Thomas Tooke

Was the depreciation of the currency specific or general in 1913-1919

In Monetary depreciations on April 22, 2012 at 9:56 pm

Following the distinction between monetary depreciations which are general or specific from Kemmerer.

Here is what the same author wrote in 1920:

“The United States since 1913 has had general depreciation, but fortunately has escaped specific depreciation, for all forms of United States money and deposit currency have been maintained at par with the standard gold unit of value. The monetary depreciation we have had has not been depreciation of paper money or of deposit currency in terms of gold, but a depreciation of our gold monetary unit itself, and of all other kinds of exchange media whose values have moved with that of Gold. ”

Here we must disagree with the author. First of all if one takes the time to read the writing from Thomas Tooke which measured commodities on a very long time scale at a time where the paper money system was not very developed, one can realize the extraordinary stability of prices of commodities over two centuries.

Here what Thomas Tooke wrote in 1838 about the price of Corn in the XVII and XVIII centuries:

Now how relevant is that to the question? The paper expansion really did not happen during this period, as it was fully redeemable with an undeveloped monetary system. Gold was free to flow, forcing contraction early in the process.

To that extent it is interesting to note what Lord Overstone had to say in 1833 about the source of inflation and circulation in the interim period of 1825 until 1848 about the banking deregulation and the impact of the Joint Stock corporations on inflation through the over issuance of paper money.


“It is next shewn what was the amount of paper-money in circulation in England and Wales, and Ireland, other than that issued by the Banks of England and Ireland. The average in England and Wales on the 29th of March, 1834, was 10,200,000 pounds, and in June 1836, 12,200,000 pounds. In Ireland the average in June, 1834, was 1,300,000 pounds and in June 1836, 2,300,000 pounds. In both cases the greatest extension took place within the last year. It thus appears that there was a total increase in this portion of the paper-money of the two kingdoms, in 1836, over 1834, of no less than three millions, or more than 25 per cent. ”


Later Lord Overstone writes


“It is needless to attempt to describe the competition that grew out of this excessive multiplication of banks: it effects were exhibited in a great and undue, even rash extension of paper-money and credits, accompanied by an unusual reduction in the rate of interest in the interior of both countries, but particularly in Ireland: the commonest observer must have seen the gathering clouds, and dreaded the consequences.


Lord Overstone again:


occurences of overtrading and any undue speculative advance in commercial prices tend to produce and unfavourable foreign exchange, and evil only to be remedied by that contraction of the circulation which eventually restores price and currency to a level with those in foreign countries.


Our tentative conclusion is that Kemmerer is erring on the idea that the depreciation of the currency is general in 1913-1919 period. Indeed later on it will be shown by Kemmerer that the expansion of paper money and credit was rampant while at the same time circulation of specie within the United States more and more restricted and export of Gold banned.  We sense a deep contradiction in the arguments of Kemmerer on this topic.

In fact one form of inflation has two sources.

One is due to the banking system and the contraction or expansion of the circulation. The absence of developed banking system reveals in the study from Thomas Tooke spanning between the 17th and 18th century that prices are extremely stable.  Though Tooke notes the impact of recoinage of 1696 in preventing scarcity of “Corn” (Wheat´s name at the time) to be too excessive.

The great recoinage of 1696 is the closest thing to the Volcker interest rate hike. Once we were on a paper currency system, the expansion and contraction in regard to the quantity of bullion determined short cycles of inflation and deflation with an increasingly manipulative tendency.

The second source is due to the increase in monetary standard which was Gold during the XIX century but was Silver in the 17th century. As Tooke wrote:


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