There was plenty of commotion in Seoul last week. Adding the G-20 insults (and its own!) to election injuries. The New York Times led its Friday paper this way:
Obama’s Economic View Is Rejected on World Stage
China, Britain and Germany Challenge U.S. – Trade Talks with Seoul Fail, Too
A good week, therefore, to ponder the work of two historians: Steven Bryan, on the use to which various rising powers put their currency systems in the nineteenth century. A historian working for the moment in Tokyo as an attorney (Columbia Ph.D, Harvard Law J.D.), Bryan exemplifies a new generation of historians who cast a jaundiced eye on the market triumphalism of the 1990s.
In The Gold Standard at the Turn of the Nineteenth Century: Rising Powers, Global Money and the Age of Empire, he argues that Argentina, Japan, Germany and other countries rose to power in the years before World War I following currency policies not all that dissimilar to China’s today. By adopting the gold standard, they were looking to lock in the most depreciated currency possible in order to promote industry and exports.
Indeed, they were consciously following a developmental strategy pioneered by Alexander Hamilton in the United States, analyzed by Friedrich List, and implemented by Otto von Bismarck in the newly-united Germany and by finance minister Matsokata Masayoshi in Meiji-era Japan. Gold just happened to be an instrument of power. .
What actually happened, however, has been obscured by the events of the mid-nineteenth century, when British military and industrial power was at its zenith. Great Britain abolished the Corn Laws, renounced protectionism, embraced free trade — and enjoyed a fabulous twenty-year boom.
“The Anglo laissez-faire triumph story… has immense appeal for those members of English-language audiences who prefer to see an idealized view of English history at the center of the world’s past and present.” Bryan writes.
But the facts of late nineteenth-century development were usually very different. Among rapidly growing economies, policies of export promotion, protectionism, currency manipulation and massive government military spending were the rule, not the exception.
“Only when countries stopped adapting the gold standard (and the exchange rate) to their own particular momentary needs and pretended that it had operated in practice (rather than just theory) as an inflexible anchor did the system collapse,” Bryan writes, in the Great Depression.
For China, the crucial lesson is what happened to Japan in the fifty years after its defeat in World War II. Things went along pretty well until the Japanese central bank succumbed to US pressure in the 1980s (the Plaza and Louvre accords of 1985 and 1987) to let the yen appreciate against the dollar. Massive shifts in manufacturing then took place, and, as the Bank of Japan sought to ameliorate their effects, a gigantic financial-asset boom and bust ensued.
“The Chinese now think this was ludicrously suicidal on Japan’s part and are in no way inclined to make any changes, currency or otherwise, simply in response to US. pressure,” Bryan writes from Tokyo in an email. “In other words, they’re following the late-19th century model of adapting international norms and institutions to their own needs and interests, and only their own needs and interests – which is what countries do — except when they’re post-WWII Japan.” His next project is a comparative history of Japan in the 1920s and 1990s.
If they are reading Bryan at the Treasury Department and the Federal Reserve Board, at the Pentagon they are probably reading The Mind of Empire: China’s History and Modern Foreign Relations, by Christopher Ford.
Ford was Deputy Assistant Secretary of State for arms control and nonproliferation in the George W. Bush administration. He is now a senior fellow of the Hudson Institute, where he maintains New Paradigms Forum, a popular website. An extended essay on how China sees itself and its future among nations, The Mind of Empire has been making the rounds among defense intellectuals.
But that’s a topic for another day. Economic Principals is traveling, and out of time.