Thomas Tooke

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Trading of Cash bar and fictitious bar of Gold in the 1930s in China

In Uncategorized on April 28, 2013 at 12:17 pm

It is the purpose of this blog to show with specific examples how history rhymes. To that end here is a piece that Frank Tamagna wrote back in 1942.

“Dealing in silver coins and bullion and in gold represented an important activity of the native banks, for both exchange and speculative purposes. Dealing in silver was very active from 1933 to 1935, but it was brought to a standstill by the nationalization of the metal and the stabilization of the currency in 1935. Dealing in gold was basically a speculative activity; operations covered “cash” gold bars if actual delivery was contracted for, and “fictitious” gold bars if the transaction was to be settled at a later data by either paying or receiving differences in accordance with price variations. Usually the cash bar commanded a premium over the fictitious bar, which constituted the bulk of speculative activity. Operations in the gold market were sharply reduced after the stabilization of the exchanges and the Shanghai Gold Stock Exchange ceased operations in August 14th, 1937 after almost two years of inactivity and financial losses.”


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.

The best explanation of the multiplier ever. The hoarding of money and drop in multiplier requires some offsetting mechanism.

In Uncategorized on January 8, 2013 at 2:10 am

It is sometimes misunderstood that the Fed increases the amount of idle money and “it does not work” because the multiplier drops. The reality is that it is the drop in the multiplier which requires the increase in idle money. The best explanation the writer of this blog is old. It dates from 1802 from Henry Thornton but everything comes clear.

In 1802, Henry Thorton wrote.

” The quantity of circulating paper, that is, of paper capable of circulation, may be great, and yet the quantity of actual circulation may be small, or vice versa. The same note may either effect ten payments in one day, or one payment in ten days; and one note, therefore, will effect the same payments in the one case, which it would require a hundred notes to effect in the other.

The cause which lead to a variation of the rapidity of the circulation of bank noes may be several. In general, it may be observed, that a high state of confidence serves to quicken their circulation; and this happens upon a principle which shall be meant a more or less quick circulation of the whole of them on an average. Whatever encreases that reserve, for instance, of Bank of England notes which remains in the drawer of the London banker as his provision against contingencies, contributes to what will here be termed the less quick circulation of the whole. Now a high state of confidence contributes to make men provide less amply against contingencies. At such a time, they trust, that if the demand upon them for a payment, which is now doubtful and contingent, should actually be made, they shall be able to provide for it at the moment and they are loth to be at the expence of selling an article, or getting a bill discounted, in order to make the provision much before the period at which it shall be wanted. When, on the contrary, a season of distrust arises, prudence suggests that the loss of interest arising from a detention of notes for a few additional days should not be regarded. It is well know that guineas are hoarded, in times of alarm, on this principle. Notes, it is true are not hoarded to the same extent; partly because the class of persons who are the holders of notes is less subject to weak and extravagant alarms. In difficult times, however, the disposition to hoard, or rather to be largely provided with Bank of England notes, will, perhaps, prevail in no inconsiderable degree. This remark has been applied to Bank of England notes, because these are in high credit; and it ought, perhaps, to be chiefly confined to these. They constitute the coin in which the great mercantile payments in London, which are payments on account of the whole country, are effected. If therefore, a difficulty in converting bills of exchange into notes is apprehended, the effect both on bankers, merchants, and tradesmen, is somewhat the same as the effect of an apprehension entertained by the lower class of a difficulty in converting Bank of England notes or bankers´ notes into guineas.

The apprehension of the approaching difficulty makes men eager to do that to-day, which otherwise they would do t0-morrow. The truth of this observation, as applied to Bank of England notes, as well as the importance of attending to it, may be made manifest by adverting to the events of the year 1793, when through the failure of many country banks, much general distrust took place. The alarm, the first material one of the kind which had for a long time happened, was extremely great. It does not appear that the Bank of England notes, at the time in circulation, were fewer than usual. It is certain, however that the existing number became, at the period of apprehension, insufficient for giving punctuality to the payments of the metropolis; and it not the be doubted, that the insufficiency must have arisen, in some measure, from that slowness in the circulation of notes, naturally attending an alarm, which has been just described. Every one fearing lest he should not have his notes ready when the day payment should come, would endeavour to provide himself with them somewhat beforehand. A few merchants, from a natural though hurtful timidity, would keep in their own hands some of those notes, which, in other times, they would have lodged with their bankers; and the effect would be, to cause the same quantity of bank paper to transact fewer payments, or, in other words, to lessen the rapidity of the circulation of notes on the whole, and thus to encrease the number of notes wanted.

Probably, also, some Bank of England paper would be used as a substitute for country bank notes suppressed. The success of the remedy which the parliament administered, denotes what was the nature of the evil. A loan of exchequer bills was directed to be made to as many mercantile persons, giving proper security, as should apply. It is a fact, worthy of serious attention, that the failures abated greatly, and mercantile credit began to be restored, not at the period when the exchequer bills were actually delivered, but at a time antecedent to that aera. It also deserves notice, that though the failures had originated in an extraordinary demand for guineas, it was not any supply of gold which effected the cure. That fear of not being able to obtain guineas, which arose in the country, led, in its consequences, to an extraordinary demand for banknotes in London; and the want of bank notes in London became, after a time, the chief evil. The very expectation of a supply of exchequer bills, that is, or a supply of an article which almost any trader might obtain, and which it was known that he might then sell, and thus turn into bank notes, and after turning into bank notes might also convert into guineas created an idea of general solvency. This expectation cured, in the first instance, the distress of London, and it then lessened the demand for guineas in the country, through that punctuality in effecting the London payments which
it produced, and the universal confidence which it thus inspired. The sum permitted by parliament to be advanced in exchequer bills was five millions, of which not one half was taken. Of the sum taken, no part was lost. On the contrary, the small compensation, or extra interest, which was paid to government for lending its credit (for it was mere credit, and not either money or bank notes
that the government advanced), amounted to something more than was necessary to defray the charges,and a small balance of profit accrued to the public. ”

COMMENT: Obviously from this account it is the hoarding of medium of circulation because of apprehension which creates a reflexive higher level of hoarding of medium of payment and circulation and a reflexive debt deflation. By that token the increase in medium of payments does not increase in any way inflation, but just compensate for the state of idleness of the economic agents. In that sense one could say that the printing from Central banks increases in no way inflation but just offset the hoarding of medium of exchange. However when confidence comes back (higher inflation expectation), the removal of the excess injections of mean of payment if too slow can help get the inflation that the government desires to inflate its debts away. So the inflation does not occur during the hoarding but during the timid exit. Another point is that in the 1793, the sovereign lent its credit to issue exchequer bills which would be used as collateral for the restoration of commercial credit. What happens when the sovereign´s credit has been tarnished, are all the proverbial bullets been shot? Finally the promise of liquidity action was as much potent as the actions themselves, was Mario Draghi taking a page from Henry Thornton´s account of the 1793 crisis?

How to measure the accumulated commercial capital?

In Uncategorized on January 6, 2013 at 7:32 pm

In his essay “An Enquiry into the nature and effects of paper credit of Great Britain”, Henry Thornton lays some important concepts about how paper credit functions and to “exposure some popular errors which related chiefly to the suspension of the cash payments of the Bank of England, and to the influence of our paper currency on the price of provisions. ”

“It may conduce to the prevention of error, in the subsequent discussions, to define, in this place, what is meant by commercial capital. This consists, first, in the goods (part of them in the course of manufacture) which are in the hands of our manufacturers and dealers, and are in their way to consumption. The amount of these is necessarily larger or smaller in proportion as the general expenditure is more or less considerable, and in proportion, also,as commodities pass more or less quickly into the hands of the consumer. It further consists in the ships, buildings, machinery, and other dead stock maintained for the purpose of carrying on our manufactures and commerce, under which head maybe included the gold found necessary for the purposes poses of commerce, but at all times forming a very small item in this great account. It comprehends also the debts due to our traders for goods sold and
delivered by them on credit ; debts finally to be discharged by articles of value given in return.”

COMMENT: It might be understood that we are talking about the asset side of the balance sheet of corporations, however in order to measure the wealth of a country the assets held by domestic corporations outside of the country should not be counted. Henry Thornton talks first about the current assets such as inventories, but also about the long term assets which include the buildings, machinery and other “dead stock” or fixed assets in today´s parlance.  Finally the accounts receivable against merchandise are part of the identifiable capital. At the time the intellectual capital of patents was not a determining factor, but it would be essentially fall in the same category.

Continuing with Henry Thornton…

“Commercial capital, let it then be understood, consists not in paper, and is not augmented by the multiplication of this medium of payment. In one sense, indeed, it may be encreased by paper. I mean, that the nominal value of the existing goods may be enlarged through a reduction which is caused by paper in the value of that standard by which all property is estimated. The paper itself forms no part of the estimate.”

COMMENT: I guess it removes a bit of the argument of the “wealth effect” touted by Mr Greenspan recently. If you alter the circulation medium, you might increase the nominal value of the assets, by manipulating the yardstick. The money illusion is an old trick which Ivring Fisher and John Maynard Keynes wrote about extensively.

Continuing with Henry Thorton

“This mode of computing the amount of the national capital engaged in commerce, is substantially the same with that in which each commercial man estimates the value of his own property. Paper constitutes, it is true, an article on the credit side of the books of some men; but it forms an exactly equal item on the debit side of the books of others.” It constitutes, therefore, on the whole,
neither a debit nor a credit. The banker who issues twenty thousand pounds in notes, and lends in consequence twenty thousand pounds to the merchants on the security of bills accepted by them, states himself in his books to be debtor to the various holders of his notes to the extent of the sum in question ; and states himself to be the creditor of the accepters of the bills in his possession to the same amount. His valuation, therefore, of his own property, is the same as if neither the bills nor the bank notes had any existence. Again ; the merchants, in making their estimate of property, deduct the bills payable by themselves which are in the drawer of the banker, and add to their estimate the notes of the banker which are in their own drawer ; so that the valuation, likewise, of the capital of the merchants is the same as if the paper had no existence. ”

COMMENT: Here we have a few interesting concepts explained and the process of netting exposed. The cash on the balance sheet of a corporation since offset by a liability from the bank, while representing a financial asset for the corporation is a financial liability from the standpoint of the bank. The merchant when computing the property looks at all assets minus liability. If the merchant has a net cash position, this net cash position is in the end a liability from the standpoint of the bank so at a collective level, what is left is just the productive capacity of the farms, the manufacturing plants, the software code etc…etc… However it would only for the subsidiaries a given country, and would not count for the subsidiaries overseas.

Continuing with Henry Thornton

“The case of gold, on the other hand, differs from that of paper inasmuch as the possessor of gold takes credit for that for which no man debits himself. The several commercial capitals of traders, as estimated in their books, would, unquestionably, be found, if deducted from their other property and added together, to correspond, in amount, with a general estimate of the commercial stock of the country, calculated under the several heads already stated. It is true, that men, in estimating their share in the public funds of the country, add to their estimate a debt due to them which no individual deducts from his valuation. On this head, it may be observed, that the nation is the debtor. But the commercial capital, which has been described, exists independently of capital in the public funds. The man in trade has property in trade. If he has property in the stocks, he has the property in trade in addition to it. In speaking, therefore, of the commercial capital, whether of the nation or of an individual, the idea that any part of it is composed either of the paper credit or of the stocks of the country, is to be totally excluded.”

COMMENT: A country which has little net unencumbered commercial capital from domestic subsidiaries only in relation to its GDP has little wealth under this definition.

Does the knowledge of history and forewarning preclude monetary debacles from happening?

In Uncategorized on January 1, 2013 at 10:11 pm

It is sometimes touted, at least I have seen twice the case between Ray Dalio and Hugh Hendry that the central bankers know very well history and as a result they have the capacity to preclude a monetary debacle.

However I found recently an old archive document from Nicolas Bergasse from France who was a lawyer and a politician.

The document is called “Protestation contre les assignats-monnoie” which can be translated into “protestation against the assignats-currency”.

This publication is troubling because it forecasts all the ills of an irredeemable currency system.

His first line of objections is based on the well established real bills doctrine which makes Assignats unsuitable since those assets are not self-liquidating. Evidently this raises a lot of questions about the use of Treasury Bonds as a more of monetary asset, but that is another question. The world seems to repeat always the same mistakes.

Then he explains the problem of the creditors of the Church. The assignats were issued against the confiscation of the assets of the Church. The problem was that some of those assets had debt against them. In his paper, Bergasse explains that by both confiscating the assets of the church and at the same time repudiating the claims from the creditors, this would create havoc of confidence in credit. If you want a recent parallel, you could think of the two tiered payment system on the Greek debt with privilege to the ECB granted back in March 2012. In his word this action would introduce a precarious environment for property rights.

He continues to explain that the assets of the Church were indeed heavily mortgaged with different lines of debts some of general credit and other with a particular claim. One of his grievances was that a lot of clergy men and women would find themselves destitute as some of the assets of the Church were supposed to produce income to bring a subsistence to those people. Finally the last creditors were actually the poor as the Church was maintaining a fund for the poor and as a result of this confiscation the burden to fund the poor would fall back on the “Nation”, the concept which replaced the kingdom.

What is interesting is that according to Bergasse the Assemblée knew about the desperate state of Finances but was desperate itself in its actions and relying on expediency a guide for its decision process.

The other caveat of the Assignats mentioned by Bergasse was that if there is a time-frame for the sale and if the Nation has to re-imburse at a fixed date, the speculators will try to buy the assets at “prix vil” or ditressed price. You can now check what happens with the auction of state assets of Greece and wonder if those “institutions” like Blackstone are just doing what Bergasse describes. Bergasse also says that if there is no time frame for the sale of assets, there is no liquidation of those assets, and those assignats would have no difference with (John) Law´s system.

Bergasse very accurately predicted a deteriorating term of trade situation, interestingly the paper money is touted as a source revival of the trade situation at the time by Bergasse´s opponents. This runs evidently contrary to decades of strength of the German mark prior to 1990s with large trade surplus and inversely of chronic inflation and trade deficit accompanied with weakening currency for many nations in history. Fullarton and Tooke describe the phenomenon even more accurately (I leave that for another post). Finally Bergasse describes a problem created by the inability of commercial agents to price properly goods and services due to instable prices and resulting friction in commerce. He predicts as a result a crumbling of manufacturing and destruction of industry.

The flight of specie overseas is described by Bergasse in two ways, first because imports will have to be settled with specie as the paper even if it would trade at par does not travel across the borders.  To that extent today´s fiat USD have managed to travel everywhere. It sounded like a fantastic advantage in the 90s, but if it stops traveling it becomes a great problem. The second way the specie would flee overseas would be through arbitrage between billets the caisse d´escompte, shipping of PMs to London and the purchase of lettres de change.

The other problem facing France at the time aside from massive amounts of debts, was a large external debt position as mentioned by Bergasse. As a result he expects fully the Gresham law principle to take hold. He also predicts that the tanking exchange in foreign capitals is only the beginning.

Another phenomenon was the rampant emigration of skilled workers which was not witnessed since the Huguenot emigration during the period of catholic-protestant strife of the “Edit de Nantes”. Another phenomenon noted is that at the time is was not possible to pay the troops in paper but only in “numéraire” (precious metals). Decidedly the military seem to have had an old affection for specie.

Bergasse deplores that the system will favor extremely the “agiotage” of bankers and will absolutely destroy commerce.  What is assignat to him: ” Un malheur inévitable pour les créanciers, une resource infâme pour les débiteurs”, which can be translated as “a inevitable curse for creditors and an infamous resource for the debtors. It think one should look at the benefits derived by negative present value LBO debt and the permanent carry trade of Warren Buffet between insurance float financing the acquisition of corporations. As Buffet said himself one of the chief criteria for an acquisition of a company is if the company can reprice inflation for the products it sells.

He describes how the debtor will buy the Assignat at dirty price to repay his debt at par. He laments that the political process is done through intrigue, based on the violation of all forms of properties, on the destruction of all morality.

Bergasse finally decries, the “Assembly of legislators, which fouls the principles of honesty, and repudiate as mere scruples the most sacred values of justice and morality, which break the most solemn contracts, the most respected obligations, who change at their whim the nature of all commitments, and who introduce bad faith in all the classes of society, without any fear of making universal corruption a mean to pass the constitution they prepare”.  Evidently the French constitution was far from perfect and had to be retooled many times…

Finally he explains that the Assignat will not be short of supporters amongst those who will benefit from it. They will not miss an occasion to publish the triumph of Assignat; that it is wrong to doubt of the solidity of the assignat, which not only has the Church´s assets as collateral but also the guarantee of the Municipalities.

The interesting point is that despite the absence of complex modeling of economics Bergasse has almost a 20/20 foresight of the different impacts of the forced assignat paper money. The destruction of commerce, the benefit to speculators and bankers, the plunge of the currency, the worsening trade balance and terms of trade, combined with large external debt and total debt, and the corruption of the legislators, who know the situation is precarious but act with expediency.

Evidently he was proven right, yet the experience of paper money debacle was known from John Law, “whose name alone was enough to instigate fear in France” as Bergasse says. So policy makers of the time were warned, they had to know the problems of paper money in Massachusetts in 1737 yet failed to act decisively and courageously. It hard to imagine that people in Weimar Germany were unaware of the previous monetary experiences of serious monetary crisis and reforms of irredeemable currencies. So why the failure?

The conjecture is that psychology makes people in power think that this was the past and this is now. In other words overconfidence and the idea that they are better, smarter more informed, more sophisticated than their elders. This was precisely the line of argument from Mirabeau which was used to dismiss the idea that France was headed toward a repeat of the John Law episode. “This time is different!”

Repayment of the government debt and contraction in 1819 and its consequences.

In Uncategorized, United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on October 29, 2012 at 11:07 pm

Thomas Tooke wrote to Lord Grenville in MDCCCXXIX (1829)

” But it has been urged, that the provisions of Mr. Peel’s Bill, by directing a repayment to the Bank of a certain amount of its advances to Government, necessarily occasioned the withdrawal of bank-notes from circulation to that extent. I am quite prepared to admit that the repayments by Government to the Bank would have the effect of diminishing the circulation, if there were no other channels through which the bank-notes cancelled by such repayment, admitted of being re-issued. But it is evident that, if the authority which I have quoted is to be relied upon, there were other channels_, including the purchases of gold, by which the sums,repaid by Government, were re-issued ; and the main question is as to the total amount of the Bank circulation, and not the manner in which the issues were made.”

“When the provisions of Mr. Peel’s Bill, directing the repayment of 10 millions to the Bank, were discussed in Parliament, it was proposed by some members, that the time of repayment should be strictly prescribed. But this was objected to by ministers as being liable to inconvenience; and it was objected to by Mr. Ricardo, because he considered,and, as the event proves, justly, that such repayment might not be necessary, or even desirable. The time, therefore, of repayment, was left open to arrangement between the Bank and Government.”


Interestingly today Mr. Dalio is more concerned by Austerity than by deficit spending. I think there is an echo with Mr. Ricardo. A repayment of debt in a middle of a deflationary environment just does not help. Evidently the event considered was the repayment of debt by the Government which would contract the circulation. The contraction can force the prices down but the expansion of the bank notes is by no means creates an automatic revival of the level of the circulation on its own. Also a redeemable regime is not comparable with a conventional system or a pure metallic standard, a pure mettalic system shares more similarities with a conventional irredeemable system than with a system of bank notes convertible in bullion with a bid-ask system for Gold. This system is equivalent in some ways to a currency board where the monetary anchor is the bullion (Hong Kong Dollar). As a pure exercise it seems that Hong-Kong would have the least issues of all countries to shift to a mettalic monetary standard. It would just peg with a bid-ask system against bullion(s).

A small annoying detail for monetary policy: Quantity of money theory is very imperfect and velocity is just an accounting “plug”.

In Uncategorized, United Kingdom Bank restriction from February 27th 1797 to May 1st 1821 on October 26, 2012 at 10:41 pm

It has been maintained by Ricardo that the plunge of prices was due to the Peel bill, which forced a contraction of the quantity of money in circulation and forced a plunge in price. The Peel bill restored the convertibility of Gold and bank of England notes.

The Peel bill really restored the convertibility of Gold, the plunge of price really happened, but there is a small annoying detail for monetarist, which is that the quantity of notes in circulation actually expanded.

Here what Thomas Tooke wrote:

” The question, whether any contraction at all took place subsequently to the passing of Mr. Peel’s Bill, is confined to the six months following August, 1819 ; for, according to the following declaration of the Governor of the Bank of England, at a Court of Proprietors, held on the 21st March, 1822, the issues of the Bank were greatly extended in the two years following March, 1820 :—” If,” said he, ” the Bank had erred, it was not on the side of a reduction of the circulating medium ; for, on looking at the amount of their issues, he found that, on the 9th March, 1822, their issues exceeded, by the sum of 3,859,000P., those of the same date in the preceding year ; and that the latter, viz. the 9th March,1821, exceeded the issues of the 9th March, 1820,by the sum of 3,440,000P. It was, therefore, quite clear that the repayment of the Government debt, called for in July, 1819, did not induce the Bank to diminish their issues, for they had been increasing them in the years which had since followed.” In answer to a question from a Proprietor the Governor added : ” That the amount of issues from which he had quoted, of course, included the sovereigns issued by the Bank.”
According  to this declaration, the amount of the circulation, as emanating from the Bank of England, and forming the basis of the Currency, stood thus:

Now, this authority is quite sufficient to establish the fact, that, as far as regards the Bank issues, constituting the basis of the circulation, there was a considerable increase of the amount,notes and sovereigns together, (and from the state of the exchanges the whole of the sovereigns must have remained in the country,) between March, 1820, and March, 1822, as compared with the amount at the time of the passing of Mr. Peel’s Bill ; and this interval of two years being that ill which the principal phenomena of the fall of
prices, and the general depression ascribed to the operation of Mr. Peel’s Bill, occurred, it is of no consequence to the general argument, whether there was or was not a small reduction in the amount of the Bank issues in the six months between August, 1819, and March, 1820. It appears, then, from this statement, that, as far as regards the Bank of England issues, there was not only no contraction of the circulation following the passing of Mr. Peel’s Bill, but an actual increase of the amount (with the trifling exception ofthe six months following August, 1819) down to1822. The mere amount of bank-notes was certainly diminished, but that diminution was more than compensated by the issue of a larger amount of coin ; and whatever coin was issued in that interval must, as already observed, have remained in circulation,because there would have been a heavy loss on its exportation.


There is a striking similarity to the present conditions, a large extension of the number of Bank issues but no noticeable increase in prices in what is related to domestic basket of consumption driven itself by wages in the United States, in the case of 1819-1822 episode we have an expansion of the bank issues yet a fall in prices. It is historically interesting to observe that declining long bond yields have proven to be deflationary, so why the twist?

Inflation Today

In Uncategorized on June 4, 2012 at 3:57 pm

I usually do not comment on current events. But since this charade goes on and on about inflation deflation, I want to post here the most visible proof that there is maybe deflation in certain areas of the economy, but there is one commodity, which was used in the XVII and part of XVIII century as a form of currency in Virginia ( , which was used as a form of currency in Weimar republic and during the second world war and which is still used in jails as a form of currency which is screaming inflation. I am talking about Tobacco and cigarettes. There is one index on Bloomberg which shows the price evolution of processed tobacco, the supply is very stable and demand is very stable. The price of Tobacco went up 28 times since 1959. In the first chart we have M1 and processed Tobacco, in the last we have the recent 15 years on Tobacco price. For anyone doubting about the effect of monetary expansion on the most  non substitutable commodity, with the most stable demand and supply, which the speculator can not distort since there are no future contracts here is the proof.

This is the most obvious indictment of the Fed. We have a 6.2% increase annually since 1959, fitting perfectly the M1 Index. This is a regime which steals constantly from the depositors (except during Volcker era, which naturally put back Gold in its box). Volcker was the only sound man in command in the last couple of decades.

So is the Processed tobacco commodity 28 times more valuable? Or is it the money which is dubious along with the ~economic growth~which has to be put into a completely different context?

Tobacco companies do not lower cigarette prices in deflation, but increase them easily in inflation environment, dividend paying gold if you will, with no risk of confiscation, and a nice put in case of real deflation (the dividend does not increase but it does not decrease either in true deflation, –I am actively looking for data series during 1873-1896 apologies–), but this is besides the point. The point was to prove inflation once and for all. Now another chart, we have British American Tobacco versus the Barbaric Relic in the last 10 years.

And finally to close the debate I think about whether we have inflation outside of the ~civilized economy~, here the price of processed Tobacco commodity in the last 15 years. No one can claim substitution (there is none), no one can claim large increase in demand, no one can claim supply disruption, no one can claim speculation because traders can not trade this index (yet). The Fed is the culprit.

A more detailed account of Gold fluctuations related to the event developments

In Uncategorized on June 3, 2012 at 9:14 pm

As Mitchell further wrote:

” The first period shows five well market subdivisions. (1) January to April, 1862, when the hope of ending the war in the spring was high, the premium was small and steady. (2) From April, 1862, to February, 1862, the occurred an almost unbroken advance in the premium connected with the failure of McClellan´s peninsula campaign, the second issue of the greenbacks, the administration´s losses in the autumn elections, Chase´s depressing finance report, Burnside´s defeat at Fredericksburg, and the third legal tender act. (3) From March to August the premium fell, mainly because of Mr Jay Cooke´s success in selling bonds, the victory of Gettysburg, and the capture of Vicksburg and Port Hudson. ”

“(4) From September to July, 1864, the premium rose again because of disappointment over Lee´s escape, lack of military progress, the dilatoriness of Congress in voting taxes, the Treasury´s futile campaign against speculators in gold, and the difficulty in selling bonds. (5) Finally the fall of the fall of the premium from August, 1864, to May, 1865, was brought about by the victories of Grant, Sherman, and Sheridan which put an end to the war. ”

One should then draw his own conclusions about the prospects of a war on the price of Gold.

The rationale for deflationary period advocated in 1920.

In Uncategorized on May 12, 2012 at 1:55 am

Here is what Kemmerer wrote about the need for a deflationary period in 1920.


Inflation for a time has a stimulating effect upon business. Things boom, and many classes of people feel prosperous when prices are rising, but this stimulant, like alcohol when taken in excess, always has its “morning after”. A falling and prospectively falling price level is depressing to business. It throws a wet blanket over industry. When the prospects are strong for a period of declining prices consumers postpone purchases, retailers and wholesalers let their supplies run down, manufacturers “play safe” both in running their plants and in purchasing raw materials.

New buildings and other new capital equipment are postponed for the day of lower prices. The business world refuses to capitalize inflated prices. The expectancy of heavy price reductions breathes a spirit of uncertainty into the economic atmosphere. A falling price level therefore would not be universally popular however much most of us at the present time think we would like to see it.

The third evil result of a substantial and continuing decline in price level is its harmful effect upon welfare of labor. This is a natural result of the depressing effect upon business just described. When business holds back in anticipation of falling prices the demand for labor declines and men are laid off. Increasing unemployment causes hardship and is a potent factor in forcing down wages and weakening the hold of trade unions on their men. Labor naturally resists wages reductions even though the price level is falling, and this means that a period of falling prices is likely to be characterized by many labor troubles.

The hardships therefore and the resulting political difficulties of carrying through a program of price level reduction through deflation are so serious that we should enter upon such a program, if at all, only after careful deliberation and under the pressure of strong reasons. Are there strong reasons why we should deliberately suffer these hardships and adopt a program of deflation? I believe there are, provided the deflation be not excessive, and that the program be carried through with firmness, moderation and reason.