Newsletter October 2002
The precious metal
Did metallic basis as international value standard
solve any of the problems it is throught of to do tomorrow? - Part 1
“Because two or more phenomenons occurs simultanously in time there does not necessarily have to light a coherence from them.”
“Let’s learn from Grandfather’s and Greatgrandfather’s experience, the winners take it all.”
“Beliefs still and perhaps always will belong to a rather unpredictable future, even though it certainly is commonly to mix up knowledge with belief. Facts always count in the long run.”
„Wir liegen alle in der Gosse, aber einige von uns blicken nach den Sternen.“
„Es is besser, ein kleines Licht anzuzünden, als auf de Dunkelheit zu fluchen.“
This historical writing intents to show how gold and silver standard work. In its starting point it concentrate substantially on England and the European mainland in the 19th century. I do not need two continents to show the missing impacts of and the intentions behind the standards. My intention was certainly not to give you a short perhaps disappointing historical account for the metal standards in USA in the 18th and 19th century, but to give you an evercounting picture of what those standards were not and still are not in the light of history in which they were introduced by law and agreements.
Up to the break down of Gold-Exchange-Standard-basis the states of the world had all indebted their nations. This implicated the citizens of the respective nations however had to pay for the decisions obvious made by the leaders of the states. The leaders of the states could certainly not pay themselves, and perhaps they should not pay for what they had done or just sanctioned with the gold and other assets in or perhaps already outside their power.
When the world in every generation reach this certain point caused by facts closely connected to perhaps the human nature and life and definitely close connected to the turn of the world from a barter-economy to a bargain-economy involving monetary units, it often comes to wars of trade or real wars. You could blame the morals of citizens, perhaps the nations, perhaps the states and perhaps the political rulers or the designers of the existing monetary system. I just mentioned several of a lot of opportunities. And it would not help you to change culture and language neither by using very strong weapons and bloodshed nor very much time to do so peacefully. The result of conflicts and wars is often seen to be centralization of power. Experience gives us a good reminder, even though many things change over time. The interior of the human mindset has not, I believe, developed much for the last 2500 years. ‘Dismantle’ is perhaps a more describing verb to use without the denial. And the result of so-called peaceful and gradually centralization of the power often is the same conflicts and wars. You would perhaps even say they were meant to be?
Monetary units may serve the purpose to make it easier to transact and save and move your values orderly. But monetary units may also be suited to run the risk that a counterfeiter or a lawful money-issuer are running the businesses that he certainly are not in charge of. And if this is actually brought to happen the first service of the monetary units can be neglected.
Money is not just notes, coins and deposits. Anonymous shares, share certificates, bonds, credits and derivatives and a lot of other papers are also more or less money as long as they can be exchanged without problems for resources, products you need, land, real estate and cash in a useful form.
When I hear that the telephone-supplier Nokia made an annual result, 50% larger than last year, and the price on Nokia’s shares - the expected value of every dollar invested in Nokia - fell with 50% in the same period, something must have gone definitely wrong either with expectations – that is what decides shareprices - or with the emission of new shares along with the own capital flowing into the company. We turn til this part of the problem - the private limited company - in part 2.
When I hear that Bolivia finance the public/the ruler’s activity, not by taxation, but entirely by issuing money, I have to say, it is actually possible to do so, but it is a great risk to run for the population without a well-educated mass of democracy-acting voters or an unthinkable (therefore theoretical) group of well-meaning power-brokers in the top. The last mentioned is a typical theoretical and contradictory phenomenon. I believe it has a built-in contradiction (having in mind what power is), and of this reason it will be suited to constitute the basis of most power-created and therefore approved science. But when I also hear that this way of financing (in Bolivia) lead to a huge state-debt – that we are not supposed to mention before they tell us on TV, and certainly they did - so severe that IMF does not even answer the telephone calls from the so-called responsible in Bolivia, something has gone definitely wrong with the money-issuing in Bolivia, and the power-brokers there are perhaps not much different from power-brokers else-where on this planet. We can say they have not taken good care by putting monetary units in the role as money.
The state, its leaders and your bank should also take the responsibility, when you buy and sell in foreign countries by using your money to exchange for foreign currency at home. You have to have confidence in your domestic monetary units or figures on your account, confidence in the exchange-rate and the cost of exchange. To secure that the foreign receiver of monetary units gets what he deserve in a transaction, he has to rely on the same in his country. If he cannot rely on the exchange-rates, the foreign receiver of monetary units just has to suffer a lost (when/if he buys) or go to his state, its leaders or his bank to complain, and expect them to make that correct what was uncorrect. Perhaps the foreign receiver would prefer shares in your business in your country for money, if he expect these shares to give secure returns easy at his disposal. To take good care of this practical threats involved in foreign trade and capital transfers in a more smooth way, an international system of money and debt is needed.
Let it be easy, uncomplicated (like this), especially without unexplained terminology and without as much personal threatening defectiveness as just even possible.
Traditionally we have to agree upon the purpose of an international system of money and credit to make foreign trade work among nations in the starting point. But as history apparently is asked for to be repeated, let’s look a little on history first. A description of a system suited to serve the ruling of all the economies of the world and primary serve the interests of the power-brokers is not needed, I believe. Such a system is close to the disorder we already have, close to Chaos.
units of account:
To get a picture of what gold standard could do and could not do to serve its purpose today, we have to understand what gold standard actually was, the world in which it was introduced and set to work, and the effects of the gold standard (in its three versions) on the international economy, especially (if possible) in terms of its impacts on the phenomenons that it was meant to or was/is believed to have had/have impacts on then and tomorrow.
1820 the Gold Standard was decided de jure in Great Britain - just after the Napoleonic Wars and the Congress Vienna: A ruined Europe except for Russia, bankrupted states and peoples that it was impossible to plunder more by taxation. Peoples were, seen from view of today, represented by the princes and their agents at the Congress of Vienna in their glory extremely disproportional to the poverty of the peoples. Bankruptcies everywhere. In Denmark (state-bankructcy) a devaluation of 90% in 1813. You wake up in the morning, and the single dollar you may have got has become a 10 cent instead.
David Hume and the Mercantilists:
Already the Scottish philosopher David Hume (1711-1776) enriched us with contributions (“Of Money” 1752 and “Of Balance of Trade”) against the thoughts and the thereof founded policies of Mercantilism (expression invented by the later Adam Smith). The Mercantilists focused for a country on getting hold on as much gold, silver and soldiers as possible. A primitive and superficial way of thinking inspired by the gold and silver discoveries made especially by Spanish explorers (in 1500s) and the their greediness to acquire these rarities and exchange them for needed commodities. It actually covers an imagination found among people, who have not systematically thought out economic questions, that mistake money for wealth (and I can supplement and anticipate by including to mistake money for gold). Foreign trading was regarded of a one-sided interest so to say. Just the one of the trading-partners would benefit from trade - the comparative advantages that can be explain to a child – had not reached the mind of 1700-mercandiser. Rather: “Don’t export your good natural or produced domestic commodities, but try to get all you can from foreign countries”. If you succeed well with this tactic, you shall become the richest. The winners were shortly those who could collect the largest amount of valuable metal or valuable minerals and earn most by protecting their own goods and reach out for foreign countries’ goods and even build a strong army to get what was needed, wanted or just desired.
Just a tiny few of David Hume’s arguments:
“Money is not, properly speaking, one of the subjects of commerce, but only the instrument which men have to have agreed upon to facilitate the exchange of one commodity for another.” (mine: Notice this starting point!)
“It is only the public which draws any advantage from the greater plenty of money; and that only in its wars and negociations with foreign states.”
(mine: Correct, but I have to add: Speculators also benefits from the greater plenty of money)
“And as to foreign trade, it appears, that a great plenty of money is rather disadvantageous, by raising the price of every kind of labour. To account, then, for this phenomenon, we must consider, that though the high price of commodities be a necessary consequence of the increase of gold and silver, yet it follows not immediately upon that increase, but some time is required before the money circulates through the whole state, and make its effect be felt on all ranks of people. “
“In my opinion, it is only in this interval or intermediate situation, between the acquisition of money and rise of prices, that the increasing quantity of gold and silver is favourable to industry. When the quantity of money is imported into a nation, it is not at first dispersed into the hands, but is confined to the coffers of a few persons, who immediately seek to employ it to advantage.”
“It is not very usual, in nations ignorant of the nature of commerce, to prohibit the exportation of commodities, and to preserve among themselves whatever they think valuable and useful. They do not consider, that, in this prohibition, they act directly contrary to their intension; and that the more is exported of any commodity, the more will be raised at home, of which they themselves will always have the first offer.”
“Suppose four-fifths of all money in Great Britain to be annihilated in one night, and the nation reduced to the same condition, with regard to specie, as in the reigns of the Harrys and the Edwards, what would be the consequence? Must not the price of all labour and commodities sink in proportion, and everything be sold as cheap as they were in those ages?”
“Again, suppose, that all the money of Great Britain were multiplied fivefold in a night, must not the contrary effect follow? Must not all labour and commodities rise to such an exorbitant height, that no neighbouring nations could afford to buy from us, while their commodities, on the other hand, became comparatively, so cheap, that, in spite of all the laws which could be formed, they would be run in upon us, and our money flow out; till we fall to a level with foreigners, and lose that great superiority of riches, which had laid us under such disadvantages?”
“The fluid, not communicating with neighbouring element, may, by such an artifice (a public treasury of money out of circulation), be raised to what height we please. To prove this, we need only return to our first supposition, of annihilating the half or any part of our cash; where we found, that the immediate consequence of such an event would be the attraction of an equal sum from all the neighbouring kingdoms.”
Money is not one of subjects of commerce, Hume maintained in his starting point. But I am afraid money was already then and is such a subject of commerce in the real world. “It is only the public which draws any advantage from the greater plenty of money.” And of speculators. Hume underlined that money is made of gold and silver. He also maintained that money (gold and silver then) in circulation was what matters.
By the late 18th century Britain was the only country that had moved to a de facto classical gold standard, after a long period during which silver had continuously disappeared from the domestic circulation. The predominance of gold had begun as early as 1717, when the gold guinea was given a value of 21 shilling. Silver’s importance as monetary units was reduced still further in 1774, when the legal tender status of silver coins was restricted to payments up to £25. However silver was so undervalued in terms of gold thereafter that it soon came to perform the function of a subsidiary coinage, the silver coins remaining in circulation having become so worn that it was unprofitable to withdraw them from circulation and melt down for export. In 1797 the Bank of England freed from its obligation to convert its notes into gold caused by the Napoleonic Wars. The supremacy of gold as unit of account in Britain was assured from that year. You could say that the basic-value-measurement-tool was circulated, so the real expression was gold-coin-basic or classic gold standard and not just a gold-exchange-standard that we shall define separately later on. Hume was also very aware of the distinction between the tool suited for commerce and the real commodities that were the actual subjects of demand – but entirely theoretically.
The question certainly is if the England ever returned to the (classical) gold standard after the war-inflation and the peace-deflation subsidiary state-loans to secure “some kind of balance.”
The movement towards the adoption of a so-called gold exchange standard in Britain was halted then during the war years, when, as a wartime measure, cash payments were suspended (as mentioned in the last paragraph). Immediately after the end of the war, however, the de facto gold standard of the late 18th century was (officially) made de jure by the passing of a number of Acts of Parliament, the final in 1820. The first was the Coinage Act that of 1816 allowed for the minting of a Gold Sovereign, a 20 shilling gold piece, the first of which was issued in the following year. The gold content of the sovereign was fixed in accordance with the mint price of gold.
The industrial revolution started in England at about 1750. The need for capital was very limited at the beginning, and so was the need for money generally in the 18th century. At least 80% of the population was smallholders, and the barter-economy was dominating. Primary the landowners financed the earliest stages of commodity-formation on the countryside, wool and later cotton. The import of cotton was multiplied by 10 from 1770 to 1800 with 56 mill. lbs and in 1830 this amount has been multiplied with 5-6. Amounts of production are not available, but the export value (of manufactured cotton) exists: 1764: £200.000, 1780: £1 mill, 1815: £22 mill, 1830: £41 mill.
The bank houses of the Absolute Monarchy (which ruled in most states) were businesses owned by one man or by partners. This should not continue in this way, when paper money was introduced, and a little later on the so-called democracy was introduced. Banks did not existed in the 18th century, but houses of bankers, inherited for generations. Bonds and share certificates of some privileged companies and markets of these originate from 17th century. In the mid-eighteenth century, at the start of the Industrial Revolution there are barely a dozen banking houses in England and Wales outside the London area.
Exchange technique and speculation in the paper of the privileged companies was central from the beginning, for example the English John Law’s Southsea-Bubble and the French Missisippi-Swindle of large dimension, and of minor dimension in the English, the Dutch and the Danish company-share certificates. This speculation not seldom concerned the state that was a major shareholder (caused by the priviledges), and the state therefore also had to bear the losses in the end (and let the citizens pay - just like to day). When speculation could occur the reason primery was the strongly varying credit supplied by the states. Rumours of war or of the death of the prince could make the bonds fall considerably. The anonymous share has not been introduced in the Mercantile world. So no exchanges had been invented either.
Repeat the fourth paragraph of this reading:
Monetary units may serve the purpose to make it easier to transact, save and move your values orderly. But monetary units may also be suited to run the risk that a counterfeiter or a lawful money-issuer are running businesses that they certainly are not in charge of.
You will find the mentioned full readings by David Hume on: http://socserv2.socsci.memaster.ca/~econ/ugem/3113/hume/money.txt
Two approved and great thinkers of economics in the 1700s and 1800s:
The private limited company was not really widespread either until the 1800s. Everything was at the beginning, and for example to build a big form formation of installations with equipment you needed the fabrication of steel. For the railroads you needed both the train driven by steam and not at least the invention of the hard steel-production-process that originate the puddling-process in the late 1700s and finally the Bessemer-process in the 1850s (after Henry Bessemer) that became widespread 1850-60. The last mentioned were simply basis of the hard-steel-productionproces and therefore needed for very large cargos of grain to be transported with profit from the American Midd-West and compete with European grain. The large cargos simply needed tremendous solid rails. The huge importance of these single inventions simply cannot be exaggerated. Because of the enormous capital need corresponding the big investment railroads actually needed the anonymous share and the limited company.
“But don’t let us anticipate and derail events even though it could be tempting”.
Adam Smith, David Ricardo and the precious metal:
The founder of economic liberal way of thinking and philosopher Adam Smith (1723-1790) was a popular lecturer in Edingburgh on Rhetoric, Aesthetic and on History of Literature from 1748. In the winter 1750-1751 he touched the theme Social Economics, and became a professor of Logic in 1751, later on of Ethics in Glasgow.
1776 (the same year David Hume died, the year Adam Weishaupt established Illuminati , and the year of the American Declaration of Indepedence) Adam Smith’s great work “Inquiry into the nature and causes of Wealth of Nations” was published. It was the first systematic reading ever on the subject Economics.
David Ricardo (1772-1823) was a brilliant British businessman and economist. He was the first economist since Smith to have profound effect on the way government actually behaved of those child prodigies in which the age specialized. His father was an exchange-broker from Amsterdam who came to London and was chosen for one of the dozen brokerships reserved for Jewes in the City. David was making exchange-businesses at age 14. He speculated cunningly in East India Company stock and, like Nathan Rothschild, contracted successfully for many of the governmental loans between 1811-1815. By this and by reinvestment with immence success in country properties he acquired a considerable fortune, and this he made him able to concentrate on writing later in life. Among his books were “The High Price of Bullion” (1810) in which he explained the reasons for the decrease of value of the British bank-notes, “Reply to Mr. Bosanquet and Proposals for an Economical and Secure Currency” (1816) and “Principles of Political Economy and Taxation” (1817). He became a member of the House of Commons (1819).
“He fretted that an unbacked paper currency was certain to lead to inflation, you read in the mainstream-readings”, but I don’t find the word “inflation” or any synonymos in any his readings (mentioned and quoted above and below and published respectively 1810 and 1817).
He introduces paper money, did hide that money was meant to be a commodity, and his solution apart from this: “The bank should turn its gold stocks into standard ingots, which could be used by merchants who needed bullions to make gold payments abroad.” He got through with proposal in the House of Commons, and the first gold ingots were issued with the name “Ricardos” on 1 February 1820.
Adam Smith’s going through on monetary issues (1776) and David Ricardo’s (the founder of Gold Exchange Standard) (1816), a student of Adam Smith as well give rise to the conclusions below the following quotations:
You have to imagine that the spirit of the time was optimistic and everything at most prosperous and without much worrying, especially after the Napoleonic Wars 1800-1815 (if you was not poor), and new real capital had to be build up almost quicker than any circulation in order to serve the industrial promoters.
Facts from history:
Loans of the state 1790-1816 were not just contracted in the form of government-bonds, but also as exchange-loan and advances (in the Bank of England) that got its means by issuing money-notes. In 1792 it had reached 11 mill. with covering-fund of £5½ mill. Without an increase in the tax-income its expenditures doubled every year in the period 1792 to 1794, in 1797 the expenditures were more than tripled, and in 1813 and 1814 it were sixfold compared with 1790, and the tax-income had not even in-creased fourfold in the same period. The budget-deficit in the period 1790-1816 was totally £ 440 mill. The Parliament allowed from 1793 the government to contract interest-free loans from the Bank, which had managed the year of crisis 1792, when 300 banks went bankruptcy, but now obvious was weakened by the draw of the government, from £¼ mill. in 1789, they reached 10 mill. in 1793 and 12 mill. in 1797, what was closed to the total circulation of notes. England lent £11 mill. partly in gold to its allied in 1790s. It became more and more difficult for Bank of England to help businessmen and country-banks, so the government made the notes unredeemable in 1797.
Quotation from David Ricardo’s “The High Price of Bullion” (1810):
“The perfection of banking is to enable a country by means of a paper currency (always retaining its standard value) to carry on its circulation with the least possible quantity of coin or bullion. This is what this plan would effect. And with a silver coinage, on just principles, we should possess the most economical and the most invariable currency in the world. The variations in the price of bullion, whatever demand there might be for it on the continent, or whatever supply might be poured in from the mines in America, would be confined within the prices at which the Bank bought bullion, and the mint price at which they sold it. The amount of the circulation would be adjusted to the wants of commerce with the greatest precision; and if the Bank were for a moment so indiscreet as to overcharge the circulation, the check that the public would possess would speedily admonish them of their error. As for the country Banks, they must, as now, pay their notes when demanded in Bank of England notes. This would be a sufficient security against the possibility of their being able too much to augment the paper circulation. There would be no temptation to melt the coin, and consequently the labour which has been so uselessly besto-wed by one party in re-coining what another party found it their interest to melt into bullion, would be effectually saved. The currency could neither be clipped nor deteriorated, and would possess a value as invariable as gold itself, the great object which the Dutch had in view, and which they most successfully accomplished by a system very like that which is here recommended.” (quotation ends)
My central argument: Ideal claims, a paper note may be made as seldom as a gold coin, but it is unequally easier to reproduce the note of paper.
Facts from history:
In the United States the debate of protection was going on in 1790.
In the war time between France and England the accustomed channels of trade and production was blocked by the (European) Continential Blockade. The wartime shortage as a result gave an enormous stimulus to those branches of the American industry, such as cotton, wool, and iron manufactures, whose products had previously been imported.
In 1815 the circulation of notes amounted £27½ mill. with a covering fond of 2 mill. in gold and at the same time the country-banks in England had flooded the country with £30 mill. in notes (all accounted in the prices of the year). This relation between notes in circulation and the covering fond had developed more and more unequally since 1799. £13-13½ mill. in circulation with a covering fond of £7 in 1799, in 1802 an average circulation of £16 mill with covering fond of £4 mill., in 1809 in circulation of £19 mill. and a covering fond of £4 mill, 1810-1812 £23 mill. in circulation with a covering fond of £3-3½ mill. £1 should have the value of 123 ¼ grain of gold, in 1809 it was reduced to 107 and in 1813 87 ¼ grain. Lord Stanhopes act of 1811 tried to stop the price of the notes, not directly by a compulsory price, but doing it a criminal offence to contract agio for goldcoins, but the price of gold in ingots was still free, and became more expensive than goldcoins, what lead to melting down of the coin.
Had gold risen in price or had the Sterling fallen, was the question that the Bullion-Committee of 1810 should answer. The result was Edwin Cannan’s answer:
When a paper currency originally founded on and convertible into coins of gold has become inconvertible, it can only be kept up to its proven value by limitation of its quantity based on observation of the price of bullion and the foreign exchanges. The committee proposed the make the notes convertible again, but it did not succeeded, on the contrary the circulation was further increased to the amount £27½ mill. with a covering fond of 2 mill. in 1815 as mentioned in the beginning of second paragraph right above.
This phenomenon is called inflation, and it is caused alone by uncontrolled or controlled issuing of paper notes called money.
The impacts on living costs:
If you go to the accounts of cost of living as did T. B. Wood (in Econ. Journ. 1899) and N. J. Silberling (in Rev. of Econ. Statistics, Harv. Ec. Serv., 1913) you find by setting 1790 to 100 that the index increased to 170 in 1800 and 174 in 1801. The maximum was reached in 1813 with the index number 187. Thereafter the index decreased very strongly to 108 in 1830, a level as before the wars that with short pauses lasted for 23 years.
The British war-expenditures on the Napoleonic Wars 1800-1815 were £638 mill. So the small amounts mentioned as advances and governments-bonds were certainly far from the fully financial injection to the wartime 1800-1810. The results of the massive consumption of expenditures were not meant to be overdue.
But the end of the (Napoleonic) wars changed the relations (??) as we read in the mainstream history-books (…for a short time).
To the more or less coherent financial history of which this was meant to be a tiny contribution
The last but perhaps most funny theory-fragment is the so-called business-cycles:
Business cycle theory matters simply because many people believe business cycles exist. This has not been a more permanent belief for ages. In the 19th century business cycles were not thought of as cycles at all but rather as spells of "crises" interrupting the smooth development of the economy. In later years, economists and non-economists alike began believing in the regularity of such crises, analyzing how they were spaced apart and associated with changing economic structures. Even the universities took the cycles and made them so-called scientific after Lord J. M. Keynes’ gospel. Assumption-logic certainly does not have get close to truth if the assumptions are false. If you repeat it enough it will however become truth in the correctly prepared brains.
A few examples more:
The Industrial Revolution (1787-1842) is the most famous Kondratiev wave: the boom began in about 1787 and turned into a recession at the beginning of the Napoleonic age in 1801 and, in 1814, deepened into a depression. The depression lasted until about 1827 after which there was a recovery until 1842. As is obvious, this Kondratiev rode on the development of textile, iron and other steam powered industries. More on this in part 2.
Karl Marx (or Mordercai that was the name his parents gave him), who forgot the international division of work and production though it was incorporated in the textbooks of economics 100 years before he wrote his own book dictated by Albert Pike, did indeed contributed to “business cycles” as well: 7 years on (speculation) in shares, then 7 years in bonds etc. It is very obvious to assume that he most likely unconsciously was inspired by the numbers in the Bible.
Quotation of David Ricardo’s “On the Principles of Political Economy and Taxation” (1817):
“The quantity of money that can be employed in a country must depend on its value: if gold alone were employed for the circulation of commodities, a quantity would be required, one fifteenth only of what would be necessary, if silver were made use of for the same purpose.”
“A circulation can never be so abundant as to overflow; for by diminishing its value, in the same proportion you will increase its quantity, and by increasing its value, diminish its quantity.”
“While the State coins money, and charges no seignorage, money will be of the same value as any other piece of the same metal of equal weight and fineness; but if the State charges a seignorage for coinage, the coined piece of money will generally exceed the value of the uncoined piece of metal by the whole seignorage charged, because it will require a greater quantity of labour, or, which is the same thing, the value of the produce of a greater quantity of labour, to procure it.”
“While the State alone coins, there can be no limit to this charge of seignorage; for by limiting the quantity of coin, it can be raised to any conceivable value.”
“It is on this principle that paper money circulates: the whole charge for paper money may be considered as seignorage. Though it has no intrinsic value, yet, by limiting its quantity, its value in exchange is as great as an equal denomination of coin, or of bullion in that coin.”
In examining the coming monetary revolution which gave governments the power to manipulate their national currency systems, we must begin by mentio-ning one of the most serious shortcomings of the classical economists.
Both Adam Smith and David Ricardo primery looked upon the costs involved in the preservation of a metallic currency as a waste.
As they saw it, the substitution of paper money for metallic money would make it possible to employ capital and labor, required for the production of the quantity of gold and silver needed for monetary purposes, for the production of goods which could directly satisfy human wants.
After the establishment of Banks, the State has not the sole power of coining or issuing money. The currency may as effectually be increased by paper as by coins; so that if a State were to debase its money, and limit its quantity, it could not support its value, because the Banks would have an equal power of adding to the whole quantity of circulation.
Paul Johnson’s “Birth of Modern”, London 1991 page 862-863 a few quotations:
“The rapid expansion of the world economy in the early 1820s marked the upswing of the first modern trade cycle (mine: still not invented). It had innumerable consequences. One was to make the new species of expert, the economist – at least for a time – to be the guide and philosopher of mankind.”
“When Harriet Martineau was learning economics in 1820s and applying her lessons instantly to best-selling moral tales – The Rioter, The Turn-Out and so forth – there were not yet rival schools of economics, but a single stream of doctrine running from Adam Smith (attended by various heretics), through Thomas Malthus (with the iron-law of wages) and Ricardo”.
“Economics was not so much a subject to be studied as theory which its advocates believed was unarguable. The only problem, in their view, was how to teach it to the working classes, to stop them from burning hayricks and smashing machines when times were hard.”
[When it comes to John Maynard Keynes’ gospel of the 1930s it is precisely the same: http://www.lilliput-information.com/truth/tru1.html ]
“But much weightier tomes also circulated in large numbers. Publishers paid Thomas Malthus and James Ramsay McCulloch, author of A Discourse on Political Economy (1825), impressive sums, running into thousands of pounds, for their works. The universities were suddenly discovering economics. McCulloch got his first chair in science set up at the new University of London. Nassau Senior was appointed to the new one endowed at Oxford. Articles on economics accupied an enormous amount of space in the reviews. Judges, too, were discovering its iron laws and gave tendentious lectures about them from the bench, to scowling machine breakers and arsonists.” (end of quotations)
At the same time G. W. F. Hegel practiced his lectures on the Dialectical Process (“the final philosophy”) in Berlin reached the highest peak of his carrier, and later on Wilhelm Wundt began practicing his lasting wonders on the human mindsets with his experimental psycology in Leipzig :
In dealing with problems of the gold exchange standard all important economists failed to realize the fact that it put into the hands of governments or a few private banks related firmly to the authorities the power to manipulate their nations' currency easily. Some economists blithely assumed that no government of a civilized nation would use the gold exchange standard intentionally as an instrument of inflationary policy. But they did. Notice how the real problem simply is not even touched by mainstreamers. The main factor was the pro-inflationary ideology. The gold exchange standard was merely a convenient vehicle for the realization of the inflationary plans. Its absence did not hinder the adoption of inflationary measures. The United States was in 1933 by and large still under the classical gold standard. This fact did not stop the New Deal's inflationism. The United States at one stroke - by confiscating its citizens' gold holdings – abolished the classical gold standard and devalued the dollar against gold.
Money orders were easier to handle in foreign trade to transport and much more unexpensive than gold-transports. In the beginning of 1800s the circulation of coins was too small. So sometimes they had to pay the workers wages in foreign currency. Deflation was actually threatening Britain.
Under the classical gold standard (mentioned earlier as Gold Coin Basic) a part of the cash holdings of individuals consists of gold coins. Under the gold exchange (for gold) standard (and later in the 1920-erne furthermore: Flexible Gold Exchange Standard) the cash holdings of individuals consist entirely in money-substitutes. These money-substitutes (most paper) are redeemable at the legal par in gold or foreign exchange of countries under the gold standard or the gold exchange standard. But the arrangement of monetary and banking institutions aims at preventing the public from withdrawing gold from the Central Bank for domestic cash holdings.
The first objective of redemption is to secure the stability of foreign exchange rates that easily would be pressed hard by all the paper.
Legal Gold Exchange Standard :
For a country to be wholly committed to a full gold exchange standard five basic requirements had to be met.
First, the unit of account had to be tied to a certain weight of gold; second, gold coins had to circulate domestically and any bank notes in circulation had to be convertible into gold on demand; third, other coins in use had to be subordinate to gold; fourth, no legal restrictions were to be imposed on the melting down on gold coin into bullion; and finally, there had to be no impediment to export of gold coin and bullion. Bimetallism, on the other hand, involved the employment of both silver and gold coins as standard money or legal tender under conditions similar to those just outlined for gold. Compared with the gold exchange standard, however, a bimetallic standard had one major and deciding drawback; it worked smoothly only as long as the ratio between the values at which the two metals could be freely minted into coins approximated to their values in the international markets. If divergence of these values did occur, then the metal with the higher international market value would tend to be sent abroad and be replaced by the other, leaving the country with a monometallic rather than a bimetallic standard. Once the mint ratio and the world market ratio diverged, it paid those who could do so to engage in arbitrage at the various exchanges. Suppose, for example, that the Paris exchange is offering 15½ ounces of silver for one ounce of gold and that the American merchant holds 15,000 ounces of silver for his 1000 ounces of gold at an American mint. It will pay him, therefore, to convert his gold into silver in Paris and to convert all his Parisian silver into gold in America. The final result of this process is, of course, that all gold leaves the United States and silver becomes the circulating medium. Gold was ‘undervalued’ and, according to the workings of Gresham’s Law, that ‘bad money drives out gold, when the face value is the same, the gold coinage does not circulate.
So the legal gold exchange standard actually became the first step but certainly not the last step toward inflation in the so-called civilized world. This was also the outcome of defeat of Napoleon at Waterloo.
Trade within a country is made easy by the existence of a single currency common to all its regions, but international transactions require a monetary system capable of handling trade involving the use of a variety of national currencies. Of course, this multi-currency barrier to trade can be overcome by conducting the international exchange of commodities on a barter basis, and in ancient and medieval times this type of international transaction often occurred. But bartering obvious result in severe limitations on the growth of trade at any level, and so during quite early times foreign exchange markets, in which different currencies could be exchanged for one another, made their appearance thus placing foreign trade on a monetary basis.
Young industrialism made populations double and triple without much deficit in the late 18th century. The price of gold had been maintained throughout the 18th century at £3 17 shilling 10½ pence an ounce. Silver coins were legally subordinated to gold and were further restricted by being legal tender for payments of up to only £2. In 1819 the convertibility of bank notes was restored, when an Act of Parliament committed the Bank of England to resume cash payments in gold bullion, and after 1823, in gold coins. This Act also repealed the law prohibiting the melting down of coins into bullion, and the trade in bullion was declared free. With the resumption of cash payments in 1820, Britain was legally on a full gold standard.
The price on gold rose measured in units of products. That stimulated the search for gold further. That development led automatically to a rise in real inco-mes (nominal incomes corrected for price changes). Larger profit margins were created, larger than what could been eaten by the amount of money. (end of mainstream history)
The reason to the relatively long period of so-called stability in England in the 18th century is simply the productivity that increased quicker than the amount of money and credits – and it has certainly nothing to do with the gold exchange standard of the 19th century that actually never functioned outside theory. The Price-Specie-Flow theory by David Hume (as a response to Mercantilism did not actually work in practice (more below). The industrialism and London as a financial centre including all the inventions within both industrial formation, transport and in the financial structures are the plain but more real expla-nation. Lower marginal cost every month or every year lead automatically to lower price-level, when competition dominates the markets. Almost no private limited companies either to surplus-capitalised in the 1700s. With an unseen supply of credit originated from both the financial centre (London) and at the beginning of an organization of savings for ordinary people interest rate was very low. So everything went smoothly.
Gold as international standard unit of account :
The movement to gold standard was completed by the end of the 19th century. Especially after the German-French war 1871-72 and Germany with the French gold turned from silver thaler and silver to gold when the price of silver in terms of gold commenced to decline dramatically. As a result the demonetization of silver after the midd 1870s. Holland, crushed in between a gold-using Britain and a gold-using Germany, was the next to go. In 1874 it ceased coining silver and not long afterwards adopted gold as its unit of account. Norway, Sweden and Denmark (state-debt!) quickly followed suit and combined this with Scandinavian Monetary Union 1873, extended with Norway 1875. The Latin Monetary Union, under pressure from its inception, encountered extreme difficulties in the early 1870s and its members were compelled in January, 1874, to limit their coinage of five-franc pieces. In 1878 they suspended the minting of silver coins altogether, and from that time on-wards France and her colleagues (debitors) operated on the so-called ‘limping’ (or ‘lame’) gold standard. In the United States bimetallism was not legally abandoned until 1900, but the country was effect-tively operating on the gold standard once convertibility of paper notes was restored (after the Civil War) in 1879. Austria moved to gold in 1892, and Russia and Japan in 1897, the year in which India adopted a gold exchange standard by pegging the rupee to sterling. A year later the Phillippine peso likewise became tied to the American dollar. After 1900, other countries, including Siam and Ceylon in Asia, and Agentina, Mexico, Peru and Uruguay eventually adopted the gold standard, while others, by the out-break of WWI, proceeding in that direction. By 1914 China was alone among major countries in still clinging to a silver standard.
This brief description of the pre-1914 gold standard brings out one of its most striking features, namely, its relatively short duration as an international monetary system – the shortest we have had. Whereas it is not possible to date precisely its beginnings – it did not exist in 1879, but it did in 1900 – WWI every other greater war certainly marks its end. We have to mention a short restoration period that failed in the midd 1920s. Some would say that citizens had been better off by a quick tax-based financing of the paper money of WWI. The total duration: Less than 30 years, I would say.
The later the worser, I was tempted to remark, the Bretton Woods Agreement (of 1944) lasted for about 25 years. Here is perhaps another kind time-phenomenon that you certainly cannot call business-cycles either.
The role of the London Capital Market and sterling as international currency:
Was the Gold Standard the purpose on the way to something better internationally or was it the mean by which London absorbed every financial link in the world trade building on centuries of experience? In period 1880 or 1897 to 1913 Europe’s proportion of world-export decreased from 64.2% to 58.9% and its proportion of the world-import decreased from 69.6% to 65.1 %.
The development in the London capital market were of paramount importance for the efficient functioning of the international gold standard. Britain’s increa-sing importance in world trade is difficult to read throughout from statistics, because in reality United Kingdom and Ireland reduces its export-share of the manufactures from 88.1% in 1880 to 69.7% in 1913 and in the same time-period increased its export-share of primary products from 11.9% in 1880 to 30.3% in 1913. But the statistics tells little of the British investments abroad that also contributed to the British dominance in multi-changing markets with USA and Japan coming in as dominating agriculture and industrial respectively industrial nations in 19th century.
As we have more than hinted another factor of tremendous importance was London as the financial centre of the world for more than 100 years, and 80-97% of that time London sucked in the nations of the world to do trade, insure, lend and borrow through Britain alone on the gold standard.
Organized markets were established in London for many types of commodities, a move which was greatly enhanced in the early years by the continued growth of the British re-export trade and later the by the adoption of free trade. These markets in turn acted as a stimulus to the British shipping and created a growing need for insurance facilities to cover the transport risks. As a result of these developments, London grew in importance as a centre of international commerce and finance, and various institutions, such as discount houses, merchants banks, insurance companies, and other specialist financial organizations, which were later to provide the essential services for a rapidly expanding international economy, began to increase in numbers. From the beginning of the 19th century, therefore, London forged ahead of Amsterdam, Hamburg and Paris as the leading financial centre of Europe and thus of the world.
While these developments were taking place, a growing proportion of the world trade was being financed by short-term credit in form of foreign bills of exchange. Under these arrangements, by accepting a bill an importer guaranteed payment within (say) 3 month of acceptance. The foreign exporter, on the other hand, if he required ready cash before the bill matured, could discount it with a bank (or other financial institution willing to do so) for something less than the face value of the bill, thus allowing interest to the discounter for holding the bill between the date of discounting and maturity and for accepting the risk against default. It was not until the early 19th century that these financial arrangements were perfected in Britain by the merchant banks and bill brokers, each of which came to perform a specialized function. The merchant banks, which were well known and respected for their integrity, then began to accept bills on behalf of reliable businessmen and firms whose names were less familiar than theirs. In other words, for the payment of a small commission, the merchant banks, by endorsing a bill of exchange, would guarantee that it would not be dishonoured on maturity. In this way merchants banks ensured that a large number of bills would be available for discounting. The discounting function was performed initially by the bill-broker – financial go-between who accumulated bills of exchange and sought out banks with surplus funds, with a view to persuading them to invest in the bills in his care. For his trouble and his knowledge, he charged a small commission. Some years later, the bill-broker began to give way to a dealer, who was himself a principal and not merely a commission agent. Supplementing his own sizeable funds with money borrowed on call or short notice from the large London banks, he used the money to discount bills on his own account. Still later came the discount houses, which were little more than large-scale dealers. They had more capital to invest; they took deposits from the public and paid interest on them; and they did a much greater volume of business.
Before the 19th century the markets of money was very unorganised in big centres in the Amsterdam, Paris and many cities of Italy. The interest rate was rather high. Landlords and merchants were sources. The young industrialization based on capital formation simply needed capital to go on. In the beginning of the 19th century the issuing of money was free. This means that a suitable supply of money deve-loped in the first half of 19th century and the lending and borrow-activities with that. The use of metal coins was actually outdone by the use of notes. Actually the needed credit for industrialization was created by this competition.
Another just as important link in the development of banking activity as well as other businesses-activities is freedom of incorporation. There were restrictions in some nations. France, for example, even made restrictions on the issuing of notes as early as 1848. The right was simply conferred on a single monopolistic institution, Bank of France. In Britain, the privileges of the private Bank of England effectively prevented any but very small partnerships from engaging in banking operations.
More financial institutions to manage the supply of money saw the light for the first time in history and savings from the ordinary man shifted from general very limited hoarding to bank deposits. The short-run supply of credit was increased enormously.
The acceptance houses did not restrict their business activities to the market for short-term credit. With the growth of British investment abroad after 1820, they came to specialize in foreign security issues as well, and before 1850 they were also important dealers in foreign exchange and bullion. Later, however, the various merchant houses came to specialize either in the acceptance business or in the issue of security, and foreign exchange dealings came to be concentrated in the hands of the branches of foreign banks in London. These branches increased rapidly in number after 1870, when the growth of the London capital market and the extent of Britain’s foreign trade made it essential for many foreign banks to establish branches in the centre. Increasingly, in the years up to 1814, the operations of these foreign banks presented a growing challenge to the supremacy of the bill on London as an instrument of international payments. For, through the use of the telegraphic process, the accumulated sterling reserves in these foreign branches tended to replace the bill on London as a methods of payment across the exchanges.
The growing importance of the London capital market, especially after 1870, was associated with the increasing use of sterling as an international currency. Throughout the 19th century Britain, on the whole, maintained a continuous surplus on the current account in its dealings with the rest of the world. But she did not amass large gold reserves chiefly because of her willingness to invest the surplus abroad. Yet, from experience over a number of decades, foreign institutions and traders confidently accepted the ability of Britain to maintain the convertibility of sterling into gold. The stability of sterling was unrivalled, and the possibility of its devaluation never even considered. Sterling was as good as gold, and in some respects even better, because it was more convenient, in the sense that British exporters and importers, who dominated world trade, preferred to draw and be drawn on in pounds of sterling, and because it brought in an income, for holders of sterling received interest payments, whereas gold holdings earned nothing.
Given the general acceptability of sterling throughout the international economy, it is not surprising to find that gold played only a minor role in settling international debt. A huge sum of foreign contracted state-debt developed whether gold standard was acting or not.
The vast majority of payments were made either by transfer of bills payable in sterling, or by purchase and sale of bills payable in foreign currencies, or simply by the transfer of credits in the books of the banks, although the volume of business conducted under the latter two heads was never large before 1914. Hence sterling bills of exchange were used not only to finance exports and imports of Britain, but also those of a large part of the rest of the world as well. The reason for this world-wide preference for the pound sterling as a medium of international payments were numerous. It came about partly because Britain was the world’s largest trader, the dominant carrier in the world trade, and the largest single source of foreign capital.
In part also, it was because the value of the pound sterling was kept stable throughout the period 1821-1914 by rigorous adherence to the gold standard, some would say. But of perhaps much more importance was the high standing of the British acceptance houses and the assurance that any bill receiving their endorsement could be readily discounted, at the world’s most favourable rates, in the London discount market. Combined together, these forces turned London into the financial centre of the world, and the pound sterling into an international acceptable currency.
Whereas sterling was used to finance the bulk of international financial transactions in the 19th century, gold remained the ultimate means of settling balances which could not be adjusted in any other way.
Moreover, the international acceptability of sterling in settlement of debts depended in the final analysis in its ready convertibility into gold. For these reasons, it is necessary to examine in some detail the working of the gold standard in the period before 1914.
Under gold standard, because the basic monetary unit of each country on the gold standard had a fixed gold content, the value of each country’s currency was fixed in terms of all other currencies at the ‘mint parity’ or ‘par’ value. But if the pare rate of exchange between two currencies, say the pound sterling and the dollar, was fixed by the gold content of each currency, the market rate of exchange was determined by the forces of demand and supplies. In the market, if the demand for dollars rose relatively to their supply, demand declined, the market rate would fall. Under the gold standard, however, the fact residents in the member countries could export and import gold freely placed limits on the extent to which the market rate could rise above or fall below the par rate. If the demand for dollars in London increased so much relatively to the supplies that the market rate of exchange (dollars per pound sterling) rose above the mint parity rate by more than the cost of exporting gold, it would have been profitable for those demanding dollars to buy gold in London, ship it to New York, and sell it for dollars in that market.
Similarly, if the demand for dollars had fallen relative to the supply forthcoming so that the market rate of dollars had declined below the mint parity by more than the cost of shipping gold, those willing to supply dollars (and thus demanding sterling) would have profited by shipping gold from the United States to London and selling it for sterling.
[The cost of shipping gold from one financial centre to another allowed a certain degree of flexibility of foreign exchange rates.]
Consequently, the market rate could fluctuate according to the forces of supply and demand between the two values, termed the ‘gold export’ and ‘gold import’ points. These limiting rates of exchange were established at values above and below the par value determined by the cost of transporting gold. The distance between the gold points could change over time if transport and other costs altered. Similarly, the distance between the two points was relatively large or small depending on the distance between the two countries whose currencies were linked together. In general, the spot rate of the dollar in London would move towards the gold export point when Britain experienced a deficit in its balance of payments with the United States (an excess demand for dollars and an supply of sterling in the exchange market).
Similarly, a British surplus with the United States would produce an excess supply of dollars (demand for sterling) and a decline in the market rate of the dollar towards the gold import point. Normally, most transactions would have been conducted in foreign exchange, and only large and persistent imbalances between the two countries would have produced a gold flows. But while gold flows produced short-run balancing of the supply of and demand for foreign exchange, they obvious could not be continued indefinitely, for a country could not sustain gold exports forever without running out of metal. Gold import could go on somewhat longer perhaps, but eventually the importing country’s trading partners would exhaust their supplies of gold. What then was the nature of the long-run mechanism of adjustment under the gold standard that prevented these situations from arising. (end of mainstream history)
Reality of the gold exchange standard:
Gold exchange standard by law 1820 in Britain.
Already in the mid-1820s the Bank of England, the most powerful and august financial organ of the world had severe problems. Early on 17 December, John Charles Herries (1778-1855), financial secretary to the Treasury, called Mrs. Arbuthnot and told her that “such has been the extra-ordinary demand for gold to supply the country bankers and to meet the general run upon them that the bank of England was completely drained of its specie and was reduced to 100.000 sovereigns, with which it would have to open today and meet demands of probably four times that amount.”
Quite by accident, however, the bank officials that day stumbled upon a huge, unmark-ed chest that contained £1.5 mill. in solid sterling. But three days later the bank again was down, now to 60.000 sovereigns. Now Rothschild that was used by the bank to keep up its golds stocks, delivered £200.000 more. Thus the bank avoided suspensi-on of payments saved its credit.
How could it turn out so bad? First of all stats-bonds and loans originating from the Napoleonic wars had to be redeemed. The price of the war was £638 mill. From the end of Napoleonic wars the tradition that governments financed wars issuing notes and then forget the real finance till after the war had changed. Now Rothschild actually went in and financed by lending in peacetime, when the right thing perhaps rather would have been not hide that war means enormous expenditures. In the period 1818-1832 Rothschild handled seven of twenty six foreign government loans raised in London (all in all £21 mill. or 39% of the whole) and an unknown amount of different governments’ bonds.
In November 1824 the exchanges moved against Britain, when the huge export of capital for foreign-government and private loans and growing imports of consumer goods led to a reversal of the inflow of gold and silver, which now began to leave the country in growing quantities. [The American market competed with the European. The first try to overtrow the Russian Tsar was take place 14 December 1825 financed by the Bank of England. And also huge very risky mining-investments in South America. Among governments and people in these new countries the slogan was to spend money especially to pay for import with with gold and silver The stream of precious metal from South America made possible for Britain return to gold-bullion standard in 1819 and made it possible for Bank of England to resume payments in specie in 1821.]
The stock exchange bull market increased the feeling of unease in some minds. Wellington was thinking, Mrs Arbuthnot noted: ”the greatest national calmities will be the consequences of this speculation mania, that all the companies are bubbles invented for stockjobbing purposes, and that there will be a general crash!” This prediction was in March 1825, and the Duke was right.
December 1825 was called the black month. Several big financial houses announced failure in London Times. One of them Chalmer & Co was London key firm with links to the country banks in Yorkshire. On 13 December the real panic started. The country bankers was in London with the purpose to procure specie and bank notes as a protection against a run on them. No one had any gold.
In the question Britain’s economic crises 1825-1866 we have to notice that the weakness of the credit-system and monetary policy of the Bank of England. It has been claimed from more sides that the issuing bank did not handle the periods of speculation very well, and that was the reason why a metal basic was proposed, so that credits and the circulation of monetary units were not chosen at the bank’s whim. But in reality that is not true. But notice a further inflationary step was taken: monetary units in question were notes decided by the Bill of 1844. It was named by its originator Peel.
The law decided that the notes should be covered by gold, when exclude a certain (unknown?) fixed amount, and it was decided that the stock of notes should influenced by anything but exchange in the inflow of gold. This principle was more of less used in other countries and at the same time the right to issue notes was also monopolized in central banks. Flexible gold exchange standard is the keyword. The second step on the inflation-ladder. Now we only need the elected politicians to take the responsibility after they have divided it between them.
To find out how more money make much more paper and stop the real production via the private limited company at last, you have to go to part 2. I shall also try to give a few proposals pointing in a more wealthy and healthy direction. The unofficial history of finances closely connected to this subject is also included:
deals primery with the problems of inflation, speculation and subjects concerning the private limited company when the papers get "hot air", and it also deals with the subjects dealt with in part 1, but now more directly in light of inflation and speculation.
 And the year Wolfgang Amadeus Mozart (1756-1791) finished Lodron Nightmusic (included in Serenate Notturna, K.239), occasional pieces to celebrate the name-day of Countess Antonia Lodron (born Arco) 13th June .