I'm listening to the audio version of George,
Nicholas and Wilhelm: Three Royal Cousins and the Road to World War I,
written by Miranda Carter and brilliantly narrated by Rosalyn Landor. It's
the story of some almost supernaturally dysfunctional governments blundering
into a war that seems more rather than less crazy with the passage of time.
Among the many surprising facts from those days (one short century ago):
Most European kings and queens were related. Only "royals" were good enough
to marry into the top strata of the aristocracy, so a relatively tiny pool
of princes and princesses were traded back and forth like baseball cards. By
the late 1800s Britain's King George, Russia's Czar Nicholas, and Germany's
Kaiser Wilhelm were all grandsons of Britain's Queen Elizabeth. They and their
families hung out together on massive yachts and 10,000 acre estates, shooting
and drinking and generally behaving dickishly, as humans will when given unnatural
amounts of power.
And about that power...most European countries were still monarchies where
the king/emperor actually ran things. Britain had, during the 60+ years of
Elizabeth's reign, morphed into a constitutional monarchy where royalty was
revered but Parliament made policy. But in Germany and Russia the guys calling
the shots (literally and figuratively) were the sons of the guys who called
the previous generation's shots. The Kaiser and Czar ran their respective shows
-- and each, in his own way, was nuts.
The story of how the neuroses of these tragicomic figures led Europe into
Hell is full of unwise foreign wars, domestic repression, secret deals structured
by inner demons rather than clear vision, weird facial hair and general stupid
rich guy hubris.
But one thing that never comes up is monetary policy. That world
was on the Classical Gold Standard, where currencies were simply names for
given weights of gold and paper notes were warehouse receipts for gold coins
that could be redeemed at any bank.
So when Russia picked a fight with Japan and got its butt kicked, it couldn't
just print more rubles and keep going. It had to rein in its ambition, take
out a big loan from France, and spend a few years licking its wounds. When
unstable Germany and relatively-rational Britain began an arms race, they couldn't
just print new currency, give it to a shipyard and expect to have a fleet new
battleships the following year. They had to get actual money from their government
treasury, their citizens' taxable wealth or loans from people who expected
to be paid back in full and on time. There was debt, of course, but it was
minuscule by today's standards because the interest had to come from a global
money supply that was only increasing by about 2% per year, as new gold was
mined.
In the decades leading up to World War I, despite some barely-sane leaders
running barely-functional institutions, inflation was never an issue. Money
saved was wealth preserved, and global capital flowed freely. Millions of people
started poor and ended middle class, and Europe, despite the occasional horror
show at the top, was perceived by the vast majority of its citizens to be progressing
nicely.
That's the power of sound money, but perhaps also, in a perverse way, its
limitation. By enabling societies to grow richer and more powerful, it creates
a sense of optimism that can, in the wrong hands, be shaped into aggression.
Which raises some interesting questions:
Was the chaos of WWI, the Great Depression and WWII caused in part by the
gold standard? Or was it just the luck of the draw, an accident of birth that
placed the wrong people in charge of a sound money world that was otherwise
heading in the right direction?
What would today's world be like if Germany and Russia had moved just a little
more quickly towards representative democracy -- or simply picked more rational,
flexible leaders -- a century ago? Extrapolate the sustained growth and stable
prices of the 19th century into the 21st, and the power of compound interest
implies some truly amazing things.
Has fiat currency and unlimited money creation handed the same kind of power
to today's bankers and politicians as absolute monarchy gave to Kaiser Wilhelm
and Czar Nicholas? And are they managing that power any better than those guys
did?
If today's central bankers are this century's dysfunctional royalty, how will
the mess they're making compare with the previous one?
