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Tribune. Central banks seem to be able to create all the liquidity that we need today. This was not always the case. When money was metallic, its scarcity was criticized: we could then speak of a real “iron law” of money.

After many historic failures, the First World War put an end to this shortage with a radical innovation: the forced price of banknotes had to permanently authorize unlimited military spending. Never would the military effort of the period 1914-1918 have been conceivable without this large-scale monetary reform.

The guns become silent, it will nevertheless be necessary to pay the price by an inflation and a massive devaluation, officially consecrated in 1928. But this brutal return to the iron law was tempered by increased barriers to convertibility into precious metal, then by the definitive end of said convertibility following the crisis of 1929 and the Second World War.

Almost a century later, the new European currency, the euro, was to enshrine the return of the iron law. The countries of the South should no longer be able to pay for their German imports by printing banknotes, unlike the French State of 1914 which, in a logic of deficit, could pay its military expenses by simply printing paper.

Archives: How the belligerents financed 1914-1918

The deficit countries in the euro zone no longer have the monetary tool, they immediately had to go into debt to pay. A whole series of Eurosystem rules [le réseau de banques centrales piloté par la Banque centrale européenne, BCE] have meant that today the debt has become a central issue, while between 1914 and 1918 this same issue was totally meaningless.

“As in 14”

The 2008 financial crisis therefore revived the iron law in a big way. Because the Greeks had to pay for BMWs bought in Germany, without being able to obtain the means of payment at the counter of the European Central Bank, they had to rebalance their accounts through structural reforms.

These reforms already undertaken elsewhere have forced the euro zone into restrictive fiscal policies, the price of which has been much lower growth than in the rest of the world. If France had applied a restrictive fiscal policy between 1914 and 1918, would she have won the war?

The pandemic once again seems to question the iron law of money. All the countries of the euro zone have started to spend lavishly, “as in 14”. Hence the many debates concerning the Covid part of the debt. Why not revive something like the equivalent of the forced price of 1914 banknotes?

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