The Surprise Witness

This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.

The New York Sun

One place President Obama, Speaker-To-Be John Boehner, Congressman Paul Ryan, or Sarah Palin could turn to for wisdom on the current dollar crisis is the editorials of the New York Times. Not the editorials of today, but those that were issued during the mid-1940s, when the nations about to become victorious in World War II were meeting at Bretton Woods, New Hampshire, to lay the groundwork for a post-war monetary system. The Times issued editorial after editorial critical of the Bretton Woods negotiations and their architect, John Maynard Keynes. It turns out that the editorials were the work of a single, prophetic editorial writer, Henry Hazlitt.

Hazlitt warned that what was being set up at Bretton Woods was an inflation trap. He turned out to be correct, and the system unraveled in 1971, when President Nixon closed the gold window. Bretton Woods unraveled over what, in retrospect, seems a modest drop in the value of a dollar — something like 10% — to a 38th of an ounce of gold from the 35th that obtained under Bretton Woods. This ushered monetary arrangements that, under the leadership of President Reagan and the Fed chairman at the time, Paul Volcker, proved serviceable for a while but are turning out to be inadequate in an era of lesser leaders.

No doubt Hazlitt, had he lived, would have said the failure was inevitable. His warnings in the New York Times stand as one of the great scoops in all of newspapering. The oeuvre is anthologized in a book that Hazlitt himself put together called “From Bretton Woods To World Inflation.” Issued in 1984, it contains more than 20 of his editorials from the Times, most of them from the 1940s, but starting with one from the 1934, called “The Return to Gold,” which contains a warning that could not be more relevant to today’s debate when the G20 is feuding over the prospect of competitive devaluations:

“There is no more a ‘natural value’ for an irredeemable currency than there is for a promissory note of a person of uncertain intentions to pay for an undisclosed sum at an unspecified date. Finally, it has been learned that competitive depreciation, unlike competitive armaments, is a game that no Government is too poor or too weak to play, and that it can lead to nothing but general demoralization.” Later, he warned, via an editorial in the Times: “The Greatest single contribution the United States could make to world currency stability after the war is to announce its determination to stabilize its own currency.”

Another memorable one of Hazlitt’s editorials of the Times, from February 1945, is called “Supply Creates Demand.” It warned against the fallacy that we could be “saved from disaster after the war only by a continuation of huge Government spending and deficit financing.” The fallacy was based on the notion that “purchasing power” must be kept above “production.” Hazlitt warned that would lead to the “crude inflationary theory that we can keep gong after the war only by the process of constantly increasing money payments regardless of production.” Does this sound familiar?

The Hazlitt compendium also includes a celebrated editorial called “Gold vs. Nationalism,” which was issued in the Times on March 17, 1945. It sketched one of the famous paradoxes, which is that agreements like Bretton Woods, which seem, on the face of it, to be archetypes of multi-nationalism are in fact the opposite. The real trans-national idea of a single standard to which all countries could, or could not, repair is gold. The opposite, the recipe for strife, was a “system under which each nation individually would be free to allow whatever unsound policies it wished, while the nations collectively would have to bail it out of the difficulties into which it fell as a consequence.” Greece couldn’t have put it better.

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Years later, Hazlitt himself was asked, in an interview by the Austrian Economics Newsletter, why he thought the editorials didn’t have more effect. Quoth he:

“As you will remember the guiding spirit at that conference was John Maynard Keynes. The delegates were making inflationary decisions every day. I was tirelessly pointing out that these decisions were inflationary. Nobody else seemed to be pointing this out and nobody paid any attention to what I was saying. In fact, I think an awful lot of people were astonished that the New York Times was taking this strange eccentric position. When the 43 nations represented all signed the agreement adopting the Bretton Woods program, Arthur Sulzberger, then publisher of the Times, called me into his office and said, ‘Look, Henry, I’ve been letting you write these things, although I had misgivings about them, but now that 43 nations have agreed to accept the agreement, I don’t see how the Times can continue to oppose it.’ I replied, ‘Mr. Sulzberger, if you feel that way, I can’t continue to write any more editorials in the New York Times on the agreement; I believe it is too harmful.’”

The Times has stuck with the Keynesian errors all the way up through Professor Krugman, and it has been by no means alone in its willingness to swing behind Bretton Woods. But it has left, in the oeuvre of Hazlitt’s editorials, a record that will repay a visit by the politicians of today, when the dollar — which under Bretton Woods was worth a 35th of an ounce of gold — is worth less than a 1,400th of an ounce of gold and when the 20 leading countries of the world are in disarray and when a new generation of politicians is rising in a new Congress that will be looking for a way forward.

The New York Sun

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