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One of the penalties for refusing to participate in politics is that you end up being governed by your inferiors. -- Plato (429-347 BC)

Thursday, September 21, 2017

Why Donald Trump Should Celebrate Today, The 300th Birthday Of The Gold Standard

by Ralph Benko, Contributing Author:  Today, September 21, 2017, is the 300th anniversary of Sir Isaac Newton’s accidental invention of the gold standard. This really is a monumental moment. Newton, as Master of the Royal Mint of Great Britain was, at Parliament’s behest, attempting to restore the silver standard. The “pound sterling” represented one pound of sterling silver. Due to a long era of shenanigans, the quality -- and value -- of the British coinage had depreciated. Newton set out to restore it. What he did still matters.

By inadvertently overvaluing gold to silver, Newton sowed the seed of the gold standard, which ramified into the world’s dominant monetary system presaging a Golden Age. The gold standard was a system that, together with other factors, helped propel England from an unimportant small island nation to the center of the world’s financial system. The true classical Newtonian gold standard also served America, and the world, very well for a long time. It could again do so.

Candidate Trump hit on something important respecting restoring America to greatness during the campaign. As I wrote here:
As I have repeatedly observed Donald Trump shows a strong affinity for gold. He has also shown a keen intuitive grasp of  how the gold standard was crucial to having made America great:

“Donald Trump: ‘We used to have a very, very solid country because it was based on a gold standard,” he told WMUR television in New Hampshire in March last year. But he said it would be tough to bring it back because ‘we don’t have the gold. Other places have the gold.’

“Trump’s comment to GQ: ‘Bringing back the gold standard would be very hard to do, but boy, would it be wonderful. We’d have a standard on which to base our money.’

Trump has been misled to believe that “we don’t have the gold. Other places have the gold.” In fact, the United States, Germany, and the IMF together have about as much gold as the rest of the world combined and America has well more than Germany and the IMF combined.
Stay tuned on that.

For today, how did two centuries of a Golden Age begin 300 years ago?

Pretty much everyone knows the tale of Sir Isaac seeing a falling apple in his mother’s orchard, and, pondering that, thereby discovered the Law of Gravity. Newton’s apple is an icon. A descendant from that same apple orchard has been planted at my daughter Jessica’s alma mater, St. John’s College in Annapolis, in homage to that fateful moment.
So too was the classical gold standard iconic. It just might become so again.

Many are aware of Sir Isaac’s status as the founder of classical physics. Fewer know of his work in optics, fewer still of his having lost a fortune in the South Seas Bubble from which he observed that he “could calculate the motions of the heavenly bodies, but not the madness of the people.” Even fewer know of his long, secret labors in alchemy (which was not yet differentiated from chemistry).

Perhaps Newton's greatest moment occurred 300 years ago today.

Hardly anyone in America is aware that Newton was Master of the Royal Mint of Great Britain. Therein he performed a famous miscalculation. It was a most happy accident.

Per JP Koning’s blog Moneyness: (described by no less than David Beckworth as “a ‘must read’ for anyone serious about understanding money and its history”):
By 1717, the silver outflow was getting significantly bad that the authorities decided to do something about it. Newton, still Master of the Mint, noted that the market price for the guinea was around 20s 8d, given the exchange rate between silver and gold in other European markets, and suggested an initial rate reduction from 21s 6d to 21 shillings.

But even at this lower price the English authorities were still overvaluing the yellow metal. They had now fixed the silver to gold ratio at 15.069 to 1, but because the rate was 14.8 to 1 in Holland and France, a profit still remained on exporting silver and importing gold. This silver outflow would continue over the decades until most silver was gone. England had gone from a bimetallic standard to a monometallic standard. Though it was still de jure bimetallic, de facto it had become a gold standard.
Thinking that others might find the tercentenary of this signal event worthy of celebration, I inquired among several substantial gold and gold standard aficionados, journalists specializing in the arcane, and monetary economists. Even the Royal Mint, which remains deeply devoted to its most famous Master.

To no avail. This column is one lonely 300th birthday tribute to the gold standard.
Join the birthday party!

From the Royal Mint Museum:
Isaac Newton was appointed Warden of the Royal Mint in the spring of 1696 on the recommendation of Charles Montague, Chancellor of the Exchequer. …

The Royal Mint was then in the Tower of London and it was accordingly to the Tower that Newton came in April 1696 to take up his new duties. It was a time of great activity, for the Royal Mint was grappling with the recoinage of old silver coins dating back to the reign of Elizabeth I and beyond. …

Appointment as Master
In 1699 the post of Master of the Royal Mint fell vacant by the death of Thomas Neale. Though technically less senior than that of Warden, it was a more lucrative post because the Master acted as a contractor to the Crown and profited from the rates at which he put the work out to sub-contractors. The Mastership was offered to Newton and he took up its duties with effect from Christmas Day 1699. Surviving the political upheavals of those troubled times, he remained as Master until his death in March 1727.

…  His famous report of 21 September 1717 paved the way for a reduction in the value of the guinea to the familiar 21 shillings
The gold standard is even more interesting when counterposed with John Law’s infamous and nearly contemporaneous experiment in a ruinous paper money scheme, the “Mississippi Bubble” (for which the word millionaire was first coined). As recalled by the Federal Reserve’s erudite James Narron and David Skeie in the New York Fed’s Liberty Street Economics:Convicted murderer and millionaire gambler John Law spotted an opportunity to leverage paper money and credit to finance trade. He first proposed the concept in Scotland in 1705, where it was rejected. But by 1716, Law had found a new audience for his ideas in France, where he proposed to the Duke of Orleans his plan to establish a state bank, at his own expense, that would issue paper money redeemable at face value in gold and silver.
....
…Law needed to print more money and broke the link to gold, which quickly led to hyperinflation, as we saw in our post on the Kipper und Wipperzeit.
John Law’s paper standard imploded within a very few years, ruining France (and Law). Isaac Newton’s gold standard lasted for almost two centuries, bringing vast prosperity to England, America, and the world.

There is a fascinating coda to the story of Sir Isaac Newton. The great Lord Keynes coined the famous indictment of the barbarous “gold-exchange standard” -- oft misunderstood as an indictment of the gold standard -- as “a barbarous relic.” Yet Keynes's last words were devoted to Newton. As recorded here:
The Royal Society of London planned an event to celebrate the tercentenary of Isaac Newton's birth in 1942. However World War II made it essentially impossible and the celebrations did not take place until July 1946. Lectures were given by E N da Costa Andrade, H W Turnbull, Niels Bohr and Jacques Hadamard. John Maynard Keynes had also been invited to lecture but unfortunately he died in April 1946, three months before the celebrations took place. Keynes was fascinated by Newton's manuscripts and had been the first person to see some of the manuscript material by Newton which had been kept secret until his papers were sold in 1936. Keynes' lecture, Newton, the man was delivered at the celebrations by his brother Geoffrey Keynes. Here is the text of the lecture:

….  In the eighteenth century and since, Newton came to be thought of as the first and greatest of the modern age of scientists, a rationalist, one who taught us to think on the lines of cold and untinctured reason.

I do not see him in this light. I do not think that any one who has pored over the contents of that box which he packed up when he finally left Cambridge in 1696 and which, though partly dispersed, have come down to us, can see him like that. Newton was not the first of the age of reason. He was the last of the magicians, the last of the Babylonians and Sumerians, the last great mind which looked out on the visible and intellectual world with the same eyes as those who began to build our intellectual inheritance rather less than 10,000 years ago. Isaac Newton, a posthumous child born with no father on Christmas Day, 1642, was the last wonderchild to whom the Magi could do sincere and appropriate homage.

         … Why do I call him a magician? Because he looked on the whole universe and all that is in it as a riddle, as a secret which could be read by applying pure thought to certain evidence, certain mystic clues which God had laid about the world to allow a sort of philosopher's treasure hunt to the esoteric brotherhood. He believed that these clues were to be found partly in the evidence of the heavens and in the constitution of elements (and that is what gives the false suggestion of his being an experimental natural philosopher), but also partly in certain papers and traditions handed down by the brethren in an unbroken chain back to the original cryptic revelation in Babylonia.
Thanks to Newton’s miscalculation, the classical gold standard became the world’s fundamental monetary system for most of two centuries. The “gold standard,” although no longer in effect monetarily, still connotes, according to the New Oxford American Dictionary, “the best, most reliable, or most prestigious thing of its type.”

As Senator Nelson Aldrich, chair of the National Monetary Commission, observed to the Economic Club of New York in 1909: “[T]he study of monetary questions is one of the leading causes of insanity.” This almost certainly was a sly swipe at William Jennings “Cross of Gold” Bryan, the leader of the Silverite faction of the Democratic Party and thrice-failed presidential nominee.

Few are aware of the gold standard’s splendid scientific provenance. Before Newton, the gold standard was anticipated by Copernicus, discoverer of heliocentricity, in his Essay on the Minting of Money, in which he wrote:
ALTHOUGH THERE ARE COUNTLESS MALADIES that are forever causing the decline of kingdoms, princedoms, and republics, the following four (in my judgment) are the most serious: civil discord, a high death rate, sterility of the soil, and the debasement of coinage. The first three are so obvious that everybody recognizes the damage they cause; but the fourth one, which has to do with money, is noticed by only a few very thoughtful people, since it does not operate all at once and at a single blow, but gradually overthrows governments, and in a hidden, insidious way.Joseph Priestley, the discoverer of oxygen and a titan of chemistry, devoted extensive attention to the gold standard, published in 1793 in his Lectures on History and General Policy.

Thus, we observe an iconic astronomer, an iconic physicist, and an iconic chemist in the gold standard’s provenance. No small matter.

Aldrich’s observation that “the study of monetary questions is one of the leading causes of insanity” is clearly true as applied to most economists and conventional politicians. Yet in the hands of scientists, it was otherwise. Really, the dollar’s definition as the fundamental unit of account for the economy properly belongs within the jurisdiction of the National Institute of Standards and Technology, right next to the ounce and the inch.

As Nathan Lewis, author of erudite books on the gold standard, including, recently, a splendid contribution to the literature Gold, The Final Standard, wrote forForbes.com (perhaps slightly exaggerating for effect, as Britain was then somewhat less of a backwater than most of Europe, yet point well taken):
Britain – which in the 17th century had been an economic backwater of no great significance – then became the financial capital of the world, the birthplace of the Industrial Revolution, and ruler of the greatest global empire of the era.

Not bad.

Britain’s monetary leadership faltered after World War I. The devaluation of 1931 was followed by a period of floating currency, and then several devaluations after WWII.

After 1914, the world’s greatest example of gold standard discipline was the United States. Although there was a devaluation in 1933, the dollar remained linked to gold afterwards, and there were no more devaluations until 1971.

The United States, which had been secondary to Britain in 1914, then rose to be the world’s financial center, the leading example of industrial excellence, and ruler of what amounted to the greatest global empire of the era.

What a coincidence.
What a coincidence....

If Donald Trump is to succeed in making America great again he will check in with his very good brain, discover that restoring the gold standard would not, after all, be so very hard to do, and propel America and the world into a new Golden Age. Restoring the gold standard would be, in some ways, as easy as an apple falling from a tree.

So, happy 300th birthday to the classical gold standard. And thank you Sir Isaac Newton, “the last wonderchild to whom the Magi could do sincere and appropriate homage,” for your splendid miscalculation.
---------------------
Ralph Benko is an advisor to nonprofit and advocacy organizations, is a member of the Conservative Action Project, a contributor to the contributor to the ARRA News Service. Founder of The Prosperity Caucus, he was a member of the Jack Kemp supply-side team, served in an unrelated area as a deputy general counsel in the Reagan White House. The article which first appeared in Forbes.

Tags: Ralph Benko, Donald Trump, Should Celebrate, 300th Birthday, The Gold Standard To share or post to your site, click on "Post Link". Please mention / link to the ARRA News Service and "Like" Facebook Page - Thanks!
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