Eurozone is a case of history repeating
Investors are sucked into faulty currency regimes with depressing regularity
There are many lessons in history, and while the future will be different we should never underestimate our own ability to repeat the mistakes of the past.
We should also not assume we are smarter than those who lived before us.
In the 1870s most major industrial countries joined the gold standard. Whereas in 1871 only the UK and some of its colonies (and its ally Portugal) used gold as the basis of their monetary system, Germany followed in 1872, Scandinavia in 1873, Netherlands in 1875, Belgium, France and Switzerland in 1878 and the US in 1879.
This fixed exchange rate regime encouraged trade and international investment soared. A world without the gold standard was simply not believed to be possible. Exchange rates were so stable for so long that school children learnt them by rote along with their multiplication tables.
But the period from 1873 to 1896 was not necessarily one of economic expansion. Many textbooks describe it as The Great Depression. Prices fell some 22 per cent in the UK, 32 per cent in the US and more elsewhere. Farm prices declined by more than a third leading to social protests. Argentina threatened to default in 1890 and Baring Brothers of London collapsed. Sound familiar?
The US presidential election of 1896 was fought on the issue of the gold standard. The gold opponents were defeated marginally. One could argue that it was an injection of money that saved the gold system, for a while at least.
Substantial discoveries of new gold ensured that the gold supply (read money supply) actually doubled by the late 1890s. As prices rose, gold became politically less contentious and more countries actually joined: Japan and Russia in 1897, Argentina in 1899, Austria-Hungary in 1902, Mexico in 1905, Brazil in 1906, Thailand in 1908.
By 1908 China and Persia were the only countries of size not on the gold standard.
It was only at the start of the First World War in 1914 that the UK left the gold standard. It returned in 1925, only to leave again in 1931. In fact almost every country abandoned the gold standard during the Depression. The UK’s departure was actually a boon for the economy. In 1933, the US followed and even banned private ownership of gold.
The reason for this brief summary is simple. The similarities between the euro and the gold standard are striking. At the time it was viewed as virtually impossible that a country could leave the gold standard or indeed that the whole system could collapse. But it did.
This sounds eerily familiar to the current euro crisis. We have not yet had a referendum in Europe about whether a country should retain or reject the euro.
The Greek election may have been billed as this but it is not so simple, as support for the euro remains high among the wider population.
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