Strangled By War, Colonisation And Gold

India, Monday, April 20, 2020. It is Day 06 of the second tranche of our lockdown. India has opened up parts of its economy from this morning. A small buzz is back even while we are in the second tranche of the national lockdown. The second tranche will expire on May 3, 2020. A bigger buzz could be back from May 4, 2020.

India chose the lockdown as a defence. It is a defence against the spreading of the coronavirus, SARS-CoV-2. SARS-CoV-2 causes COVID-19, a deadly respiratory disease.

The 2020 lockdown

The lockdown – let me reemphasise – has been a necessity to stop the spreading of SARS-CoV-2. The spreading of SARS-CoV-2 would have wiped out a part of the population. Hence, the lockdown since March 25, 2020 is a prudent choice to preserve and protect the population as a whole.

The lockdown is an organic and an economic necessity. A lockdown is cheaper than the sum of three costs. The first is the uncertain cost of massive quarantining in hospitals. The second is the uncertain cost of massive curing in hospitals. The third is the inestimable cost of human lives. The lockdown is wholly prudent and inexpensive from the perspective of both prospect theory and options theory. We have been intelligent and humane in 2020; 2020 is different from 1918.

The 1918 influenza pandemic

One hundred years ago, the 1918 influenza pandemic had claimed at least 17 million lives. Sober estimates have it at 50 million. Outliers include an estimate of as much as 100 million deaths. The deaths occurred between January 1918 and December 1920. By contrast, World War One (WW1) – 1914 to 1918 – claimed merely 16 million lives.

The armies and navies that fought in WW1 spread the 1918 influenza pandemic across the world. The soldiers and sailors travelled over land and sea. They took it from one port to another. The influenza pandemic infected 500 million people – about a third of the world's population at the time. The virus was a bigger killer than WW1. Any virus is a more serious threat than any war. Any virus will always be a more serious threat than any war.

April 19, 2020

https://www.dhirubhai.net/pulse/war-virus-gopalan-ramachandran/

The colonies

The world was in a state of uncomfortable hegemonic structural rigidities before WW1 broke out. Then the 1918 influenza pandemic broke out. A very large part of the global population lived in the colonies of the European powers. There were European colonial masters. There were Asian and African natives. Large swathes of population lived in the French and British colonies. Britain and France controlled the largest two colonial empires. They were on the same side of the warring alliance during WW1.

Colonial rivalry had a hand in triggering WW1. It was one of the principal causes of WW1. Colonial rivalry had led to strained relations among the European powers. Alliances, ententes and the restructuring of alliances occurred frequently. For example, Italy chose to ally with Germany and Austria when Italy lost Tunis to France in 1881. Italy would continue this alliance with Germany in World War Two.

The rivalry was deadly and global. Colonial rivalry sowed bitter divisions in Asia and Africa. For example, natives supported by the French were at war with the British in India. Natives supported by the Germans were at war with the British in Afghanistan.

Peace was impossible. When there is no peace, there can be no good health and hygiene. When there is no peace, there can be no defences against viruses. The doors and roads in the colonies were wide open for the influenza pandemic to sweep through.

But no lockdown

The European powers needed the support of the colonies badly. The European powers needed the colonies to be up and active. First, they needed the output from the economic activities of the natives. They needed agricultural produce, raw materials such as timber, semi-processed goods, and cotton fibre, yarn and fabric. They needed minerals, semi-processed metals and metal components for their war machines.

Second, the European powers needed the men from the colonies to fight in WW1. Massive mobilisation followed. Mobilisation on a continental scale was necessary to fight the war that stretched from the Black Sea to Belgium. Mobilisation required continual groundwork in the colonies.

Mobilisation produced the desired results. Millions of natives of the colonies joined the battles in Europe, the Mediterranean and the Middle East. They fought side by side with their colonial masters! They got paid. They got killed. They got the virus too.

Neither the economic activities nor the social activities could be shut down in order to stop the spread of the influenza. The influenza pandemic could not be contained for two reasons. First, its outbreak in 1918 coincided with the most critical phase of WW1 – the endgame. The USA had entered the war last and it had to beat Germany into submission. France and Britain had to fight on to defeat the Ottoman Empire. Thus, none of the three could afford to be held back by the colossal deaths inflicted by the influenza.

Second, their societies and their economies had to be rebuilt after the armistice in November 1918. More rebuilding and reconstruction followed the signing of the Treaty of Versailles in June 1919. No country could afford to be deterred by the colossal deaths inflicted by the influenza. Thus, the influenza pandemic lasted all the way into December 1920. The outbreak had begun in January 1918.

Fiscal impairment

In the absence of peace, the doors and roads to habitats remained open to disease. In the absence of peace, the fiscal ability to defend habitats from viruses and pandemics was impaired. Allocation of tax receipts to the war effort – materials and mobilisation – took precedence over allocation to hygiene, health and disease control.

WW1 began to take a toll on the innards of people’s habitats. Villages, towns, cities and entire districts felt the fiscal pinch. The noose was tightening around fiscal allocation. The fiscal pinch and the tightening of the noose had begun to impair Britain and France. The fiscal pinch and the tightening of the noose had a more severe impact on their colonies.

The fiscal pinch and the tightening of the noose were extremely severe in Russia. The February Revolution of 1917 was a direct result of the perceived inability of the Tsar to share the pain of the common citizens. Tsarist Russia had rushed to help Serbia in 1914. Within three years, the Tsar was a helpless captive.

Sucking out fiscal allocation to hygiene, health and disease control was not the sole impact of the heavy allocation to the war effort. Fiscal allocation to public infrastructure, consumption goods and wage goods had begun to decline.

Declining fiscal allocation to wage goods, consumption goods and public infrastructure – please take note of the change in order – is the most lethal route to taking the life out of a society and its economy. The colonies, their masters and the empires were on the threshold of the Great Depression. The seeds had been sown!

Then the golden noose

We will have to wait until tomorrow to get a better understanding of the gold standard and the world’s monetary system. However, we will see how the gold standard exacerbated the woes of the world.

The gold standard added to the miseries of the colonies such as India. The gold standard added to the miseries imposed on people by the raging influenza pandemic. The gold standard added to the miseries imposed by the war and the fiscal impairment.

Russia, France and Britain went to war against Germany and Austria-Hungary in 1914. The United States of America (USA) entered the war in 1917, three years later. The impact of fiscal impairment had begun to show in Britain and France – in that order – as early as in 1915. Russia too was struggling. Germany was a master at running a compact and deadly war machine.

America’s banks had come to the rescue of Britain and France. They had been lending to Britain and France since the war began. But Britain’s and France’s credit quality had begun to dip. Moreover, by September 1916 it had become clear in the USA that it was merely a matter of time before America would plunge into WW1. The USA needed to build its war machine.

The USA needed to conserve its financial firepower. Britain and France could not borrow more. There were very few willing-and-able lenders left. None of the three could print money – a public ‘I owe you’ or IOU – to fund the war. They could not print paper currencies without holding the requisite gold that was proportionate in value.

The world was under the gold standard. There was no International Monetary Fund (IMF) that had set up such a monetary system. There was no World Bank. We are in, say, early 1917.

The gold standard was a lose arrangement and agreement. It was not institutional. The gold standard was a voluntary association of countries that (1) had colonies, (2) were involved in global trade, (3) allowed the mobility of human capital and businesses, and (4) allowed migration and legal residence in host nations. Gold enabled countries, businesses and people to talk with one another.

Consider this. The Mysore Maharaja’s gold could say hello to King George V’s gold. Gold knows gold. But could the Indian rupee, anna and paisa say hello to the British pound, shilling and pence? What would their relative values be?    

The gold standard was immensely useful. It was an immense constraint too. It was a deadly constraint. The gold standard was a golden noose. It could strangle. It did. The gold standard had become the global noose.

In order to protect the value of the pound and the franc, Britain and France had to – had to as in a self-imposed code of conduct – restrict the printing and issuance of the pound and the franc respectively. But they needed money to fund the war. They needed money to keep the civilian economy running. They could not borrow. They could not print.

They were not alone. The empires, the colonies and the independent countries that had voluntarily accepted to comply with the gold standard could not issue more currencies. They could not print money because they did not have the required gold reserves. Under the gold standard, a country could print and issue currencies only to the value of the gold held in its gold reserves.

Deadly cocktail

So what do we have? We have a deadly cocktail. We began with WW1. The mobilisation in the colonies came soon thereafter. The tightening of the fiscal noose came next.

Then the fiscal impairment began to affect public infrastructure, consumption goods and wage goods. Then there was the outbreak of the influenza pandemic. We could not impose a lockdown because the war needed massive economic activity and support. We had to live with the disease. We had to die with the disease.

To keep the massive economic activity up and running, we needed money. We could not borrow because everyone wanted to borrow. There were no savers. We could not print money to keep things moving because we had the gold standard. The gold standard was the golden noose. The colonies were the worst affected. But the world had gotten to the precipice. What followed thereafter was the Great Depression.