Money's Sordid Tale of Dirty Floats, Debasement and Doom: Today's Floating Currency System Is Just One of Many That Global Trade Has Operated under. Each Previous System Broke Down after Multi-Nation Wars. This Series Reviews Previous Monetary Systems and Examines History to Shed Some Light on the Viability of the Current Fiat System
Berg, Ann, Modern Trader
Marx extolled it as the numeraire. Keynes damned it as a barbarous relic. In the end, Nixon snuffed it. Yet for more than two millennia, gold was matchless among precious metals, valued in multiples against silver, copper or bronze. Rare, ductile and noncorrosive, it gave reins to commerce, providing a universal medium of exchange.
But not until the 19th century did gold play such an integral role in international trade, the balance of power and societal advancement.
The scientific and philosophical discourses of the late 18th century Enlightenment stirred an eruption of new political and economic institutions. The same year Adam Smith wrote The Wealth of Nations, America revolted against the absolutism of monarchial power and soon after developed the first comprehensive contract in history between state and citizenry. Working under a Constitutional framework during the first Congressional Congress in 1789, Alexander Hamilton, the nation's first treasury secretary, brought a fractured country to the international forefront. In three years he restructured the nation's war debt into revenue backed (import tariffs) marketable securities, facilitated the IPO of the Bank of United States and ensured dollar convertibility by linking it to gold. Such confidence arose in the international investment community for this new sovereign that by 1803, half of American issued bonds were held by foreigners. The American financial miracle had begun.
As America ascended, the muscular era of mercantilism characterized by state-chartered trading monopolies was sinking in decline. The embodiment of economic nationalism, mercantilism aimed to enrich the state by forcibly promoting exports and limiting imports through tariffs and the Navigation Acts.
Echoing Smith, the German philosopher Immanuel Kant in 1795 rejected the mercantilist dogma in the prophetic Perpetual Peace, asserting only representative republican governments that respected autonomy and universal hospitality could be trusted to keep citizenries out of war. Five years later, the 200-year-old Dutch East Indies Corporation, once towering in the seas with a fleet of 150 battle and merchant ships and a labor force of 50,000 was bust.
The Napoleonic Wars, which lasted 25 years and bankrupted Austria, Holland and nearly Russia, proved the last outbreak of commercial wars between the Great Powers until the 20th century. In 1815, a quadruple alliance of Britain, Russia, Austria and Prussia, and later France, emerged from Vienna to create the Concert of Europe and brought stability to the continent. A new creed of economic liberalism emerged, and despite brief and mostly localized conflicts, such as the Crimean War (1853) and Franco-Prussian War (1870), the peace continued for a 100 years. The adoption of the gold standard would prove critical to this era and China would play a curious role.
THE CHINA PROBLEM
Just as the trade deficit with China vexes America today, it doubly vexed Britain two centuries ago. China snubbed British manufactures and Britain, a voracious importer of silks and tea, exchanged Chinese goods for silver. The pound sterling (literally a pound of pure silver), Britain's currency since the millennial crusades, was fixed to gold under the tenure of Isaac Newton--Britain's master of the mint from 1700 until his death in 1727--in a ratio of approximately 15 to one. While European trade followed the Newtonian 15:1 ratio, China and Japan valued silver much higher at 9 or 10 pounds per one pound of gold. Drained of silver bullion through the trade deficit with China, in 1816 Britain made the pound sterling note directly convertible to gold.
As the largest economy, Britain led the way in building institutional credit and ridding the market of 18th century restraints. David Ricardo rose on the shoulders of Smith, and after amassing a fortune on the London Stock Exchange, theorized in his 1811 treatise "The High Price of Bullion" that not unlike today, Britain's inflation was due to its lax monetary policy. …