Random Thoughts from Reading

One of the things I do when I read is keep a journal of passages that I find interesting. The interest may be the words the author used to describe something; or a particularly vivid (to my mind) description of an event or place; a clear explanation of an idea; or just something that gets me thinking – along old lines or new doesn’t matter.

My objective for the journal has long been to react to each entry. The problem has been opportunity cost. To write reactions has meant not reading. That still hasn't changed but situation has changed over time. Originally the reaction was strictly meant for me. Now I can share these passages, share my thoughts, and solicit yours. Hopefully what started as personal reflection will now lead to discussion.

Given my recent review of Barry Eichengreen's Globalizing Capital, it is fitting to use a passage from another of his books as my first attempt to "share my journal."

“Why were European countries with depreciated currencies so hesitant to expand? To a remarkable extent, their actions were still conditioned by attitudes formed during the last episode when the gold standard had been in abeyance. The early 1920s had been marked by inflation, social turmoil, and political instability. Only when domestic interest groups had agreed to compromise over the distribution of incomes and the burden of taxation and had sealed their compact by reimposing the gold standard had this chaos subsided. Central bankers hesitated to capitalize on the suspension of the gold standard until they were convinced that the same would not happen again."
Barry Eichengreen
GOLDEN FETTERS:
THE GOLD STANDARD AND THE GREAT DEPRESSION, 1919 – 1939”

I found this passage interesting because it explains the lack of response by central banks in the early years of the Great Depression. Central bankers are averse to inflation, as are most bankers in general. Likewise they are concerned about political and social instability. These fears are logical. Inflation, political and social instability represent risk and risk makes long-term planning and growth difficult. But risk also makes long-term lending difficult. It increases the likelihood of default, and devalues the future stream of payments meant to repay the principal and compensate the lender (depositors as well as stockholders) for deferred consumption.

As Eichengreen points out in this book, after World War I the great commercial powers sought to restore economic and financial stability by reattaching their respective currencies to the gold standard. But this proved especially difficult because the powers sought to reattach their currencies to gold at the old values. This ignored the years of expansion in the monetary base that helped finance the war. It also ignored the fundamental change in the social and political structure.
Socially, there had been a major shift. Workers issues had become more important. Unions became a larger factor in economic and political life.

And with the expansion of the franchise, policy moved toward greater support of the working class - a welfare state. This restricted the flexibility in the economy to adjust to downturns by reducing wages and employment levels. This was accompanied by a corresponding lack of willingness by politicians to hold the currency value stable. Consequently a currency pegged to gold was contrary to the new social and political reality. A gold-based currency was fine, as long as it did not interfere with political needs.

When viewed in this light, the gold and currency connection to the economic unrest of the twenties that ultimately contributed to the Great Depression is understandable. There was a fundamental conflict between the central bankers and the policy-makers seeking to meet the desires of their newly important sector of the electorate.

To me, this speaks to one of the trade-offs of a democratic system. While greater opportunity and voice are among the benefits of a society with a wider franchise, it creates new incentives for the participants at all levels. And we know from economics that incentives are a motive to action (decision-making). By making the political system more responsive to the workers, the incentive to those representing the workers changed. And the opportunities for the workers changed as rules changed to accommodate them. These changes, in turn, act to limit the politically acceptable range of choices.

There is much more to Eichengreen's book. And there were more passages that intrigued me. When I'll get to them I don't know. But share your thoughts on the passage, and whether or not this type of entry is interesting and or useful. If it's an exercise in personal interest only, I'll discontinue it.
I look forward to your comments.