Info-Stat
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.”
Conclusion:
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
and on http://socserv2.socsci.memaster.ca/~econ/ugem/3113/hume/trade.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).
Speculation in the Napoleonic Wars
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 :
http://www.lilliput-information.com/wundt.html
Conclusion:
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.
Mainstream history:
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.
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