The economic consequences of Mr Trump

Keynes' criticism of Churchill's decision to restore the pre-war gold standard applies to the US president-elect's redrawing of American priorities

- AMOL AGRAWAL

IN 1925, JOHN Maynard Keynes wrote The Economic Consequences of Mr Churchill, criticising the monetary policies of the then British government. Nearly 100 years later, Keynes' article resonates strongly today. Before making comparisons, we need some background.

Ever since humanity invented money, the temptation to create a quick fortune has ironically only led to misfortune. In 1717, the United Kingdom, seeking a solution, fixed the price of its currency to silver under the Master of the Mint Isaac Newton. Under this new system, money could be created only based on discovering more silver, which was relatively scarce. In 1819, silver was replaced by gold, leading to the famous gold standard. The system was successful in reining in inflation, leading other countries to adopt it and laying the foundations of globalisation from 1880 to 1913.

In 1914, the UK suspended the gold standard due to the First World War. The war needed spending, which was not allowed under the gold standard. After WWI, a British government-commissioned report recommended not just restoring the gold standard, but also at the pre-war price. After much discussion, then Chancellor Winston Churchill restored the pre-war gold standard in 1925.

The decision prompted Keynes to write the aforementioned famous article as a critique. It was not the first time Keynes had used the phrase "economic consequences". In 1920, he wrote his famous book The Economic Consequences of Peace, deploring the harsh economic reparations on Germany. The book was equally prophetic as it paved the way for the rise of Nazism in Germany.