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But what about the British understanding of the role of gold? J.M.Keynes had been following the German bullionist/nominalist controversy and in 1914 he published a review of the Theorie des Geldes und der Umlaufsmittel (Theory of Money and Credit; Munich and Leipzig, 1912) by Ludwig von Mises, giving the bullionist point of view, and of Bendixen's Geld und Kapital (Money and Capital; Leipzig, 1912) expressing sympathy for Bendixen:

[Bendixen says that the] 'old "metallist" view of money is superstitious, and Dr. Bendixen trounces it with the vigour of a convert. Money is the creation of the State; it is not true to say that gold is international currency, for international contracts are never made in terms of gold, but always in terms of some national monetary unit; there is no essential or important distinction between notes and metallic money; money is the measure of value, but to regard it as having value itself is a relic of the view that the value of money is regulated by the value of the substance of which it is made, and is like confusing a theatre ticket with the performance. 

'With the exception of the last, the only true interpretation of which is purely dialectical, these ideas are undoubtedly of the right complexion. It is probably true that the old "metallist" view and the theories of regulation of note issue based on it do greatly stand in the way of currency reform, whether we are thinking of economy and elasticity or of a change in the standard; and a gospel which can be made the basis of a crusade on these lines is likely to be very useful to the world, whatever its crudities or terminology.' (11)

(11) See

It is interesting in this context to note that von Mises blames Bendixen and Knapp for the German travails of the 1920s:

'The idea that monetary and credit expansion make business good, create “full employment,” and bring general prosperity was the essence of the ideas of Mercantilism. The fallacies implied were utterly exploded by the economists whom the Prussian Historical School and their modern followers, Keynesians and the American advocates of unbalanced budgets, disparage as orthodox ... 

'Among the gravediggers of the German people’s prosperity and the German currency, Friedrich Bendixen occupies an eminent place. He was a bank manager and the author of many books and articles dealing with monetary matters. His prestige and his influence on the course of the Reich’s financial policy were enormous.

'When in the first World War the mark’s purchasing power declined and concomitantly foreign exchange rates went up, Bendixen trumpeted that this was a rather fortunate event. For, he said, it made it possible for the Germans to sell their holdings of foreign securities at a profit ...

'The exporter makes an apparent profit—in domestic currency—although he may sell at a lower price in foreign currency. But what really goes on is that he gives the domestic products away at a price which enables him only to buy a smaller quantity of foreign products. It is true, the nation whose currency has been devalued exports more during this interval, but it gets in exchange only less or, at least, not more than previously for a smaller quantity exported.

'This is what the economists have in mind when speaking of “apparent” gains. These gains are the result of false reckoning and self-deception ...

'Of course, the Germans, steeped in the monetary fallacies of Bendixen and Knapp, were not aware of this fact. Neither were the foreign bankers and investors shrewd enough to judge correctly the plight of the German big banks and of many of the big German business concerns. In the twenties foreign loans to the Reich, the member states, the municipalities and to the banks and big business amounted to about 20 billion Reichsmarks. Besides, foreigners invested $5 billions directly in German business. This huge inflow—against which reparation payments of about $10.8 billions had to be held—disguised for a few years the frailty of the big banks. When the depression ended foreign lending to Germany, the collapse of the banks could no longer be delayed. It occurred in 1931 as the payoff both of inflation and of ignorance of fundamental economic issues.' (12)

(12) Quoted from an article originally published in the Commercial and Financial Chronicle, March 7, 1946. Taken from the website of the Foundation for Economic Education.

Keynes became an adviser to the British Treasury at the beginning of the war under Lloyd George as Chancellor of the Exchequer, securing a salaried job early in 1915 as assistant to Sir George Paish, appointed by Lloyd George as his chief adviser on financial affairs. But Paish very soon departed the scene following a nervous breakdown, leaving Keynes in place. In May 1915, when Asquith brought the Conservatives into the government, Lloyd George became Minster of Munitions and was replaced as Chancellor of the Exchequer by Reginald McKenna who, as Churchill's predecessor as First Lord of the Admiralty, favoured naval blockade rather than a land based military commitment as Britain's main contribution to the war effort. (13) The Liberal war policy associated with McKenna and Asquith and supported by Keynes was that Britain should be as little involved in the actual fighting as possible but should instead subsidise the war efforts of its allies. In the account by Robert Skidelsky: 

'The conference which Keynes attended in Paris from 2 to 5 February [1915, while Lloyd George was still Chancellor and while Keynes was still, in Skidelsky's account, 'simply a junior adviser among many'] was the first inter-Ally conference. It inaugurated the whole complex system of inter-Ally war credits. Russia, and to a lesser extent France, could no longer export enough goods or gold to pay for their purchases abroad of essential war materials. Britain, whose international financial position was much stronger, had to start financing them. Britain and France agreed to make a joint loan to Russia; Russia agreed to increase its wheat exports as soon as the Dardanelles was open. Russia and France also agreed to transfer gold to the Bank of England. Britain’s first credit to France followed in April. From the decisions taken at the conference stemmed the whole post-war debt problem, since it was decided that transfers were to take the form of loans, not grants. Once Britain started to finance its allies, it was inevitable that it would seek to control their foreign spending, so as to make sure that the money was not frittered away or simply used to support the exchange value of their currencies. Financial control led, by stages, to a centralised buying system, with Allied orders abroad placed through Britain, and paid for by British credits earmarked for Allied accounts at the Bank of England. This was the system which Keynes helped to build up over the next two years, and over which he came to preside. Its evolution can be traced in the Anglo-French agreement of April 1915, the Anglo-Russian agreement of September 1915, the Anglo-Italian agreements of June and November 1915 and the Four Power Protocol of July 1916. Britain would advance its allies credits for their purchase of war materials in return for some control over their buying, and the deposit of gold in London as partial collateral. Purchasing Committees were set up in London to handle the orders. Keynes played a prominent part in the negotiation of these agreements. His influence on the initial decisions taken in Paris comes out most strongly in his insistence that Russia be obliged to hold some portion of its gold reserves in London. "Only the English,’"he minuted characteristically, ‘have realised that the main use of gold reserves is to be used."’ (14)

(13) There is a very good account of McKenna's involvement not just during the war but in planning the aggression against Germany in Eamon Dyas: Blockading the Germans, Belfast Educational and Historical Society, 1918.

(14) Robert Skidelsky: John Maynard Keynes, Vol 1 - Hopes betrayed, 1883-1920, London, Macmillan, 1992 (first published 1983), pp.298-9

In an article published in December 1914, Keynes had ridiculed what was effectively the German policy of keeping gold safely stored in the vaults in order to maintain a fixed ratio with the quantity being issued of paper money: 

'Ratios, which began by being little more than the results of chance, have been sanctified by time. ... a gold reserve is thought of as being sone sort of charm, the presence of which is valuable quite apart from there being any idea of dissipating it - as the emblem, rather than the prop, of respectability. It would be consistent with these ideas to melt the reserve into a great golden image of the chief cashier and place it on a monument so high that it could never be got down again. If any doubt comes to be felt about the financial stability of the country, a glance upwards at the image will, it is thought, restore confidence. If confidence is not restored, this only shows that the image is not quite big enough.' 

He continued: 'If it proves one of the after effects of the present struggle that gold is at last deposed from its despotic control over us and reduced to the position of a constitutional monarch, a new chapter of history will be opened. Man will have made another step forward in the attainment of self-government.' (15)

(15) Keynes in the Economic Journal, (of which he was editor), November 1914. The first quote is given in Gross: Confidence and Gold, p. 239, the second in Skidelsky: Keynes Vol 1, p.292), who also in the text gives the date of December not, as in the footnotes, November.

The use Keynes envisaged for gold was to facilitate the international movement of money - in the first place, Britain lending to its allies, in the second place borrowing from the US, a process that became increasingly onerous as conscription was introduced and Britain, following the desire of Lloyd George and the Conservatives, became more involved in fighting on its own behalf. Borrowing from the US was hardly an option available to the Germans. According to Gross (p.250): 'In New York before 1917, Germany was able to raise $27 million in loans in comparison with over $2 billion for the Entente.' He explains in a footnote that German attempts to borrow from the US had to contend with the dominance of the pro-British J.P.Morgan. The total borrowing of the central powers in New York has been calculated at $35 million. Meanwhile the bulk of money floated as war loans in Switzerland went to France. Germany, then, much more than the allies, was very heavily reliant on her own resources.

According to Skidelsky: 'The stability of the Allied exchanges and the whole structure of inter-Ally finance, depended on Britain being able to borrow enough dollars in the United States to pay for Allied spending. By September it was paying out over $200m a month in the U.S.A. (about two-fifths of its total war expenditure). Of this about half was being paid for by dwindling reserves of gold and the same of British-owned American and Canadian securities. The rest was being borrowed by the sale of Treasury bills, public issues of U.K. bonds, and collateral loans.' At the same time 'By mid-1916 Britain was paying for the whole of Italy's foreign war spending, most of Russia's, two-thirds of France's, half of Belgium's and Serbia's.' In October 1916, 'Keynes drew the sensible conclusion that "the policy of this country towards the U.S.A. should be so directed as not only to avoid any form of reprisal or active irritation but also to conciliate and please."' Skidelsky comments: 'These words fix the moment when financial hegemony passed irrevocably across the Atlantic.' (16)

(16) Skidelsky: Keynes Vol 1, pp.333 and 335.