Home > Global Finance, History, Indian Economy, Politics, Uncategorized, World Economy > Two Books on the Monetary Horror Story That Looks Like Today’s – NYTimes.com

Two Books on the Monetary Horror Story That Looks Like Today’s – NYTimes.com


Hjalmar Schacht (above left) and Sir Montagu Norman (right)

In the 1920s the press had been infatuated with an international foursome of elite bankers who took on the challenge of restoring global economic balance after the wreckage created by World War I. They had been called the “Most Exclusive Club in the World.”

With the angrily Prussian-mannered Hjalmar Schacht of the Reichsbank, the conniving Émile Moreau of the Banque de France and Benjamin Strong of the Federal Reserve Bank of New York as its other principals, and with Winston Churchill, John Maynard Keynes and Franklin D. Roosevelt among its secondary players, “Lords of Finance” tracks the shifting balance of economic power that reflected each country’s self-interested agenda. But one of the book’s most important points is that self-interest, in the world of global economic fluctuations, can be self-defeating. (via Books of The Times – Liaquat Ahamed’s ‘Lords of Finance’ – Monetary Horror Story That Looks Like Today’s – Review – NYTimes.com).

Elephants in the room

Another interesting book which covers a wide area – between the wars. The Western pre-occupation with itself, its total self absorption, at a cost to the rest of the world shows up in this book.

As is usual, it ignores other crucial elements and factors. For instance, how the Indian economy was used to meet Britain’s Post WW1 liabilities. To ‘dampen’ India’ gold demand, the Indian rupee was put on fixed, overvalued rate vis-a-vis the sterling.

Indian exports crashed, imports ballooned. Indian accounts would be settled at ‘official’ silver prices, with inflated silver released by the US under the Pittman Act. Gold prices were deflated – and Indians would therefore receive less for their gold. Thus with with a combination of inflated silver price, deflated gold price, high interest rates and an overvalued Indian rupee, the Indian economy was strangled. None of the book reviews or interview however identify this – unwittingly, or deliberately.

India funded the post WW1 recovery

The mechanics and the development is laid out in a better book, John Bullion’s Empire by By G. Balachandran. This book traces how much of India’s poverty was a result of economic policies between the two World Wars co-ordinated by these four central bankers.

On October 27th, 1931, the Ramsey Macdonald led “National” Government (Conservatives and Liberals coalition, fearful of the rising Labour Party) in Britain won a huge majority of 554 MPs of 615. The economic crisis of September 1931 (misnamed as the Indian Currency Crisis) was a result of this economic policy which reduced Indian economic activity – resulting in bankruptcy of the Colonial India Government.

Parallel Great Depression era problems in the US, the Weimar Republic problems – and other issues pushed this ‘National’ government to ram through a series of measures (page 130-131) that inflated silver prices, depressed gold prices and raised interest rates in India. The Indian rupee was pegged at a high exchange rate vis-a-vis the sterling. Indian exports crashed. To ensure that Indian farmers had no options, Indian money lenders were regulated and licensed into paralysis.

Indians were paid, with inflated and abundant silver stock, instead of gold. This silver was the same silver released by the Pittman Act. The silver buffer solution to the gold drain to India was seen as the “only buffer to protect Western gold reserves against the Indian drain (was) a silver buffer.” Of course, later the British Raj decided to settle Indian debts with promissory notes – and not even silver. It was this Indian ‘sacrifice’ which enabled the recovery of the West.

Done over the protests by Gandhiji, trade bodies and merchants and threats of resignation by the Viceroy and his Executive Council, the resulting ‘money famine’ (page 155) had the Lord Willingdon ecstatically say ‘Indians are disgorging gold‘ (page 156). Neville Chamberlain pitched in with his classic statement “The astonishing gold mine that we have discovered in India’s hordes has put us in clover.”

Crash in silver prices

New mines and increased silver production saw a crash in silver prices. US silver coinage was being depreciated due to increasing supplies of silver. On the other side, Britain had a large debt due to WW1. Britain and America stuck a deal at the cost of the Indian subjects of the British Raj. The US passed the Pittman Act which mandated silver sales at more than a dollar per ounce – double the 50c per ounce prevailing price of silver. Britain agreed to settle all Indian debts with silver. Gold prices were deflated. Interest rates in India were increased. Restrictions on gold imports on were placed and gold demand in India was ‘normalized.’

Impoverishment of India

With crashing exports and increased imports, the Indian citizenry had no option but to pay for all essentials and taxes with gold. As a quid pro quo, for this silver for gold scam, the US lent gold to Britain in 1926, which allowed Britain to revert back to the pre-War old standard.

Looking back, it was clear that this achieved nothing but the impoverishment of India. In 1948, Montagu Norman had to admit that with these maneuvers “We achieved absolutely nothing, except that we collected a lot of money from a lot of poor devils and gave it to the four winds.”

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