Dominic Lawson: It all went wrong when we left the gold standard

The Bullion Vault in London reports a 'phenomenal' interest in its product

Related Topics

My nearby market town of Lewes has started issuing its own pound notes: Tom Paine's portrait is on one side, Lewes Castle on the other. The Bullion Vault, a London gold broker, reports "phenomenal interest" in its product. The multi-millionaire media magnate Felix Dennis tells the FT that he has followed the instructions of his financial adviser to "buy gold. Physical bits, small bits, so when you need to get a sandwich you can take it down the shop and take 300 sandwiches away; God help me, in a vault here in London, I have huge quantities of small bits of gold."

We should not assume from this that the pound sterling is about to go the way of the Zimbabwean dollar. Lewes has ever been a contrary place; the Bullion Vault is obviously talking up its own business; Felix Dennis is highly impulsive.

Yet these are also straws in the wind, or rather a howling gale. When Governments spend vast sums of money to shore up the banking system, you just know that it would be all too convenient for it to let inflation erode the national debt incurred in the process. Even before these gigantic expenditures, Britain's true level of national debt, according to the economist Liam Halligan – the Government won't give the real figure including off-balance sheet liabilities – is over £1,300bn. This is equivalent to £50,000 per household. Perhaps Gordon Brown might call it "imprudence with a purpose" – he dumped Prudence some time ago, although he kept on telling everyone that they were still an item.

In America, the situation is much the same, only, as you would expect, bigger. Last Saturday, the digital display in New York showing the current level of national debt did not have enough digits to show the real number, after it breached the $10 trillion mark ($10,150,603,734,720 to be precise). Per American household this works out as $86,023 (£49,747); so Mr Brown, in this respect at least, is in no position to lecture George W Bush on economics.

There is, however, a small band of men and women – long insulted as fanatics or even fantasists by the political mainstream – who can now say: "We told you so." I am not referring to the Communist Party of Great Britain (Marxist-Leninist). No, I'm talking about the followers of the great Austrian economist Ludwig von Mises (1881-1973). in his 1912 work, The Theory of Money and Credit, Mises declared that the corruption and distortion of money by the state and bankers, usually to pay for wars, was the principal cause both of inflation and – to coin a phrase – boom and bust.

As the chief economic advisor to the Austrian government in the 1920s, Mises put his theories into practice and slowed down inflation in his native country (which, as a Jew, he later fled). He used his "cycle" theory to forecast that the "New Era" of apparently permanent prosperity in the 1920s was illusory, and that it would end in runs on banks and depression: The Wall Street crash of 1929 was exactly what Mises had predicted.

Mises believed that any currency which was not backed by gold was powerless to resist the depredations of governments and bankers addicted to the possibilities of limitless credit. Until the past few weeks, this has been seen as a bizarrely old-fashioned and eccentric outlook; but I would not be surprised if many young people – who have hitherto been comfortable with the idea of money as something which can just exist in the ether, travelling through the digital highway – now wonder whether anything of intrinsic value lies behind it all.

As far as Mises was concerned, even money made of paper, if it had nothing behind it other than the good word of politicians and central bankers, was inherently unsound; he lived just long enough to see the United States of America – where he ended his days – break decisively with the international Gold Standard.

Up until August 1971, the owner of dollars could, at least theoretically, exchange them for gold. That month France, to whom the US owed about $3bn as part of the financing of the Vietnam War, demanded that the dollar debt be repaid in gold. Unfortunately, there was no longer enough in the vaults of Fort Knox. Apparently there exists a tape of Richard Nixon saying: "Screw the French!" - some accounts have the President using a more alliterative verb. America immediately came off the gold standard, after which there was no theoretical limit to its ability to print money and – according to the followers of Mises –the age of high inflation was under way.

John Maynard Keynes, rather than Ludwig von Mises, is the economist whose name is currently being invoked on the airwaves in Britain. in his own day, too, Keynes obliterated Mises: it became fashionable to believe that Roosevelt's New Deal was a kind of successful rudimentary application of Keynesianism.

Yet Roosevelt's policy of massive intervention by the state to prop up wage rates and inflate credit gets a much better press than it ever deserved. Consider this: in September 1931 the US unemployment rate was 17.4 per cent and the Dow Jones industrial Average stood at 140. By January 1938, unemployment was still at 17.4 per cent, and the Dow Average had dropped to 121.

Mises' followers insist that the present problems in the economies of the West have not been caused by laissez-faire, but by the opposite: politically sensitive central bankers so desperate to prevent any stock market slump that they cut interest rates to a level which turbo-charged the debt markets. So when George Osborne, as he did yesterday, declares that "laissez-faire is dead", the Mises-ites – one of whom is the libertarian ex-Presidential candidate, Congressman Ron Paul – would protest that such a policy was never tried in the first place.

Yesterday, I spoke to one of the leading academic figures in that movement, Professor Thorsten Polleit of the Frankfurt School of Finance. The professor is less enthusiastic than the stock market about the British Government's injection of taxpayers' money into the weakest banks. He points out that by standing behind those banks, but giving no general guarantees, the Government is encouraging savers to pull all their money out of well-run smaller institutions and switch it into badly run bigger banks.

The Government will insist that it is no time to be debating economic theories and the origins of this crisis – that we should simply do what we can to inject confidence back into the system. Professor Polleit sees it differently: "A proper diagnosis is necessary before you know the right remedy. Your Government – and others – are dealing with the symptoms but not the causes." As any doctor will tell you, that is not in the patient's long-term interest.

React Now

  • Get to the point
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

SThree: Trainee Recruitment Consultant - Manchester

£18000 - £23000 per annum + competitive: SThree: Trainee Recruitment Consultan...

Recruitment Genius: Plumber

£22000 - £25900 per annum: Recruitment Genius: The Company is expanding and th...

Recruitment Genius: Corporate Account Manager

£27000 - £30000 per annum: Recruitment Genius: A Corporate Account Manager is ...

Recruitment Genius: Chef de Partie

£7 per hour: Recruitment Genius: This award winning conference venues provider...

Day In a Page

Read Next

Hollywood: Stop trying to make Superman cool. The world needs a boy scout in blue

Matthew James
A man enjoys the  

If you really want to legalise cannabis, then why on earth would you go and get high in a park?

Peter Reynolds
Revealed: Why Mohammed Emwazi chose the 'safe option' of fighting for Isis, rather than following his friends to al-Shabaab in Somalia

Why Mohammed Emwazi chose Isis

His friends were betrayed and killed by al-Shabaab
'The solution can never be to impassively watch on while desperate people drown'
An open letter to David Cameron: Building fortress Europe has had deadly results

Open letter to David Cameron

Building the walls of fortress Europe has had deadly results
Tory candidates' tweets not as 'spontaneous' as they seem - you don't say!

You don't say!

Tory candidates' election tweets not as 'spontaneous' as they appear
Mubi: Netflix for people who want to stop just watching trash

So what is Mubi?

Netflix for people who want to stop just watching trash all the time
The impossible job: how to follow Kevin Spacey?

The hardest job in theatre?

How to follow Kevin Spacey
Armenian genocide: To continue to deny the truth of this mass human cruelty is close to a criminal lie

Armenian genocide and the 'good Turks'

To continue to deny the truth of this mass human cruelty is close to a criminal lie
Lou Reed: The truth about the singer's upbringing beyond the biographers' and memoirists' myths

'Lou needed care, but what he got was ECT'

The truth about the singer's upbringing beyond
Migrant boat disaster: This human tragedy has been brewing for four years and EU states can't say they were not warned

This human tragedy has been brewing for years

EU states can't say they were not warned
Women's sportswear: From tackling a marathon to a jog in the park, the right kit can help

Women's sportswear

From tackling a marathon to a jog in the park, the right kit can help
Hillary Clinton's outfits will be as important as her policies in her presidential bid

Clinton's clothes

Like it or not, her outfits will be as important as her policies
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders