Thomas Tooke

Archive for the ‘Monetary depreciations’ Category

An account on Silver embargo of 1927 in China

In Monetary depreciations, Uncategorized on February 3, 2013 at 1:13 pm

Mr Frank M. Tamagna wrote an interesting book in 1942 called ” Banking and Finance in China”. It was written under the Institute of Pacific relations. It is important to note that indeed the United States in the mid thirties did purchase some Silver. After the onset of the 1929 debacle the price of Silver plunged, which initially gave a devaluation advantage to China which was on a Silver standard, the United States though purchased large amount of Silver which had the result of suppressing this devaluation advantage a few years later. Those actions resulted in a large swings in the price of Silver. Over the long run though, those attempts were futile. Before that 1930s episode which we will relate in another post, there is the episode of 1927.

As Tamagna wrote:

“In the autumn of 1924, the opening of hostilities, between armies in the two provinces of Chekiang and Kiangsu provoked a banking crisis which involved the three important money markets of Shanghai, Ningpo and Hangchow. Some institutions failed when the native bankers associations refused support; others just managed to overcome their difficulties with the help of modern banks. Foreign banks then decided to stop any further advances of call money to native banks. The crisis was followed by a curtailment of speculative operations and by period of extreme caution. The crisis of 1924 marked a definite slowing down of the boom. In the interior of China, a series of local crises spread along with the northward march of the National Revolutionary Army, which left Canton in July 1926. During the following year, embargoes on the exports of Silver were imposed by most of the provincial governments; the depreciation of the local currencies advanced rapidly, and the native banks, especially those connected with army leaders or politicians, suffered hard setbacks. With the establishment of the National Government in Nanking in 1927 and the impulse given to the modernization of the country and the banking system, the native banks entered into an era of decline.”

The piece is anecdotal account of yet another attempt to embargo precious metals, whenever there is distress with the local currencies.  This attempt was futile as all the other ones in preventing the fall of the currency, but the policy makers have to do something so they try it anyway.


How did the French “livre” fair during the 1721 John Law paper money debacle. Where is the 1-15 official ratio of Gold Silver originating from.

In Inflationary Periods, Monetary depreciations on January 1, 2013 at 3:48 pm

Recently I was asked to go on assignment to find out what was the French “livre” worth back in 1708 and 1721.

After erring a bit on the assignment I found good data which are interesting and noteworthy.

First of all, it worth recalling that “livre” were a unit of account with a reference to coinage, but in fact the unit of account was on purpose not coined into one “livre” coin. The “livre” had a fluctuating reference to coinage, so indeed it was an abstraction like any other currency with reference to coinage.

The system of unit of account was inherited from the middle age under a format of 1-20-240 or 1 “livre” worth 20 “sols”, each sol worth 12 deniers. In Britain the system was similar with 1 pound worth 20 shillings and each shilling worth 12 pennies. So 240 pennies for 1 pound in Britain and 240 deniers for 1 “livre” in France under the “Ancient Regime” (before the revolution).

In fact France was operating under a dual currency system of livre “Tournois” which were used below the “Loire” and livre “Parisi” which were used above the Loire. In 1667 Louis XIV officially abolished the Livre parisi. At the time 5 “livres tournois” were needed for 4 “livres parisi”. This is for the currency parities, but it does not tell their precious metals equivalent.

In 1266 one ~livre~ corresponded really to its weight of 409 grams of Silver. In 1790, it was so debased that it was 1/18th of its weight of 1266. During the period of interest we have a lot of fluctuation in the parity to fixed coinage and new coinage of inferior weight at the same.  Fortunately there are records of constant coin parity to “livre” during the period.  One such example is the Louis d´or.

Monetary reform in 1709:

The edict of May 1709, one of the great monetary reforms of the early century, went the following for Gold Coinage “aux” 8 L 22 karats fine, 30 to the marc and current at 10 livres. The counterpart in Silver was the écu 3 couronnes, at 12 deniers “argent-le-roi”, 8 to the marc and current at 5 “livres”. The reform was new because it put a fixing between the prices of Gold and Silver. (Isaac Newton was observing floating ratios between Europe –wider– and Asia –Tigther–). The marc of Gold was put at 531 “livres” 16 “sols” 4 4/11 deniers, that of silver at 35 “livres” 9 “sols” and 1 1/11 deniers. This produced a Gold to Silver ratio of 1:15.

Given that the marc was at 244.75 grams, under this regime, we have “livre” effectively at 6.90 grams with a ratio of 5 to Silver Ecu in 1709. The ratio went to 6 in 1726 and we can infer something like 5.75 gram of Silver per nominal unit of account “livre”.

Now what was the devaluation of the unit of account “livre” in 1721 looking like? Here the constant coin is helping us. The louis d´or coing was at 10 “livres” abstract denomination in 1640. In 1709 after the many wars from Louis XIV it went to 20 livres. In 1721, due to the crisis going on, it went to 54 “livres” before the “Volcker moment” and coming back to 24 “livres”. So the Gold price of the coin measured in unit of account “livre” went up 54/20 = 2.7 times between 1709 and 1721. That translates into the weight equivalent of Silver of the “livre” going from 6.9 grams to 2.55 grams, before coming back to 5.75 grams. This is for the constant weight parity. Now the government at the time also used lower weight per écu as evidenced by weight of coins back in 1719.




Inflation as a monetary phenomenon during the greenback period.

In Monetary depreciations, The Greenback inflationary period on June 9, 2012 at 8:48 pm

As Mitchell wrote in 1908:

“When two countries have similar monetary systems and important business relations with each other, the movements of their price-levels as represented by index numbers are found to agree rather closely.”

This comment from Mitchell raises the question about the very different inflation indexes between Hong-Kong and the US despite sharing the same currency in the last question. Obviously the method of computation of those indexes include different items.

“This agreement is so strong that similarity of movement is usually found even when comparisons are made with materials so crude as index numbers compiled from unlike lists of commodities and computed on the basis of actual prices in different years.  It is therefore a highly significant fact that the  movements of the price-level in the United States during the years of the paper standard were almost wholly unlike the contemporary movements of the price-level in England and Germany. ”

“To facilitate comparisons between the movements of the price-levels in these three countries, Professor Falkner had Sauerbeck´s English table, and Soetbeer´s German table recomputed on the basis of his own American table — namely, actual prices in 1960 == 100. The results — reproduced in Table 6 — show a general agreement between the English and German index numbers and marked differences between both of these index numbers and the Americna index numbers during the period of the greenback standard. These differences are greatest during the years of high premiums on gold and decline with the premium as the date of  resumption is approached. After resumption, indeed, the figures indicate a closer agreement between relative prices in the United Sates and Germany than between relative prices in England and Germany. ”

Monetary depreciation due to the Aquileia mine in the Noric Taurisci

In Bullion and Mining, Monetary depreciations on April 23, 2012 at 11:47 pm

Examples are abundant of expansion of the monetary standard and the resulting effect on its own price.  One of the earliest is Polybius. In his “histories”, in Book XXXIV, he writes the following:


Near Aquileia, in the territory of the Noric Taurisci, in my own time a gold mine was discovered, so easy to work, that by scraping away the surface soil for two feet, gold could be found immediately. The seam of gold was not more than fifteen feet; in some it was found unmixed with alloy in nuggets of the size of a bean or lupine, only an eighth of it disappearing in the furnace; and some wanted more elaborate smelting, but would still pay thoroughly well. Accordingly, on the Romans joining the barbarians in working this mine, in two months the price gold went down a third thought Italy; and when the Taurisci found out that, they expelled their roman fellow workers and kept the monopoly themselves.


This raises obviously the question about what is the price of a currency when the quantity is rapidly expanded.

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:

Monetary Depreciation definition according to Kemmener

In Monetary depreciations on April 22, 2012 at 9:33 pm

Here is an interesting definition of monetary depreciation by Kemmener written back in 1920:

“There are two kinds of depreciation- specific depreciation and general depreciation. Specific depreciation occurs when one or more kinds of exchange media are issued in such relative excess that they depreciate in terms of the legal standard-money unit. Good examples of specific depreciation are found in the United States greenbacks from 1863 to the end of 1878, and in the notes of the Bank of England during the period of suspension of specie payments from 1797 to 1821. General depreciation occurs when excessive issues of money, or of deposit currency which circulates in the form of checks, result in the depreciation of the legal standard-money unit itself. Examples of general depreciation are found in England during the years immediately following the Australian and Californian gold discoveries and in all gold standard countries from 1896 to 1913. In these cases gold itself depreciated and hte prices of most goods in terms of gold standard money rose. Obviously, general depreciation may exist either with or without specific depreciation.”