An Historical Background of Poverty
An efficient monetary system needs to deal with two central problems. The first is the problem of adjustment, or the elimination of undesirable trade imbalances. The second is the problem of liquidity, i.e. of providing adequate international working capital and reserves, the nature of the problem depending on exchange rate policies. In the period before 1914, the main adjustment problem occurred between the United Kingdom and the rest of the world, which the market effectively solved through the export of capital. Ex post there was no major recycling problem because of the dominance of the United Kingdom.
Neither was there a problem of international liquidity. Up to 1914 the world by and large operated on what was known as the Gold Standard. That is to say the value of currencies was fixed in terms of gold and currencies were freely exchangeable into gold. The world before 1914 experienced relative monetary stability. Many supposed, and some still do, that this was attributable to the existence of the Gold Standard which imposed monetary discipline on individual countries. Although there is something in the idea that stable exchange rates are associated with international monetary stability, the monetary system before the First World War reflected not only dependence on gold as a reserve asset, but also dependence on sterling. Sterling itself constituted an essential part of international liquidity. It was the growth of sterling rather than the increase in the stocks of gold available that kept the wheels of international trade turning smoothly.
There was no very clear idea that the economy, in a macroeconomic sense, might not function very well. The economics of the time supposed that markets functioned efficiently, and public debates on problems as we see them today were noticeably absent. True, there had been extensive debates about protectionism, but hardly in the context in which such debates are carried out today. Economics was seen to be concerned with economic efficiency in the allocation of resources on the one hand and with equity on the other. There was no place for extensive discussions about the economy as a whole, of the kind that had characterized Marx and some of the earlier so-called classical economists. It was recognized that government intervention on efficiency grounds would be justified where social costs and benefits of economic activities diverge from private ones. On the other hand the growing concern with the consequences of laissez-faire for the distribution of income and wealth was a more potent force leading to concern with poverty and minimum living standards. These stimulated the budgets introduced by Lloyd George, often seen as the beginnings of the welfare state.
But economists, politicians and the public at large were far from the concepts of modern economic policy-making which dominate, indeed excessively dominate, public debate today.