of £1.3 billion annually. This figure doesn’t include the vast cost to taxpayer-funded industries such as steel and electricity which were obliged to buy British coal.

But when Arthur Scargill appeared before a Parliamentary committee and was asked at what level of loss it was acceptable to close a pit he answered “As far as I can see, the loss is without limits.”

Source: The BBC

Falling production, falling employment, falling sales, and increasing subsidy; that was the coal industry Margaret Thatcher inherited.

She did not swoop in and kill perfectly good industries out of spite. Industries like coal and steel were already dead by the time she was elected. Thatcher just switched off the increasingly costly life support which had kept these zombie industries going.

When Margaret Thatcher dies the streets of Sheffield will flow with ale. But the next day the revelers will wake up with headaches and Margaret Thatcher will still have crushed Arthur Scargill, will still have helped win the Cold War, and will still have shown the supposed inevitability of socialism to be the dimwitted sham it was. And those achievements will last longer than the hangovers.

This article originally appeared at The Commentator

The euro – lessons from history

Dinner money

When currencies and monetary arrangements have broken down it has always been because the currency issuer can no longer fight the lure of the seigniorage to be gained by over issue of the currency. In the twentieth century this age-old impulse was allied to new theories that held that economic downturns were caused or exacerbated by a shortage of money. It followed that they could be combated by the production of money.

Based on the obvious fallacy of mistaking nominal rises in wealth for real rises in wealth, this doctrine found ready support from spendthrift politicians who were, in turn, supported by the doctrine.

Time and again over recent history we see the desire for seigniorage allied with the cry for more money to fight a downturn pushing up against the walls of the monetary architecture designed to protect the value of the currency. Time and again we see the monetary architecture crumble.

The classical gold standard

At the start of the twentieth century much of the planet and its major economic powers were on the gold standard which had evolved from the 1870s following Britain’s lead. This was based on the twin pillars of (1) convertibility between paper and gold and (2) the free export and import of gold.

With a currency convertible into gold at a fixed parity price any monetary expansion would see the value of the currency relative to gold decline which would be reflected in the market price. Thus, if there was a parity price of 1oz gold = £5 and a monetary expansion raised the market price to 1oz = £7, it would make sense to take a £5 note to the bank, swap it for an ounce of gold and sell it on the market for £7.

The same process worked in reverse against monetary contractions. A fall in the market price to 1oz = £3 would make it profitable to buy an ounce of gold, take it to the bank and swap it for £5.

In both cases the convertibility of currency into gold and vice versa would act against the monetary expansion or contraction. In the case of an expansion gold would flow out of banks forcing a contraction in the currency if banks wished to maintain their reserve ratios. Likewise a contraction would see gold flow into banks which, again, in an effort to maintain their reserve ratios, would expand their issue of currency.

The gold standard era was one of incredible monetary stability; the young John Maynard Keynes could have discussed the cost of living with Samuel Pepys without adjusting for inflation. The minimisation of inflation risk and ease of convertibility saw a massive growth in trade and long term cross border capital flows. The gold standard was a key component of the period known as the ‘First era of globalisation’.

The judgement of economic historians Kenwood and Lougheed on the gold standard was

One cannot help being impressed by the relatively smooth functioning of the nineteenth-century gold standard, more especially when we contemplate the difficulties experienced in the international monetary sphere during the present century. Despite the relatively rudimentary state of economic knowledge concerning internal and external balance and the relative ineffectiveness of government fiscal policy as a weapon for maintaining such a balance, the external adjustment mechanism of the gold standard worked with a higher degree of efficiency than that of any subsequent international monetary system

The gold exchange standard and devaluation

The First World War shattered this system. Countries printed money to fund their war efforts and convertibility and exportability were suspended. The result was a massive rise in prices.

After the war all countries wished to return to the gold standard but were faced with a problem; with an increased amount of money circulating relative to a country’s gold stock (a problem compounded in Europe by flows of gold to the United States during the war) the parity prices of gold were far below the market prices. As seen earlier, this would lead to massive outflows of gold once convertibility was re-established.

There were three paths out of this situation. The first was to shrink the amount of currency relative to gold. This option, revaluation, was that taken by Britain in 1925 when it went back onto the gold standard at the pre-war parity.

The second was that largely taken by France between 1926 and 1928. This was to accept the wartime inflation and set the new parity price at the market price.

There was also a third option. The gold stock could not be expanded beyond the rate of new discoveries. Indeed, the monetary stability which was a central part of the gold standard’s appeal rested on the fixed or slow growth of the gold stock which acted to halt or slow growth in the currency it backed. So many countries sought to do the next best thing and expand gold substitutes to alleviate a perceived shortage of gold. This gave rise to the gold exchange standard which was put forward at the League of Nations conference in Genoa in 1922.

Under this system countries would be allowed to add to their gold reserves the assets of countries whose currency was convertible into gold and issue domestic currency based on this expanded stock. In practice the convertible currencies which ‘gold short’ countries sought as reserves were sterling and dollars.

The drawbacks were obvious. The same unit of gold could now have competing claims against it. The French took repeated advantage of this to withdraw gold from Britain.

Also it depended on the Bank of England and Federal Reserve maintaining the value of sterling and the dollar. There was much doubt that Britain could maintain the high value of sterling given the dire state of its economy and the dollar was weakened when, in 1927, the Federal Reserve lowered interest rates in order to help ease pressure on a beleaguered sterling.

This gold exchange standard was also known as a ‘managed’ gold standard which, as Richard Timberlake pointed out, is an oxymoron. “The operational gold standard ended forever at the time the United States became a belligerent in World War I”, Timberlake writes.

After 1917, the movements of gold into and out of the United States no longer even approximately determined the economy’s stock of common money.

The contention that Federal Reserve policymakers were “managing” the gold standard is an oxymoron — a contradiction in terms. A “gold standard” that is being “managed” is not a gold standard. It is a standard of whoever is doing the managing. Whether gold was managed or not, the Federal Reserve Act gave the Fed Board complete statutory power to abrogate all the reserve requirement restrictions on gold that the Act specified for Federal Reserve Banks (Board of Governors 1961). If the Board had used these clearly stated powers anytime after 1929, the Fed Banks could have stopped the Contraction in its tracks, even if doing so exhausted their gold reserves entirely.

This was exacerbated in the United States by the Federal Reserve adopting the ‘real bills doctrine’ which held that credit could be created which would not be inflationary as long as it was lent against productive ‘real’ bills.

Many economists, notably Ludwig von Mises and Friedrich von Hayek, have seen the genesis of the Depression of the 1930s in the monetary architecture of the 1920s. While this remains the most debated topic in economic history there is no doubt that the Wall Street crash and its aftermath spelled the end of the gold exchange standard. When Britain was finally forced to give up its attempt to hold up sterling and devalue in 1931 other countries became worried that its devaluation, by making British exports cheaper, would give it a competitive advantage. A round of ‘beggar thy neighbour’ devaluations began. Thirty two countries had gone off gold by the end of 1932 and the practice continued through the 1930s.

Bretton Woods and its breakdown

Towards the end of World War Two economists and policymakers gathered at Bretton Woods in New Hampshire to design a framework for the post war economy. Looking back it was recognised that the competitive devaluations of the 1930s had been a driver of the shrinkage of international trade and, via its contribution to economic instability, to deadly political extremism.

Thus, the construction of a stable monetary framework was of the most utmost importance. The solution arrived at was to fix the dollar at a parity of 1oz = $35 and to fix the value of other currencies to the dollar. Under this Bretton Woods system currencies would be pegged to gold via the dollar.

For countries such as Britain this presented a problem. Any attempt to use expansionary fiscal or monetary policy to stimulate the economy as the then dominant Keynesian paradigm prescribed would eventually cause a balance of payments crisis and put downward pressure on the currency, jeopardising the dollar value of sterling. This led to so called ‘stop go’ policies in Britain where successive governments would seek to expand the economy, run into balance of payments troubles, and be forced to deflate. In extreme circumstances sterling would have to be devalued as it was in 1949 from £1 = $4.03 to £1 = $2.80 and 1967 from £1 = $2.80 to £1 = $2.40.

A similar problem eventually faced the United States. With the dollar having replaced sterling as the global reserve currency, the United States was able to issue large amounts of debt. Initially the Federal Reserve and Treasury behaved reasonably responsibly but in the mid-1960s President Lyndon Johnson decided to spend heavily on both the war in Vietnam and his Great Society welfare program. His successor, Richard Nixon, continued these policies.

As dollars poured out of the United States, investors began to lose confidence in the ability of the Federal Reserve to meet gold dollar claims. The dollar parity came under increasing pressure during the late 1960s as holders of dollar assets, notably France, sought to swap them for gold at the parity price of 1oz = $35 before what looked like an increasingly inevitable devaluation. Unwilling to consider the deflationary measures required to stabilise the dollar with an election due the following year, President Nixon closed the gold window on August 15th 1971. The Bretton Woods system was dead and so was the link between paper and gold.

Fiat money and floating exchange rates

There were attempts to restore some semblance of monetary order. In December 1971 the G10 struck the Smithsonian Agreement which sought to fix the dollar at 1oz = $38 but this broke down within a few months under the inflationary tendencies of the Federal Reserve. European countries tried to establish the ‘snake’, a band within which currencies could fluctuate. Sterling soon crashed out of even this under its own inflationary tendencies.

The cutting of any link to gold ushered in the era of fiat currency and floating exchange rates which lasts to the present day. Fiat currency gets its name because its value is given by governmental fiat, or command. The currency is not backed by anything of value but by a politicians promise.

The effect of this was quickly seen. In 1931 Keynes had written that “A preference for a gold currency is no longer more than a relic of a time when governments were less trustworthy in these matters than they are now” But, as D R Myddelton writes, “The pound’s purchasing power halved between 1945 and 1965; it halved again between 1965 and 1975; and it halved again between 1975 and 1980. Thus the historical ‘half-life’ of the pound was twenty years in 1965, ten years in 1975 and a mere five years in 1980”

In 1976 the pound fell below $2 for the first time ever. Pepys and Keynes would now have been talking at cross purposes.

Floating exchange rates marked the first public policy triumph for Milton Friedman who as long ago as 1950 had written ‘The Case for Flexible Exchange Rates’. Friedman had argued that “A flexible exchange rate need not be an unstable exchange rate” but in an era before Public Choice economics he had reckoned without the tendency of governments and central banks, absent the restraining hand of gold, to print money to finance their spending. World inflation which was 5.9% in 1971 rose to 9.6% in 1973 and over 15% in 1974.

The experience of the era of floating exchange rates has been of one currency crisis after another punctuated by various attempts at stabilisation. The attempts can involve ad hoc international cooperation such as the Plaza Accord of 1985 which sought to depreciate the dollar. This was followed by the Louvre Accord of 1987 which sought to stop the dollar depreciating any further.

They may take more organised forms. The Exchange Rate Mechanism was an attempt to peg European currencies to the relatively reliable Deutsche Mark. Britain joined in 1990 at what many thought was too high a value (shades of 1925) and when the Bundesbank raised interest rates to tackle inflation in Germany sterling crashed out of the ERM in 1992 but not before spending £3.3 billion and deepening a recession with interest rates raised to 12% in its vain effort to remain in.

Where now?

This brief look back over the monetary arrangements of the last hundred years shows that currency issuers, almost always governments, have repeatedly pushed the search for seigniorage to the maximum possible within the given monetary framework and have then demolished this framework to allow for a more ‘elastic’ currency.

Since the demise of the ERM the new vogue in monetary policy has been the independent central bank following some monetary rule, such as the Bank of England and its inflation target. Inspired by the old Bundesbank this is an attempt to take the power of money creation away from the politicians who, despite Keynes’ high hopes, have proved themselves dismally untrustworthy with it. Instead that power now lies with central bankers.

But it is not clear that handing the power of money creation from one part of government to another has been much of an improvement. For one thing we cannot say that our central bankers are truly independent. The Chairman of the Federal Reserve is nominated by the President. And when the Bank of England wavered over slashing interest rates in the wake of the credit crunch, the British government noisily questioned its continued independence and the interest rate cuts came.

Furthermore, money creation can reach dangerous levels if the central bank’s chosen monetary rule is faulty. The Federal Reserve has the awkward dual mandate of promoting employment and keeping prices stable. The Bank of England and the European Central Bank both have a mandate for price stability, but this is problematic. As Murray Rothbard and George Selgin have noted, in an economy with rising productivity, prices should be falling. Also, what ‘price level’ is there to stabilise? The economy contains countless different prices which are changing all the time; the ‘price level’ is just some arbitrarily selected bundle of these.

An extreme example, as noted by Jesús Huerta de Soto, is the euro. Here a number of governments agreed to pool their powers of money creation and invest it in the European Central Bank. The euro is now widely seen to be collapsing. So it may be, but is this, as is generally assumed, a failure of the architecture of the euro itself?

Let us remember that the purpose of erecting a monetary structure where the power to create money is removed from government is to stop the government running the printing presses to cover its spending and, in so doing, destroy the currency.

The problem facing eurozone states like Greece and Spain is presented as being that they are running up debts in a currency they cannot print at will to repay these debts. But is the problem here that these countries cannot print the money they need to pay their debts or that they are running up these debts in the first place? The solution is often offered that either these countries need to leave the euro and adopt a currency which they can expand sufficiently to pay their debts or that the ECB needs to expand the euro sufficiently for these countries to be able to pay their debts. But there is another solution, commonly called ‘austerity’, which says that these countries should just not run up these debts. As de Soto argues, the euro’s woes are really failures of fiscal policy rather than monetary policy.

It is thus possible to argue that the euro is working. By halting the expansion of currency to pay off debts and protecting its value and, by extension, preventing members from running up evermore debt, the euro is doing exactly what it was designed to do.

There is a growing clamour inside Europe and outside that ‘austerity’ alone is not the answer to the euro’s problems and that monetary policy has a role to play. The ECB itself seems to be keen to take on this role. But it is simply the age-old idea, based on the confusion between the real and the nominal, that we will get richer if we just produce more money. Germany is holding the line on the euro but history shows that far sounder currency arrangements have collapsed under the insatiable desire for a more elastic currency.


ANDERSON, B.M. 1949. Economics and the Public Welfare – A Financial and Economic History of the United States 1914-1946. North Shadeland, Indiana: Liberty Press

BAGUS, P. 2010. The Tragedy of the Euro. Auburn, Alabama: Ludwig von Mises Institute.

CAPIE, F., WOOD, G. 1994. “Money in the Economy 1870-1939.” The Economic History of Britain since 1700 vol. 2: 1860-1939. Roderick Floud and D.N. McCloskey, ed. Cambridge: Cambridge University Press, pp. 217-246.

DRUMMOND, I. 1987. The Gold Standard and the International Monetary System 1900-1939. London: Macmillan

FRIEDMAN, M. 1950. “The Case for Flexible Exchange Rates” Essays in Positive Economics. 1953. Friedman, M. Chicago: University of Chicago Press, pp. 157-203.

HOWSON, S. 1994. “Money and Monetary Policy in Britain 1945-1990.” The Economic History of Britain since 1700 vol. 3: 1939-1992. Roderick Floud and D.N. McCloskey, ed. Cambridge: Cambridge University Press, pp. 221-254.

HUERTA DE SOTO, J. 2012. “In defence of the euro: an Austrian perspective”. The Cobden Centre, May 29th

KENWOOD, A.G., LOUGHEED, A.L. 1992. The Growth of the International Economy 1820-1990. London and New York: Routledge

KINDLEBERGER, C.P. The World in Depression 1929-1939. London: Pelican

MYDDELTON, D.R. 2007. They Meant Well – Government Project Disasters. London: Institute of Economic Affairs

ROTHBARD, M. 1963. America’s Great Depression. BN Publishing

SAMUELSON, R.J. 2010. The Great Inflation and its Aftermath – The Past and Future of American Affluence. New York: Random House

SELGIN, G. 1997. Less Than Zero – The Case for a Falling Price Level in a Growing Economy. London: Institute of Economic Affairs

TIMBERLAKE, R. 2008. “The Federal Reserve’s Role in the Great Contraction and the Subprime Crisis”. Cato Journal, Vol. 28, No. 2 (Spring/Summer 2008), James A. Dorn, ed. Washington DC: Cato Institute, pp. 303-312.

VAN DER WEE, H. 1986. Prosperity and Upheaval – The World Economy 1945-1980. London: Pelican

This article originally appeared at The Cobden Centre

New year, new blog

Another belated New Year

Well, here I am. After more than five years as The Boy Phelan I decided it was time to grow up. Not too much, but I thought I could use something a little more descriptive. The new title was a little tricky. I solicited opinions and though My Struggle was a favourite of mine people seemed to like Child of Thatcher. While I can appreciate the thought it seemed a little restrictive. It would give people the idea that they knew what Id say on this or that simply by seeing what Maggie said about this or that. So I plumped for Manchester Liberal. How so?

The Manchester Liberals were a 19th century group inspired by the writings of David Hume and Adam Smith among others, members of the Scottish Enlightenment who extolled individual sovereignty. They were, in this sense, quite distinct from the contemporaneous school of thought based around Rousseau and later cranks like Hegel with their concepts of ‘General Will’ and the like which went on to inspire socialism, the biggest wrong turn made by humanity since it decided to give the dark ages a try.

Manchester was one of the thriving industrial centres of England in the early 19th century yet its people couldn’t afford to eat. The Corn Laws, enacted and maintained by the Tory land lords who benefited from them, made corn expensive and raised the price of food.

It was, thus, clearly seen that the free market in corn was in the interest of the average worker. The Anti Corn Law League was founded in Manchester in 1839 and, with figures such as Richard Cobden and John Bright, it made the case for free trade. When Peel’s Conservatives buckled and abolished tariffs in 1846 it ushered in more than half a century of rapid growth and rising wealth.

There was more to it than just this though. The Manchester Liberals were concerned with social issues of poverty and improvement. They saw the solutions not in the vast and largely useless hand of the state as increasingly did those who called themselves Liberals under the doleful influence of John Stuart Mill. They saw them in the spontaneous relations between free individuals which would be written about at length by Freidrich von Hayek, a thinker far more in tune with Enlightenment impulses than Mill.

So Manchester Liberalism is the belief that free markets and free people, the two are largely indivisible, is the optimal social arrangement. Making this cause the cause of the worker was the its great achievement.

That is why, though quite a partisan Conservative today, I am not a conservative. It is why half a dozen suggestions for Conservative or, worse, Tory themed blog names were rejected out of hand. Im a liberal.

So if you’re new to this blog that’s broadly what you can expect. If you’ve followed from the old blog it the same old rubbish.

Go West, young man!

On the wrong side

I’m in the United States and one of my holiday reads has been has been David McCullough’s excellent ‘1776‘, a wonderfully written history of the first year of the Revolution, or Rebellion, depending on which side of the Atlantic you’re from.

McCullough, a Pulitzer Prize winner, has a gift for character and is helped by those left by history to populate his story. Two of the characters in ‘1776’ are particularly striking. On the American side you have Major General Nathanael Greene. On the British side you have Captain John Montresor.

What is striking is if you look at both men a little closer. Greene, aged just 33, was a self educated foundry owner on the outbreak of the war. Montresor, by contrast, had over 20 years military experience behind him fighting in North America in the Seven Years War (or French and Indian War depending on which side of the Atlantic you’re from), with Wolfe at Quebec, leading expeditions and building fortifications “from Boston to Detroit to New York City”.

Yet Greene was a Major General and Montresor a Captain. As McCullough writes

“If the desperate American need for leaders had thrust young men like Nathanael Greene into positions beyond their experience, the British military system, wherein commissions were bought and aristocrats given preference, denied many men of ability roles they should have played”

Two and a bit centuries later little has changed. True, the USA has seen the rise of powerful dynasties such as the Kennedys, Clintons, and Bushes but a Ronald Reagan, a Bill Clinton, or even, dare I say, a Barack Obama or a Sarah Palin, can still rise from origins like Nathanael Greene’s to shape the nation.

Britain, on the other hand, remains almost as crusty and ossified as it did in the reign of King George III. Efforts have been made to remedy this malady. The most successful were the Whigs. They generated the wealth which allowed the Tories to paint the planet Imperial Pink and but were still sneered at.

Next came the early socialists. Despite initially noble intentions they failed to see how their ideology would simply replace one elite with another leaving them with the same ossifiaction, just with different people. And given how many Labour leaders from Clement Atlee to Ed Miliband were thoroughly posh even the faces changed little.

Finally came Maggie Thatcher (who Milton Friedman always saw as a 19th century Whig anyway) who’s attempts to convince the working and middle classes that there was no shame in seeking to be as rich as the upper class drew horror from Tory toffs like Lord Stockton. In the end they did for her.

So Britain remains, as it was when the expertise of John Montresor went untapped, a place where who you know matters more than what you know. In the USA, which cast this off in 1776, the difference is exhilarating. For the ambitious and talented the advice of the 19th century newspaperman Horace Greeley still holds; Go West, young man!

The birth of English history

The History Man

‘What Is History?’ E. H. Carr asked in the title of his famous book. Nothing objective, he argued, saying, “The belief in a hard core of historical facts existing objectively and independently of the interpretation of the historian is a preposterous fallacy, but one which it is very hard to eradicate.” Several decades later, Richard J. Evans responded with ‘In Defence of History’ and argued the opposite.

It’s not taking sides in this ongoing debate to say that once upon a time, what we now know as history – a lineal narrative of cause and consequence consequence – didn’t exist. When Thucydides sat down about 400 years before the birth of Christ to write his ‘History of the Peloponnesian War’, his chronological ordering of events was a radical break with what had gone before. There was a city called Troy and there was certainly some fighting around it but the account of the Trojan War given by Homer in ‘The Iliad’ was mostly myth. Even the ‘Histories’ of Herodotus, written about 40 years before Thucydides put quill to parchment, have a confusing, scattergun approach with chronology largely absent. Quite simply, Thucydides marked a quantum leap in the documentation of experience: the birth of history.

The United States meets the world

In 1865 the United States of America emerged from the nightmare of civil war. It had been won by the northern states of the Union bringing their overwhelming industrial superiority to bear on the agrarian Confederacy. This surging industrial might would be the central fact of the United States for the 100 years after Appomatox turning the America of Henry David Thoreau into the America of John Dos Passos in the next 50.

Between 1890 and 1913 the population grew from 62.6 million to 97.3 million. The increase in population worldwide was augmented in America by the influx of immigrants, mostly from southern and eastern Europe, but also from the Far East with over 1 million immigrants a year were arriving by 1914. This growth was in the cities, the urban population of the United States increasing from 15.3% in 1890 to 23.1% in 1913.

This growing population was supported by wheat production which grew by 256% between 1865 and 1898. In the same period corn production increased by 222%, refined sugar by 460%, coal by 800%, steel rails by 523%, and miles of railway track by 567%. Manufacturing grew thanks to the father of mass production, Henry Ford. According to D.M. Pletcher, “In newer industries the growth, starting from near zero, was so great as to make percentages meaningless. Thus the production of crude petroleum rose from about 3,000,000 barrels in 1865 to over 55,000,000 barrels in 1898 and that of steel ingots and castings from less than 20,000 long tons to nearly 9,000,000 long tons”. In 1890, the U.S. produced 9.3 million tons a year of pig iron, by 1913 this was up to 31.8 million. To put this in context, its pig iron production was, as Paul Kennedy points out, “larger than those of the next three countries (Germany, Britain and France) combined, and its steel production almost equal to the next four countries (Germany, Britain, Russia and France)”.

In 1880 The United States share of world manufacturing output stood at 14.7% by 1913 this had grown to 32%. In 1902 WT Stead wrote a book titled ‘The Americanization of the World’.

Thus, America had much the same problem as Bismarck and Wilhelm II had had to face in Germany; namely clearing a space on the world stage and creating an identity and a role in a world still largely defined by European empires. While ever Americans had the ‘Manifest Destiny’ of establishing their rule over all of America south of Canada and (not always) north of Mexico to occupy them there was no need for the US to have much to do with global politics. The Civil War and ‘reconstruction’ fostered this isolationism. Also many Americans had gone there, or were descended from people who had gone there, to escape the troubles of the old world.

However, in 1890 the census declared that the frontier was closed. The Native Americans of the High Plains had been subdued by the turn of the century and of the contiguous continental landmass only Oklahoma, New Mexico and Arizona remained as Territories rather than States. The US would now have to engage the world.

Presidents McKinley (1897 – 1901) and Theodore Roosevelt (1901 – 1909) were both willing to exercise American power overseas. In 1823 President Monroe had told British Foreign Secretary George Canning that the American continents “are henceforth not to be considered as subjects for future colonization by any European powers”. In 1897 the US and Britain clashed over Venezuela and control of the Panama Canal. In the event Britain’s redeployment of its navy to guard against Germany defused the situation and in 1902 the two countries signed an agreement in which the British agreed to an American sphere of influence in American continental waters. There was a dispute with Canada over a unilateral redrawing of the Alaskan border and in 1902-1903 Washington mobilised its navy, this time against Germany, again over Venezuela.

As these disputes increased the US took steps to ensure that its military strength could support its new found role. Its army of only 34,000 in 1880 had grown to 164,000 in 1914. Its warship tonnage increased from 169,000 in 1880 to 985,000 in 1914.

This military strength was soon put to the test in defence of the Monroe Doctrine. In early 1898 the USS Maine was sent to Havana to protect American citizens there from the war between the Spanish army and the Cuban rebels. On February 15th the Maine mysteriously blew up and the finger of blame was pointed at the Spanish. America went to war. What one Senator described as a “splendid little war” ended in December that year with the US gaining control of Spanish colonies in the Philippines, the Pacific islands, Puerto Rico, and Cuba until its transition to democracy. The U.S. was now a major power.

Yet, in August 1914, the new world was still reluctant to become involved in the quarrels of the old. Besides, there were 6.4 million German Americans in the US, many of whom were in favour of war against the Allies, and 3.4 million Irish Americans for whom war alongside Britain was unthinkable. President Woodrow Wilson told the German ambassador, Count Johann von Bernstorff, that “we definitely have to be neutral, since otherwise our mixed populations would wage war on each other”. The Chicago Herald said “Peace loving citizens of this country will now rise up and tender a hearty vote of thanks to Columbus for having discovered America” whilst the Wabash Plain Dealer heartily agreed, saying that they “never appreciated so keenly as now the foresight exercised by our forefathers in emigrating from Europe”.

It seemed as though America was fulfilling the hopes of John Winthrop in 1630 that America would become a “city upon a hill”. Wilson said “Look abroad upon the troubled world. Only America at peace! Among all the great powers of the world, only America saving her power for her own people…Do you not think it likely that the world will some time turn to America and say: ‘You were right and we were wrong’?”. On August 4th he issued a Proclamation of Neutrality, and urged Americans to be “impartial in thought as well as in action”.

Neutrality worked well for the US until the start of the first German submarine campaign in February 1915. Then the sinking of the Lusitania with the deaths of 128 Americans and the Arabic in August brought the US to the brink of war with Germany. Berlin broke off the U Boat campaign in the face of American anger and on November 5th, under pressure from cotton producers whose prices had fallen by 50%, Wilson and Secretary of State Robert Lansing sent a note to London protesting about the blockade of Germany.

The situation was growing more complex as the British began to arm merchant vessels and it became clear that Germany was just biding time before it recommenced the U Boat campaign. Responding to an approach by Sir Edward Grey Wilson sent Colonel House to London late in December 1915 to try to build an Anglo – American drive for a negotiated peace. In January Wilson proposed that the Allies should disarm the merchant vessels if the Germans agreed to give warning and safeguards to the sailors prior to attack. On April 18th 1916 Wilson warned Germany that the US would break off relations if submarine attacks continued and Bethmann – Hollweg agreed. The plan thrashed out by House and Grey that Britain, France and Germany would submit to American led peace talks provided the US agreed to join a post war League of Nations was put before the British government. After some evasion, and with the Allies grand plan for victory in 1916 ready to launch on the Somme and in Galicia, Grey informed Wilson that neither France nor Britain would follow this peace plan.

With the Germans on their best behaviour a wave of anti Allied sentiment swept America. As in 1812 the British search and seizure measures were considered an affront to American sovereignty while the British suppression of the Irish rebels and America’s long standing distaste for Tsarist absolutism combined to undermine the Allies claim of moral superiority. In the 1916 presidential election Wilson ran as a peace candidate and portrayed his Republican opponent Charles Evans Hughes as a warmonger. On November 7th Wilson was re-elected President. In December he said that relations with Britain “were more strained than with Germany” and prompted the Federal Reserve to make a statement which put a temporary halt to Allied borrowing on Wall Street. In January 1917 Wilson told Congress “There will be no war”.

But America had been turning a tidy profit from the war. Much of France’s industrial heartland lay in the area occupied by the Germans and Britain’s industry was wholly unsuited for the demands which the war and Lloyd George’s Munitions Ministry were placing on it so the Allies had to look to America for supplies. On January 15th 1915 the British made the American financier JP Morgan their sole purchaser in the US. In return Morgan promised to “use their best endeavours to secure for His Majesty’s Government the most favourable terms as to quality, price, delivery, discounts, and rebates, and also to aid and stimulate by all means at their disposal sources of supply for the articles required”.

Despite lecturing Europeans on peace the US was turning a tidy profit selling them vast quantities of weapons. Between 1914 and 1916 trade with the Central Powers fell as a result of the blockade from $169 million to $1.6 million but trade with the Allies rose from $824 million to $3.2 billion. By December 1916 40% of British military supplies were coming from the US and of the £5 million per day Britain was spending on the war £2 million was being spent in the US. By April 1917 1 million pounds of smokeless powder a day was leaving American factories for the Allied forces.

By April 1917 Britain was spending $75 million a week in the US and it was estimated that it had only enough credit left for three weeks spending. In other words that was how long the Allied war effort had left. Faced with the prospect of Allied bankruptcy many American creditors began to worry.

Luckily the Germans, demonstrating the diplomatic ineptitude that had done so much to bring the war about in the first place, came to their rescue with two horrendous blunders. Indeed, it is striking how at every end and turn, be it the massacres in Belgium, the sinking of the Lusitania or the execution of the British nurse Edith Cavell, the Germans rarely failed to hand the Allies a propaganda coup and confirm the ‘Hun’ reputation the Allies had fixed them with.

The first blunder came on January 9th 1917 when Germany decided to resume unrestricted submarine warfare. Bernstorff was informed on the 19th and, following his directions but much against his instincts, he informed Wilson that the submarine campaign would begin again on February 1st. This prompted Wilson to finally sever diplomatic links with Germany. When Bernstorff was handed his passport and packed back to Germany he said “I am not surprised. My government will not be surprised either. The people in Berlin knew what was bound to happen if they took the action they have taken. There was nothing else left for the United States to do”.

Yet this still did not mean war. On February 3rd Wilson addressed Congress and said “I refuse to believe that it is the intention of the German authorities to do in fact what they have warned us they will feel at liberty to do…Only actual overt acts on their part can make me believe it even now”. As late as February 26th Wilson could tell Congress that “The overt act which I have ventured to hope the German commanders would in fact avoid has not occurred”.

War became inevitable with the second blunder. On March 1st American newspapers printed details of the Zimmerman Telegram which had been sent to Bernstorff from the German Foreign Secretary Arthur Zimmerman on January 16th. It was nothing less than a German proposal for an alliance with Mexico against the US. It said that “we shall make war together and together make peace. We shall give general financial support, and it is understood that Mexico is to reconquer the lost territory in New Mexico, Texas and Arizona”. The message had been intercepted and decoded by the British, who realised its significance and promptly passed it on to the Americans.

The Chicago Tribune warned its readers to realise “without delay, that Germany recognizes us as an enemy”. In Cleveland the Plain Dealer said that there was “neither virtue nor dignity” in remaining neutral. Wilson admitted that “armed neutrality, it now appears, is impracticable”. The author Willa Cather said that “Even to those quiet wheat growing people (of Nebraska) the siege guns before Liege were a menace…Something new, and certainly evil, was at work among mankind”. As Robert H. Ferrell wrote, “In the annals of international stupidity during the 20th century, or any other century, this famous telegram hardly has an equal”. Within two weeks the Russian revolution was under way to remove the Tsar and, thus, an obstacle to American involvement with the Allies. Wilson spoke of “The wonderful and heartening things that have been happening in the last few weeks in Russia”.

On the evening of April 2nd Wilson went to Congress to recommend war with Germany saying that “The world must be made safe for democracy”. “We shall fight for the things which we have always carried nearest to our hearts – for democracy, for the right of those who submit to authority to have a voice in their own government, for the rights and liberties of small nations, for a universal dominion of right by such a concert of free peoples as shall bring peace and safety to all nations and make the world itself at last free”. An eyewitness said that “As the President proceeded in his address, the tension of suppressed excitement grew until it burst all bounds…As the President recommended the declaration of war, applause which seemed universal, rolled through the whole assembly from floor to gallery”.

Later that evening Wilson remarked to his secretary “my message today was a message of death for our young men. How strange it seems to applaud that”. On April 4th the Senate voted 82 to 6 in favour of war and on the 5th the House of Representatives backed it by 373 votes to 50. The following day the United States declared war. The panicked money men on Wall Street calmed as the prospect of Allied bankruptcy evaporated. As soon as America entered the war $3 billion dollars was earmarked for ‘Liberty Loans’ to the Allies.

Joyeux Noel

On Christmas Eve 1914 German soldiers around Ypres, trying desperately to recreate something of their distant homes, were decorating their trenches with candles and singing carols. A few hundred yards away in the British trenches similarly homesick and weary men joined in the singing.

“First the Germans would sing one of their carols and then we would sing one of ours”, recalled Graham Williams of the Fifth London Rifle Brigade, “when we started up ‘O Come, All Ye Faithful’ the Germans immediately joined in singing the same hymn to the Latin words Adeste Fideles. And I thought, well, this is really a most extraordinary thing – two nations both singing the same carol in the middle of a war”

Josef Sewald of the 17th Bavarian Regiment rememberedI shouted to our enemies that we didn’t wish to shoot and that we make a Christmas truce. I said I would come from my side and we could speak with each other. First there was silence, then I shouted once more, invited them, and the British shouted ‘No shooting!’ Then a man came out of the trenches and I on my side did the same and so we came together and we shook hands – a bit cautiously!”

“We shook hands, wished each other a Merry Xmas, and were soon conversing as if we had known each other for years” wrote John Ferguson of the Second Seaforth Highlanders.We were in front of their wire entanglements and surrounded by Germans – Fritz and I in the center talking, and Fritz occasionally translating to his friends what I was saying. We stood inside the circle like street corner orators…What a sight – little groups of Germans and British extending almost the length of our front! Out of the darkness we could hear laughter and see lighted matches, a German lighting a Scotchman’s cigarette and vice versa, exchanging cigarettes and souvenirs”

100,000 men from the British, French and German armies took part in the Christmas Truce of 1914. The truce lasted into the following day when joint memorial services were held for the dead and football matches were played in no mans land.

Christian Carion’s powerful 2005 film ‘Joyeux Noel’ captures something of this moment. Carion depicts the truce as the last fleeting prospect that the horror of the next four years could be avoided. By this fourth month of the war the economies and societies of Europe, with the exception of Germany, had not yet given themselves over to total war, the mobilisation of all the states resources toward conflict. The historian Herbert Butterfield had written “(total war) heralds Armageddon, the giant conflict for justice and right between angered populations, each of which thinks it is the righteous one. So a new kind of warfare is born – the modern counter part of the old conflicts of religion” To mobilise a whole population the aims of total war must be millennial, the enemy must be dehumanised. Playing football or praying with him jeopardises that.

But the real tragedy of ‘Joyeux Noel’ and the truce itself is that even by this early stage it was probably too late. Contrary to AJP Taylor’s ‘war by timetable’ thesis World War One was not an accident but the predictable result of two decades of the aggressive and incompetent foreign policy of the idiotic Kaiser. This had hardened attitudes even before 1914. A British soldier, Bruce Bairnsfather, wrote “on our side, not for a moment was the will to win the war and the will to beat them relaxed. It was just like the interval between the rounds in a friendly boxing match”. Robert Graves asserted that the truce was “no emotional hiatus, this, but a commonplace of military tradition—an exchange of courtesies between officers of opposing armies”

‘Joyeux Noel’ has faults. The presence of a Danish opera star (Diane Kruger) in the trenches stretches credulity and towards the end the film works too hard to build a narrative out of these spontaneous events. But it does invite you to share what an unknown British soldier described in his a letter to his mother as “the most memorable Christmas I’ve ever spent or likely to spend”

This article originally appeared at Middlebrow Magazine