In Keynes’s marvellous [amazon_link id=”0230249574″ target=”_blank” ]Essays in Persuasion[/amazon_link] are a couple of open letters of advice to the French minister of finance (“whoever he is, or may be”). Of course the context of the times (1926 and 1928) was entirely different from today’s crisis, but it isn’t entirely fanciful to consider some similarities between the gold standard and the Euro. I will let Keynes speak for himself:

“When I read in my daily paper the projects of yourself and your predecessors to draft new budgets and to fund old debts, I get the impression that Paris discusses very little of what seems to me in London to be the technical analysis of your problem…. the proportion of his earned income which the French taxpayer will permit to be taken from him to pay the claims of the French rentier.”

Substitute ‘European’ for ‘French’, and the same question is at the heart of how the Euro debt crisis is to be resolved. The essence of Keynes’s advice in the 1920s was to inflate away the real value of the debt burden. He concludes, optimistically,

“France has abandoned principle and consistency alike, but she has always refused sacrifices which were avoidable and has obeyed in the end the teachings of experience.”

It’s worth noting, though, that the late 1920s were exactly the period when France accumulated large amounts of gold reserves, sterilising the impact on domestic demand. Douglas Irwin (pdf) has suggested that this policy was an important cause of the Great Depression.

Who can say what Keynes would advise President Sarkozy to do in today’s different circumstances. But I think it certain he would work out how best to ensure it is the rentiers, rather than the workers and taxpayers who end up suffering.

[amazon_image id=”0230249574″ link=”true” target=”_blank” size=”medium” ]Essays in Persuasion[/amazon_image]