Monetary Planners as the Masters of Denial

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This review
originally appeared in Inquiry, January 1978, pp. 26–27.

International Monetary System
u2022 By Robert Solomon u2022 Harper
and Row, 1977 u2022 381 pages; and The
Origins of International Economic Disorder
u2022 By Fred Block
u2022 University of California Press, 1977 u2022 282 pages

At the end
of World War II an all-powerful United States succeeded in imposing
on the Western world its major economic war aim: the Bretton
international monetary system, establishing fixed exchange
rates and the dollar as the base of world currencies. That system
was thought to be engraved in stone; yet by the end of the 1960s
Bretton Woods lay in ruins.

But this
was only one part of the monetary history of this century. Since
World War I the leading nations have been stumbling and bumbling
in their approach to international monetary affairs. The world
has been pulled in and out of fixed exchange rates, various degrees
of fluctuating exchange rates, international collaboration, harsh
"beggar thy neighbor" monetary and economic warfare,
various forms of partial reliance on gold, and different kinds
of pound, dollar, and "paper-gold" standards.

During this
same period, the world has suffered from myriad monetary crises;
runs on gold, the pound, and the dollar; and jerry-built agreements
that are supposedly eternal but that collapse in a few months.
(The Smithsonian
of December 1971, which President Nixon hailed as
"the greatest monetary agreement of all time," collapsed
within a year and a half.)

One would
think that being on the inside of many decades of careening one
step ahead of monetary chaos might induce a sober, even cynical,
spirit – that it might lead the insider to call for keeping
one’s metaphorical air-raid shelter well stocked and at the ready.
But such is not the case with Robert Solomon, a Harvard PhD, for
many years a leading insider as the Federal Reserve Board’s chief
international economist, and now enjoying R&R at the Brookings

On the contrary,
Dr. Solomon’s view from the top is almost incredibly benign. Not
only is there no sense that any real crises ever took place, but
Solomon’s book is an outstanding example of what has been called
the "Whig theory of history," readily summed up as the
thesis that "whatever was, was right." And so, regardless
of what flop of a plan was adopted by the United States or the
Western world, even if it lasted only a few months, it was right
for that time span. Considering the somber record of
international money in this period, "Whig theory of history"
is a kindly label; "Pollyanna in the nursery" might
be more appropriate.

nave approach is facilitated by the fact that, although an able
monetary technician, he shows no sign whatever of economic understanding,
of apprehending the causes of the economic situations he and we
found ourselves in.

One example
will suffice: After World War II, the countries of Europe and
Asia discovered that they could not find dollars to buy in foreign
exchange markets. Hence, establishment economists came up with
the idea of a mysterious "dollar shortage," a shortage
somehow embedded in the structure of world economies and destined
to be quasi-permanent.

A few years
after the dollar-shortage theory was discovered and solemnly intoned,
lo and behold! the world began to experience a dollar glut; the
world was increasingly awash in dollars. The turning point, in
fact, can be pinpointed: 1950. Some of our more perceptive economists
have since taken to ridiculing the prophets of the permanent dollar

so Dr. Solomon, the quintessence of establishment man. No, for
Solomon, such a view is unkind; instead, displaying no insight
whatever into the causes either of the advent of the shortage
or of its reversal, Solomon maintains that the theorists of the
dollar shortage were correct for the 1940s and became incorrect
only after the shortage disappeared. To Solomon the causes of
these changes rested vaguely in production and postwar reconstruction
– important phenomena, no doubt, but irrelevant to whether
the dollar is short or in plentiful supply.

The pons
asinorum of economics is to realize that aggregate concepts
like "production," "spending," "unemployment,"
or "shortage" are meaningless except in reference to
the question, At what price?

The dollar
was "short" before 1950 because foreign countries fixed
their exchange rates too high and the dollar too low. Making the
dollar artificially cheap meant that it could not be found in
the foreign-exchange markets. As soon as the leading European
countries devalued their currencies in 1949 and made them realistically
cheaper in terms of the dollar, the so-called structural and permanent
"shortage" disappeared, as if by magic. None of this
elementary economic lesson has penetrated Dr. Solomon’s sphere
of knowledge.

But, politically,
after all, it didn’t make much difference, for the conclusions
of the establishment were the same whether the dollar was plagued
by shortage or glut. The inference drawn from the "shortage"
was that foreign countries could not possibly acquire their own
dollars, so the United States had to supply them with countless
billions of dollars in foreign aid.

Later, when
they had plenty of dollars, the conclusion was that the United
States had to pump more dollars abroad in order to "enhance
their liquidity" (read "promote inflation"). Whatever
the contingency, then, establishment economics and politics decree
that the US government should pump more dollars into the economy
and that some dollars should go abroad to fuel a boom there. In
short, the recipe is for continuing worldwide inflation.

While the
title of the Solomon book specifies 1945 as the taking-off point
of his discussion, the bulk of it is devoted to the period after
1960. Admittedly, it is a lively presentation, chock-full of facts;
and while the book is hopeless for economic interpretation or
analysis, it is a useful compendium of what happened.

Don’t look,
however, for real inside dopester material or any sort
of keen critique of plans, suggestions, or personnel. That
sort of material can be expected only of ex-insiders, preferably
embittered ones. Solomon’s personal inside material is limited
to the "how prescient I was to submit that report" variety.

The author’s
politicoeconomic views are, as to be expected, echt establishment.
Viewing every event and proposal since 1945 as marching onward
and upward into the light, Solomon is quite simply delighted with
the current jumbled mess of an international monetary order: a
cooperatively "managed" (others would call it a "dirty")
float of exchange rates, with that annoying commodity, gold, being
supposedly phased out, and with Special
Drawing Rights
(SDR) – a harbinger of a future world-reserve
bank issuing a new world paper currency.

If the US
establishment were ever able to bludgeon West Germany, Switzerland,
France, and other "hard money" countries into it, that
sort of world reserve bank is what we would have, enabling us
to have continuing "controlled" worldwide inflation
with no international economic conflict.

There are
enough facts in Solomon’s book, however, for alternative explanations
and viewpoints to peep through. Thus, the "phasing out"
of gold has been proclaimed by US authorities (the main opponents
of gold) for many years, but gold is coming back stronger than
ever – witness its recent price rise to more than $160 an
ounce (after its enemies, for the umpteenth time, maintained it
would never go above $130), and witness the fact that after January
1978 central banks will, for the first time in decades, be able
to buy gold on the market without restriction.

Also, one
can piece together from Solomon’s work at least the outlines of
the most fascinating international politicoeconomic struggle of
the post-World War II period: the attempt of Charles de Gaulle
to combat US-dollar imperialism by stressing and returning to
gold. De Gaulle’s attempt was defeated early by the inflationary
effects of the economic concessions to the French "revolution"
of 1968. But gold, as a commodity dug out of the ground and therefore
not totally subject to political control and unlimited creation
(as is paper currency), is and will be the major weapon by which
the West European anti-inflationary countries can try to counteract
the continuing inflationary thrust of American state capitalism.

The leading
American official on international money matters is the undersecretary
of the treasury for monetary affairs. During the post-World War
II period the major holders of this post were Paul
(now powerful head of the Federal Reserve Bank of
New York) and his successor, Jack Bennett. It is not surprising
that Solomon either doesn’t know or doesn’t care that both men
were heavily in the Rockefeller ambit, Volcker at one time serving
as personal representative of David Rockefeller on international
monetary matters, and Bennett having worked almost two decades
for Exxon. Both men were the major militant opponents of gold
and advocates of fiat paper in this era. Perhaps this was not
a coincidence.

While the
Solomon book is at least chock-full of facts, Fred Block’s work
has no redeeming feature. Block seems to know far less about economics
than does Solomon; indeed, especially on monetary matters, Block
seems to have a genius for error. He understands not at all the
intimate connection between the supply of money and inflation
of prices – the cornerstone of monetary economics. Block’s
nave faith that socialism or collectivism will cure inflation
simply lacks any theoretical or empirical backing whatsoever.

One would
think that a socialist would at least be alive to international
economic power struggles, but the major disappointment of the
Block book is that it is even less helpful than Solomon’s, which
at least provides some of the facts. There is not a word in Block’s
discussion about de Gaulle’s gold policy and the gold-vs.-dollar
struggle, not a word about Volcker, Bennett, and the Rockefeller

when Block discusses the origins of the Marshall
and mentions the key role of William
L. Clayton
as undersecretary of state, he says not a word
about the critical fact that Clayton’s own cotton brokerage firm
of Anderson, Clayton & Co. benefited from a multimillion-dollar
cotton contract under the Marshall Plan.

We are still
looking for good sense and understanding on the development of
the current international monetary mess. That analysis would have
to combine the insights of economic theory and of power politics,
a knowledge of the influence of the quantity of money on prices
and on exchange rates, and a sensitivity to the use of money to
advance the power and wealth of privileged interests. In short,
a rare blend of the best of’ "right-wing" and "left-wing"


N. Rothbard
(1926–1995) was dean of the Austrian
School, founder of modern libertarianism, and academic vice
president of the Mises Institute.
He was also editor — with Lew Rockwell — of The
Rothbard-Rockwell Report
, and appointed Lew as his
literary executor. See
his books.

Best of Murray Rothbard

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