In Ghosts of Empire: Britain’s Legacies in the Modern World (2012), conservative Parliament member Kwarteng delivered an impressive chronicle of the long-term effects of British colonial rule. This book, about the economics of war and the use and abuse of the gold standard, is a bit less readable, but still informative, for those not well-versed in economic theory.
The author easily explains Robert Peel’s theory of balanced budget and sound currency and follows up with Keynes’ theory of borrowing and stimulating the economy. With the advent of 20th-century economics, the picture became more convoluted. The theory that war is the greatest influence on fiscal policy was illustrated beginning with the 17th century and the Habsburg’s perpetual need to fund their imperialism. While vast, the amount of gold and silver coming from their New World holdings was still not enough, so they had to borrow. Gold is the real story here, as Kwarteng traces the gold supply and who has held it, as well as the development of central banks as the lender of last resort. Funding for wars usually came from increased taxes and customs duties, but borrowing was inevitably the major source of capital. Usually, it came down to the country holding the biggest gold reserves. The British dropped the gold standard with the beginning of World War I in 1914, and gold was pegged to the U.S. dollar at the 1944 Bretton Woods conference. That made the dollar convertible to gold, a dangerous situation that forced President Richard Nixon to close the “gold window” in 1971.
Should we return to the gold standard? Has oil taken the place of gold on the world economic stage? Who will be the next big power? Kwarteng does not provide all the answers, but he does give a solid overview of the possibilities.