Thomas Tooke

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On the original purpose of banking from Elbridge Gerry Spaulding

In Unreserved Banking on August 14, 2012 at 2:06 am

Elbridge Gerry Spaulding is known for his “history of the legal tender paper money issued during the Great Rebellion being a loan without interest and a national currency”, and as a chief promoter of fiat money to finance the civil war. However there is a speech which is quite interesting called “One Hundred Years of Progress in the Business of Banking”, which Spaulding gave at the Meeting of the Bankers Association.

He wrote:

” In collecting historical facts I have frequently adopted the verbatim statements of those who have previously written upon the subject. The Bank of Venice, the first establishment of the kind in Europe, was established in 1171, and owed its existence of the Crusades, and the necessity of the government obtaining means for conducting these wars. It was originally a bank of deposit, and in the earlier days of the institution these deposits were not subject to draft, as is generally the case with banks of this kind. These deposits could, however, at the pleasure of the owner, be transferred on the books of the bank. This system was at a later period discontinued, and the deposits became subject to draft. This bank continued in existence without interruption until it was overthrown by the revolutionary army of France in 1797.

The Bank of Genoa was projected in the year 1345, but did not go into full operation till 1497. It was for centuries an important institution in that commercial city, but in 1800 it shared the same fate as the Bank of Venice, by being pillaged by the French army under Massena.

The Bank of Amsterdam was founded in 1609,  Holland being then possessed of a large foreign trade. This bank was only a bank of deposit, and the money in its possession was transferred on the books of the institution at the pleasure of its owner or owners. The primary object in the establishment of the bank was to give a standard of certain value to bills which might be drawn upon Amsterdam — rendered necessary by the depreciation of the coin owing to its having been worn or clipped. Here these coins were received on deposit, and had their value established by weight or fineness. It was not the design on founding the institution that the funds should at any time be lent out, but should remain in its vaults. However, the directors having lent to the governments of Holland and Friesland a large sum of money, the fact became known on the invasion of the French army, and produced the ruin of the institution. The Bank of Hamburg was established in the year 1619. This institution is a bank of deposit and circulation, which circulation was upon fine silver in bars.

Bank of England.

The Bank of England was established in 1694 — William and Mary then being on the Throne. To the war with France, and the extreme difficulty experience by the Government in raising funds for the war, is the institution of the monopoly due. Like the earliest of these institutions, the Bank of Venice, it owes its existence to the wants of the Government which gave it life. The idea first originated with Mr. William Patterson, a merchant of London, who readily saw that the Government, which had been paying interest at the rate of from 20 to 40 per cent. per annum, would, without much hesitation, grant exclusive and almost unlimited privileges to such parties as would in turn furnish it with a fixed and permanent loan at a reasonable rate of interest. The plan being brought to the attention of the King, was submitted to the Privy Council, where the details were completed, and it was laid before Parliament. There, however, it met the violent opposition of a formidable party. Nevertheless, the bill was carried by the Government, and on April 25th, 1694, became law. It was provided that the capital, ₤1,200,000 should be permanently lent to the Government at 8 per cent. per annum; and that in addition to the interest, an allowance of ₤4,000 per annum should be made by the Government for the management of the debt.

The capital has, at various periods, been as follows:

1694, ₤ 1,200,000

1697, ₤ 2,201,171

1708, ₤ 4,402,343

1709, ₤ 5,058,547

1710, ₤ 5,559,996

1722, ₤ 8,959,996

1742, ₤ 9,800,000

1746, ₤ 10,780,000

1782, ₤ 11,642,400

1816, ₤ 14,553,000

Since first this institution was founded, its capital and the loan to the Government have been nearly identical in amount. The following are the dates of the several renewals of the charter, with the amount of Government debt at each period, to wit:
1694, ₤ 1,200,000

1697, ₤ 1,200,000

1708, ₤ 3,375,027

1713, ₤ 3,375,027

1742, ₤ 10,700,000

1764, ₤ 11,686,800

1781, ₤ 11,686,800

1833, ₤ 11,015,100

1844, ₤ 11,015,100

The management of the entire public debt of Great Britain is placed in the hands of the Bank of England, for which service it has received compensation which has from time to time varied in amount, according to circumstances. During the year 1845 this compensation was ₤94,111 19s. 10d. The Bank of England is a striking example of the combined power of public authority and private influence in sustaining the Government of England, as well as the agricultural, manufacturing and commercial business of that empire. This bank has been the chief agent in sustaining the British Government in the long and exhausting wars in which she has been engaged. ”

” The bank of England is the fiscal agent of the Government”.

Well, this is unequivocal, central banks are a mean to an end, those are there to finance the government the trade was to grant a monopoly of issuing the currency which would be very lucrative to whomever that bank would belong to. In exchange for that monopoly the bank would fund the government. This is very clearly stated by one of the chief proponent of the Greenback during the civil war, Elbridge Gerry Spaulding.   It will become clear how it initially functioned from the account from E.G. Spaulding during the civil war. Before that banks were issuing private money, or bank notes backed by coins. So today, we still have a war currency and a central bank whose primary responsibility is to fund the Government debts, nothing more, nothing less. At least Spaulding is honest about the design of this system. As per the so called “central bank independence”, this probably the most silly joke that one could come up with, maybe to the exception of Germany´s bundesbank, since the very purpose of a central bank is to lower the cost of borrowing from the Government at the expense of the population.

The sequence of Price increases during the Greenback standard period

In Commodities, Inflationary Periods on August 12, 2012 at 8:43 pm

As we have seen before Gold, the commodity form of money was the first to spike up and indicate rise in prices. What happens next is to compare the behavior of Food and Non Food commodities during this inflationary period.

Those charts describe the behavior of food and non food commodities with the median of each category across time with the data on lower deciles on the left and higher deciles on the right.  Initially the non-food commodities increase in price faster than the food commodities.

However food commodities increase in price and peak around January 1865 at around the same as the Gold peak in price.

How did Gold track commodities during the Greenback period?

In Commodities, The Greenback inflationary period on August 12, 2012 at 8:05 pm

How Gold and commodities evolve one against the other in a paper standard. There is fortunately a precedent which is quite instructive, and this precedent is the Greenback era. There are plenty of interesting statistics. Wesley C. Mitchell provides a context of price fluctuations between commodities and Gold. As we will see, in fact Gold and commodities have move in tandem with the Gold price anticipating the increase in price and being sensitive to political developments.

In the tables below, Mitchell provides a range of commodities price in deciles and measures if the Gold is above or below the median increase in commodities price. Non surprisingly, as a commodity form of money Gold evolves in the middle of the distribution of commodities prices.

As we can see initially, Gold races off faster than commodities, as the range of price by the end of 1862 climbs between the 6th and 8th decile of commodities.

As we can see after a flare up in January 1865, Gold starts to lag commodities for the rest of 1865.

While the Greenback standard is referred as a high inflationary period, in fact it is nothing compared to today´s situation as the government debt to GDP stood at only 50% at the top of the war. Had the war lasted longer though, the currency would probably have been destroyed. It is notable to see the price of Gold contract, however one should know the events related to this lower price of Gold in paper. McCulloch implemented his policy of contraction in 1866.

As one can see, the policy of repaying the debt and contracting the currency made price lower. This type of deflation was not a debt-derangement deflation event, but a reduction of the circulation in order to reward those who had carried the greenback and had suffered dear prices. (How different times! Today, which politician would care about rewarding the savers in paper money, only Volcker cared!). 1873 is marked by a global contraction and the demonetization of Silver, hence cash is getting harder on top of the policy implemented. In fact in 1873, in order to fight a bit the effects of the contraction, more greenback were issued.

The year 1874 is marked by a slight rebound in Gold price from the contraction days of 1873. However the policy of contraction is maintained until 1879, when the Gold is brought back to its initial parity with paper and the convertibility is restored.

Keynes repeating the nonsense of war stimulation which had already been debunked by Thomas Tooke.

In United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on August 4, 2012 at 10:31 pm

In 1838 Thomas Tooke wrote:

“Those persons who consider the range of high prices which prevailed from 1793 to 1814, as being fully accounted for by the war, independently of its attendant taxation, proceed on the assumed operation of the following causes :—.
1. An extra demand or consumption arising out of a state of war in general.
2. The extra demand or consumption peculiarly characterising the last war.                                                                                                                       3. The monopoly of trade enjoyed by this country (United Kingdom).And,                                                                                                                           4. The stimulus or excitement to increased population, production, and consumption, occasioned by the profuse government expenditure during the above period.

Section 1. — Extra Demand or Consumption arising out of a state of War in general.

The reasoning in support of the opinion, that the principal phenomena of high prices may be ascribed to the effects of war in general, through the medium of extra demand, independently of any reference to circumstances affecting the supply, may be stated in substance as follows : —

That the whole of the government expenditure for naval and military purposes may be regarded as creating a new source of demand for the articles constituting that expenditure, and consequently as tending to raise the price of such articles. That not only the price of those commodities, which come directly under the description of naval and military stores, must experience an advance in
consequence of the increased demand, but that the price of corn and other necessaries must likewise be affected in a considerable degree by the additional consumption occasioned by the maintenance of the men composing the fleets and armies. That not only the demand for seamen and soldiers must tend directly to raise the rate of wages of that description of labourers from among whom these men are taken, and indirectly the rate of wages generally; but that the increased demand for various kinds of manufactured articles requisite for the equipment of fleets and armies, is calculated further to raise the rate of wages ; and that this increased demand for labour, and the consequent advance of wages in general, naturally occasion increased population and increased consumption by the labouring classes.

Thus the government expenditure in all its ramifications is thought to extend the sphere and increase the activity of demand for  necessaries, to operate directly or indirectly in promoting briskness of circulation, to vivify every branch of industry, and consequently to stimulate exertion to an increase of every kind of production.

The cessation, by the peace, of all such extra demand, the great customer war being withdrawn, (when by the stimulus of previous high prices there was a general increase of production,) would naturally, it is supposed, account for falling markets and consequent distress among the producing classes, and for reduced wages and diminished consumption ; these leading, through a long course
of suffering, to the only remedy, viz. a diminished production.

The fallacy of this doctrine, which represents a  general elevation of prices, both of commodities and labour, to be a necessary consequence of a state of war, proceeds (and cannot otherwise than so proceed) on the supposition that the money expended by the government consists of funds distinct from and over and above any that before existed ; whereas, it is perfectly demonstrable, that an expenditure by government, whether defrayed by immediate taxes to the whole amount, or by loan on the anticipation of taxes to be levied, is nothing but a change in the mode of laying out the same sum of money ; and that what is expended by government would and must have been laid out by individuals upon objects of consumption, productive or unproductive.”

Some might argue that printing new money is not included in Thomas Tooke´s objections, to which one would answer obviously that diluted capital is not the same as new capital. One would have to remember the definition of money and capital by Adam Smith.

Tooke continues:

“I am here supposing that, both on the part of government and on that of individuals, the habit of hoarding to any extent is out of the question. If government were in the practice of collecting a surplus revenue in coin in time of peace, and of accumulating it as treasure to be expended on the occurrence of a war, then indeed there would be a marked difference in general prices on the transition from peace to war; but even this addition to the circulating medium would be limited in its effect on prices to the time within which the treasure was in a course of progressive outlay, until its natural distribution into other countries was effected.

A similar effect would follow, if individuals were in the habit of hoarding, and if, for the purposes of war, they were obliged to give up their hoards to the use of government. These suppositions, however, are quite foreign to the practice of the times which are under consideration. ”  Is he referring to government taxes on the rich, the ones able to hoard? As for government expenditures outlaid out of previous hoarding from the government, it is from a timing perspective the opposite of borrowing, it is time shifting some drag on the economic activity, nothing more, nothing less. Where there is no more capacity to shift some present economic drag to the future, and this burden shifted in the future refuses to move forward, that is the point of insolvency.

 

What commodities to buy during a war period?

In Commodities on August 4, 2012 at 5:26 pm

As previously mentioned Gold and commodities seem to be joined at the hip, yet with a great disparity of prices across the board. An interesting question which might be relevant today is to look at what commodities would benefit from a conflict? Is a ~war premium~ on oil warranted, is it a new phenomenon ? The historical series of the Greenback episode are instructive in that respect.

Mitchell wrote in 1908.

“The widest range of commodity prices was 1321 points (in July 1864, when cotton had a relative price of 1410, which meant that the war had the result of making the price increase many folds. “Evidently such an outcome was due to the disruption of production and shipments of cotton farms in the South. Would today a disruption of the Straight of Ormuz generate anything else than a large spike in price?

But one can be more creative, as we know China controls a large portion of the rare earth supplies of the world, should a conflict result in some tariff hikes, and constraints in supply, the hoarding and backwardation resulting from this set of global trade constraints would probably mimic what Thomas Tooke described as one of the key reasons for price hikes of commodities during the bank restriction episode.

As Thomas Tooke reflected in 1838 on the price hikes during the bank restriction in the UK:

“The remaining question is, what effects are to be ascribed to war as regards supply? And the answer may be, in general terms, that it is the tendency of war to diminish supply. The mode in which was may be calculated to operate to this effect, is 1st, by a diminution of production, and 2ndly, by increased cost of production, and by impediments to commercial communication. ”

Here one must reflect upon that reality. As we well know Silver is used for electronics heavily and for solar panels and other key technologies.  In case of a conflict, we might see the US dollar getting strong and Gold getting strong if the former is wrongly perceived as safe while the later somewhat less disputable from a typical historical response. In the end people are free to decide what they believe is the best store of value and they might decide that what the government decide is the mean of exchange is a very poor store of value.  But let us consider Silver now. If Gold were to spike with a conflict, Silver might spike for monetary reasons as well, but what would happen to the flow and constraints in trade of the metal which is a critical component for maybe many high-tech applications not only strategic but also part of the backbone of our modern economic system?

Thomas Tooke in 1838 writes:

“It will be readily admitted, that the immediate and obvious tendency of a state of war is to abstract a portion of the capital and labour, which would otherwise have been employed in reproduction; and if, from the course of military operations, or from arbitrary government exactions,  and apprehension should be superadded of insecurity of property, there will be a further cause for diminished production; so that dearth and impoverishment are likely to be the consequences of a state of war in a country thus situated. It is probable that circumstances of this kind operated in diminishing and deteriorating the cultivation among some of the states of the continent of Europe, in different periods of the war. In the early part of the war, the extensive military operations were calculated to diminish the produce of the Netherlands, Germany, and Italy; and, at the same time, the political convulsions attending the revolutionary period might affect the extent and quality of cultivation of the land in France.

In the subsequent periods of the war the course of military operations can hardly have failed to diminish the produce of Poland, Prussia, Saxony,and Russia, as likewise of Spain, Portugal, and Italy. And while causes like these were, perhaps,operating in a diminished reproduction in some of the countries alluded to, there were circumstances arising out of the war, which, beyond all question, added greatly to the cost of production in this country; these were—

1. The increased rate of interest of money, which, more especially as regarded all outlay as fixed capital, formed an important element in the calculation of the price at which reproduction could be continued, or a new production afforded.
2. The increased rates of freight and insurance, which applied to the whole period of the war, but which in the last six years of it amounted (as will be seen when the period comes under consideration) to an enormous charge on all importations from the continent of Europe. And, although the greatest charge under this head applied to our foreign trade, there was also a great increase of freight and insurance attaching to our coasting trade, forming no inconsiderable item in the cost of all commodities, the more bulky ones especially,such as corn, coals, building materials, &c. conveyed coast-wise. “