No-one argues that the founders of the Eurozone intended to create a monetary regime that in some respects resembles the Gold Standard – yet, amazingly, that is what they achieved
After the First World War governments and central banks in Europe were determined to rebuild the Gold Standard. The re-linking of national currencies to gold was regarded as a precondition for economic recovery and stability. Furthermore, it was widely understood that the Gold Standard had a moral dimension. It acted as a constraint on radical and spendthrift governments, and was believed to be a force for peace and democracy.
The Eurozone was also established for reasons that had as much to do with political aspirations as with economics. A common European currency would reduce transaction costs and make life easier for companies operating across Europe and travellers. But the euro was also envisaged as a giant leap towards a federal Europe, and a means of chaining a reunited Germany to its western neighbours.
Both the Gold Standard and the Eurozone placed tight constraints on the ability of national governments to manage their economies in times of crisis. During the slump of the early 1930s countries on the Gold Standard were forced to introduce strict austerity measures in order to stem the loss of gold abroad. They could not devalue their exchange rates or reflate domestic demand whilst staying on gold. As a result the depression worsened and democracy came under growing strain.
Similarly the members of the Eurozone are denied the use of measures such as devaluation or quantitative easing that might alleviate their current distress. Monetary policy is controlled by the European Central Bank, and its German-inspired mandate is to prevent inflation at all costs. It was never imagined that the ECB would find itself in the middle of a slump, and it was not given the tools that are required in such a crisis. Like their predecessors in the early 1930s, Eurozone governments today are forced to pursue austerity programmes that lead to rising unemployment and poverty, and deepening social divisions.
Britain in 1931 was the first European country to quit the Gold Standard, and the first to experience recovery. Once Britain, followed by Sweden, had left gold, the competitiveness of their exports picked up. Inevitably, those countries that remained on gold experienced falling competitiveness. But it took until 1936 for some states, the most important being France, to give up the fight and leave the Gold Standard. In the meantime their economies and societies suffered enormous damage.
Austerity weakened the economy, the business sector, and the banking system throughout Europe in the early 1930s. There were devastating banking collapses – most famously in Austria and Germany in 1931 – and a further round of economic misery. The threat of banking collapses in the Eurozone is never far away today, as is obvious from even a cursory reading of the financial press.
Once a regime like the Gold Standard reaches a tipping point, as in 1931, attempts to save it may be fruitless. Will the same happen in the Eurozone? We must wait and see.
Of course there are also differences between the Eurozone and the Gold Standard. I will mention just one. Germany is the strongest member of the Eurozone. Indeed membership of the Eurozone allows Germany to export at lower prices than if it had kept a separate currency. In 1930, however, France was the strongest European member of the Gold Standard and had the highest gold reserves. When France returned to the Gold Standard in the late 1920s it did so at an exchange rate that made French exports very competitive. Like Germany today, France was reluctant to help its neighbours – especially Germany – with new loans, partly out of fear of compromising its own position. So, in a curious way, France and Germany have swapped places.
We might ask ourselves what kind of Europe is the safest, both economically and politically? Is it a Europe of rigid monetary control and austerity as in 1930-31, or is it a Europe that allows each nation to pursue the economic and monetary strategies that are most suitable to its own needs?