Dollars and Jens
Tuesday, October 02, 2012
I was at a talk yesterday about the resumption of metallic backing for Scandinavian currencies after the Napoleonic wars and then again after World War I; the speaker mentioned the UK experience in the first era but not the second. I commented that the UK experience in the second era was very different from in the first era (more so than was the case in Scandinavia) because the foreign investment position of the UK had changed, whereupon someone else — there's no question that I was the most ignorant person in the room on this topic — noted that the parliamentary reform of the mid 1800s may have made a bigger difference; debtors were in a much stronger political position vis-à-vis creditors in 1920 than 1820, and deflating back to pre-war price levels wasn't something in which the latter parliament had so much interest.
I think this is a very good point, and especially in evaluating the historical why of currencies, which are even more regularly subject to the actual or threatened intervention of political bodies than are other economic phenomena, looking at who has political power is always going to be important. I do think that the foreign investment position had something to do with it; if the pre-war investment income had been providing foreign currency, the macroeconomic effects of revaluation would have been less severe, and that would have increased parliament's willingness to attempt it. I'm less confident than I was 24 hours ago, though, that that would have been sufficient. Certainly it should be noted that naive treatment of "who has political power?" can be misleading as well; while it may be largely the case in some democracies that voters tend to vote for whichever candidate will humiliate and take things from the other guy and give them to them (the history of Latin America seems to be plagued by this), in developed countries such voting is heavily constrained by conceptions of fairness; no English creditor was agitating for revaluation to a lower price level than existed before the war, and few English debtors were agitating for much larger devaluation from the new price level. No doubt Englishmen would have been more favorably disposed in general to revaluation if it had been relatively cost free in terms of the functioning of the national economy. Still, where different groups will support different policies, for whatever reason, it will matter which of them gets to decide how the national government will behave.