The 1st European War
In 1790s, Britain was isolated by the Continental Blockade imposed by Napoleon, the revolutionary dictator/emperor of France. Soon, England suffered a massive shortage of silver coinage and began minting ‘token’ silver coins and over-struck the loaned foreign coins.
By 1797, paper money was legalised as an increasingly confident Britain promised it would reimburse the businesses with gold once the war is over. Until that time, the business would take paper bills as certificates of gold. One use of such money was this: Napoleon and his zealous army could seize paper money from those doing business with Britain; it was paper to the enemy, gold to a friend! yaaahooo!!
Introduction of ‘Gold Standard’
For millennia, almost all civilised human societies traded their goods in two currencies – gold and silver (poorer societies used other easily degradable metals like copper, nickel, etc). Such a system where two highly precious metals with distinct intrinsic value was called Bimetallic System.
1815: When Britain won the 1st European War, the Napoleonic continent was at its mercy. With all the treasure at its disposal, England began a massive coinage program that standardised the gold sovereigns (7.98 gm coin) and circulated even more silver crowns (28.2 gm) and half-crowns (14.1 gm).
Britain then declared to the world its intention to apply a Gold Standard into effect – an economic policy where all trade was to be done in gold only, and silver coins were pegged to the gold as any other commodity. The policy effectively flattened silver of its intrinsic value as a precious commodity. In Britain, silver coins were declared legal tender only for sums of money up to two sovereigns (or two pounds)!
By 1820, gold sovereigns were used in exchange for goods all over the British colonies. In the international market, 1 British Pound was fixed at 4.85 US dollars, 5.25 Canadian dollars, 12.10 Dutch guilders, 26.28 French francs (or Latin Monetary Union currency), 20.43 German Marks or 24.02 Austro-Hungarian Krones.
1821-44: Britain introduced a series of laws that made the Bank of England issued paper Notes as the legal tender, as they were fully backed by gold. The British Pound became established as the full gold standard. BoE also acquired the monopoly of printing and issuing bank notes, with an ability to charge interest more than 5%. The Protestant rule of ‘moderate interest’ was ignored in the name of progress and pragmatism.
The empire was ready to dominate the world, economically.
Challenging the Gold Standard: Latin Monetary Union/Euro-1
1867: In Europe, the International Monetary Conference, which shunned by Britain, formed the Latin Monetary Union. France, Belgium, Italy and Switzerland standardised their national currencies where 1 Franc was equal to 4.5 gm of silver or 0.29 gm of gold (in a ratio of 15.5 to 1), and freely interchangeable between these countries. LMU promised to practice Bimetallism (dual standard of gold and silver).
Next year, Spain and Greece joined LMU, and later by Romania, Bulgaria, the Papal States (ruled by Pope), Venezuela, Serbia, Danish West Indies and Albania.
However, France and Papal States did not honor the purity of their coins they were producing, making profits at other’s expense. In addition, the witty German traders brought cheap silver from Britain, minted them into LMU silver coins and then exchanged those silver coins for gold coins, making huge profits.
1871: By defeating France, the Protestant Prussia (which later became Germany after unification) became a major European player. Soon, it accepted the Gold Standard and forced France to pay its war indemnity only in gold.
In the years 1871 and 1872, the French government mint received 5 million francs of silver for conversion to coins. In 1873, it received 154 million francs of silver for coin conversion. In 1874, free conversion of silver to coins was temporarily halted by france. By 1878, minting of silver coinage was suspended.
The Latin Monetary Union became a de facto gold standard.
Scandinavian Monetary Union
1871: The newly founded German Empire had accepted the British created Gold Standard. And Germany was Scandinavia’s main export partner – supplying it with iron ore.
1873: The Scandinavian Monetary Union was created by Sweden where one krona was fixed at 0.40 grams of gold. Denmark joined it by debasing its currency (rigsdaler) by half and Norway lost 25% of its (speciedaler)’s value on joining the SMU. Unlike LMU, it was the Gold Standard.
Later, all three countries lost their peg, one to one, with the outbreak of 2nd European War (World War-1) in 1914 when Sweden untied its krona to gold.
In United States
Before the Revolutionary War, European coins freely circulated as legal tender in the American colonies. The most common was the Spanish silver dollar coins, minted mostly in Mexico from silver mined from Central and South America.
After the war, in 1785, the United States adopted a silver standard based on the Spanish dollar, from where US dollar derives its name.
1792: US accepted Bimetallism (at 15:1 value; at $1.29 troy of pure silver and $19.39 troy ounce of fine gold). Also, it allowed free coinage of these metals by its mint – anyone could exchange these metals for government coins.
As there was precious little gold available in the US (required to trade with Britain after introduction of Gold Standard), only silver circulated as money in the Americas.
1791: The First Bank of the United States was created, licensed for 20-year, by the US government for accepting deposits, issuing bank notes, making loans.
1816: After 5 years without a central bank, the Second Bank of the United States was formed. For its corrupt practices and constant frauds, the United States did not renew its license in 1836.
To weaken the effect of bank Notes which depended on silver coins, US increased the value of silver to 16:1, effectively ending the rein of silver in US. No silver was coined in US till its Civil War. The small business had beaten the big banks. The US was without a central bank for the next 40 years.
Domination of Gold Standard
1861-65: During the US Civil War, paper money in the form of ‘greenbacks’ were issued, without the promise of they being redeemed for either gold or silver. In fact, US suspended payments in silver. Post-Civil War, the ‘greenbacks’ had to be taken out of circulation to introduce standardization.
1873: Following the British deed of 1816, the new Coinage Act standardized gold coins in US but not the silver coins, effectively adopted the Gold Standard and ‘demonitizing’ the silver: now silver was pegged, just like any other commodity, to gold.
The demand for gold resulted in increased availability of silver worldwide, resulting in dramatic rise of gold prices when compared to silver: from 15.5:1 in 1870 to 16.5:1 in 1880 to 30:1 in 1896.
Effects of Gold Standard: Economic Imperialism
By 1880, the European banking elite had accepted the Gold Standard, while the colonized countries of the world, including India and China, and rising Japan were not on the Gold Standard.
By 1896, the value of gold rose to 30:1 vis-a-vis silver in the capitalist countries. The colonized world still traded their gold in the ratio of 15:1. The net effect was drain of gold from the colonised world, while silver flooded the colonies and Japan.
From 1879 to 1889, the share of US gold increased from 7% to 20% of world gold. Rest of the gold went to European empires.
As more industrial goods, including railways, came to the colonized world, the Europeans demanded payment in gold. Lack of gold and silver at 30:1 in these colonised lands meant devaluation of their currency. That resulted in devaluation of Indian Rupee by 25% of its value, while Japanese Yen, Chinese Yuan, Philippine and all Latin American Peso (all pegged to Mexican Peso) lost 50% of their value!
This meant that the colonized nations imported good at double the rate while their exports were discounted by 50% in Europe. For investments too, the poor natives had to double their capital as a head-start to compete with the Europeans.
The other effect was worse: the debt and interest owed to Europeans by non-Europeans, due to wars or royal shoppings or just public necessity (railways to roads), simply doubled in a decade.
Economically, it was the Gold Standard that kept the colonised people poor and dependant on their European masters. While militarily and cultural imperialism was quite obvious to the natives, the economic policies of colonisers were unknown to the barely literate people.
Effects of the 2nd European War
Before 1914, Britain held 40% of the world’s overseas investments which was regarded as the safe haven for any money – hard earned or otherwise. It came from European monarchies, plundering politicians of South America, businessmen from Africa and Asia, even Russia.
1914: With the outbreak of 2nd European War, Britain suspended the gold standard – it declined to pay gold to depositors/investors in return of its paper Notes. The moneyed world had no choice but to hope for Britain’s victory, to get their money back.
By 1918, Britain itself was in debt, mostly to the US, with interest costing Britain’s 40% of all government spending. This was also the case for all of the European empires.
After the wanton destruction of life and property in the 2nd European War, Europe decided it will not part with its gold to its debtors. Various measures were introduced to avoid the money owed to the others.
Revised Gold Standard
1925: Britain returned to the gold standard, its currency fixed to gold at its pre-war peg value (£1:US$4.86), even though it was in huge debts and its economy had contracted. The US patiently swallowed the injustice meted out to it.
This Gold Standard was slightly modified: the government withheld issuing gold coins (gold specie) though paper money was allowed to be exchanged for at least 400 ounces troy (12.5 kg) of fine gold (gold bullion). However, the elite business saw through the weakness of British fiscal policy and gold began to be shifted from the vaults of Bank of England to that of France and US.
Corruption and Failure of Confidence
1929: The Stock Market in New York crashed. However, it effected only 16% of the US population, and only 10% of wealth was lost.
On August 24, 1921, the Dow Jones Industrial Average (an index of Stock Market) stood at a value of 63.9. In a week, it had risen more than sixfold, touching 381.2. After the Crash, it would not regain this level (381.2) for another twenty-five years!
1930: Britain had enforced high tariffs (around 25%) on good imported from other nations. The American Tariff Act imposed high tariffs on goods imported from Europe (some were up to 50%), forcing other countries of the world to enact a similar protective tariff on imported goods. While interest rates were cut from 6% to 4%.
U.S. imports and exports decreased by some 2/3rd from 1929 to 1933. However, the effect on its GDP was trivial and Europe remained its net importer of goods. Meantime, decrease of world trade by 66% in Europe had a devastating impact as Europe attempted to build itself after its foolish war.
American business, politely, demanded due shift of power across the Atlantic.
‘Run’ on Austrian Bank, end of Gold Standard
1931, May: Austria’s largest commercial bank, Credit-Anstalt – founded by Rothschild family in 1855, went bankrupt. After the 2nd European War, CA was propped up and managed by loans from the Great Powers since 1923. Bad loans were taken and given, year after year with little supervision.
When the corruption came to fore, the depositors withdrew their gold. When the Austrian government stepped in to guarantee all the bank’s deposits and other liabilities, its own credit-worthiness came into question. Credit-Anstalt went bankrupt.
The depositors then withdrew gold from a large German bank which too went bankrupt. The German central bank lost substantial amount of its gold reserves. The scare then touched Latvia, Turkey and Egypt. By July, Germany adopted exchange control, and went off the gold standard.
Then, depositors turned on the overvalued British Pound, withdrawing large amount of gold from the Bank of England’s vaults. Loans of £50 million from French and American banks became inadequate. By September, Britain went off the gold standard – betraying its promise to redeem gold for its currency.
The New York Fed had loaned over $150 million (over 240 tons of gold) to various European Central Banks. Now, these loans became questionable once England went off the gold standard.
1934: The US made it a criminal offense to own gold. It forcibly nationalized all gold, held by individuals or banks, to fill its Treasury (it was lifted only in 1975; ask why?). Any contract done in gold was also declared invalid (reinstated only in 1977). Public’s refusal to part with gold meant going to jail for 10 years and a fine, or both.
Instead of the market rate of $20.67 per the troy ounce of gold, the public were offered $35/troy ounce. In reality, the dollar was devalued at international markets from $20.67 to the troy ounce to $35 to the troy ounce (40% devaluation). With no gold to hoard money, the public and banks were forced to invest in the nation building (US still has 8,000 tons of gold, more than world’s 25% gold reserves).
By 1937, no country in the world was on the full gold standard. However, international debt settlement was still done in solid pure gold.
Effects of Going ‘Off the Gold Standard’
The Central Banks, which were allowed to print notes in the name of its people, were required by law to have the backing of gold for the Notes they were printing. So, in the US, the Federal Reserve was required by law to have 40% gold backing of Federal Reserve demand notes.
By ditching the gold standard, the central banks could print as much money as they could without any regard to the amount of gold reserves they held in their vaults, though some were smart enough not to cause hyperinflation.
International trade took a beating, the less well-off countries saw hyperinflation, and societies demanded food and jobs. Socialism, nationalism and fascism came to dominate the politics of Europe. Europe was ready for a third war. And, US was ready to fund them, for the 2nd time.
First, usury was accepted as ‘moderate interest’ in the name of growth and progress. Then, an artificial ‘gold standard’ was applied so as to earn off your accumulated gold. In testing times, with an opportunity to earn easy money, even gold will not be enough.
Stay in the caravan —> avar dets.3 – dollar, doldrums and floating
