This process, whereby precious metal coins become debased, as a result of wear and tear, clipping or deliberate debasement by the state, has occurred throughout history, and results in the prices of these metals rising, but also in a rebasing of the currency, and an increase in the quantity of it in circulation – inflation. It is a time honoured means of states paying off their debts, contracted in currency at one value, and paid back with currency of lower value.
“When, because of the resulting difficulties, it was decided to recoin all the money, Lowndes, the Secretary to the Treasury, claimed that the value of an ounce of silver had risen and that in future accordingly 6s. 3d. would have to be struck from an ounce instead of 5s. 2d. as previously. He thus in effect asserted that, because the value of an ounce of silver had risen, the value of its aliquot parts had fallen. But his false theory was merely designed to make a correct practical measure more palatable. The government debts had been contracted in light shillings, were they to be repaid in coins of standard weight? Instead of saying pay back 4 ounces of silver for every 5 ounces you received nominally but which contained in fact only 4 ounces of silver, he said, on the contrary, pay back nominally 5 ounces but reduce their metal content to 4 ounces and call the amount you hitherto called 4/5 of a shilling a shilling. Lowndes’s action, therefore, was in reality based on the metal content, whereas in theory he stuck to the name of account.” (p 77)
The bourgeoisie, however, who were, by this time, asserting their growing economic and social power, objected to this deception. It was they, after all, who were the state's creditors, and who were being repaid in funny money. As with many other such issues, at this time, their ideological champion was John Locke. In the confrontation between Locke and Lowndes, it was Locke who won the day.
“John Locke won the day and money borrowed in guineas containing 10 to 14 shillings was repaid in guineas of 20 shillings. Sir James Steuart gives the following ironical summary of this operation:
"...the state gained considerably upon the score of taxes, as well as the creditors upon their capitals and interest; and the nation, which was the principal loser, was pleased, because their standard” (the standard of their own value) “was not debased.”
Steuart believed that in the course of further development of commerce the nation would become wiser. But he was wrong. Some 120 years later the same quid pro quo was repeated.” (p 77-8)
After WWII, as part of the Bretton Woods Agreement, the price of gold was fixed at $35 an ounce. All other currencies exchange rates were then fixed against the Dollar. If a country found itself in difficulties, because it was importing more than it was exporting, it was expected to correct this by slowing its economy, thereby, slowing its imports. By raising taxes on consumption, it could divert some of its output to exports, and by raising its interest rates it would both slow its domestic consumption and draw in foreign capital, thereby bolstering its balance of payments. It could also apply to the IMF for loans to cover deficits in the short-term, and these loans came with strings requiring the country to get its finances in order.
In severe cases of imbalance, a country could devalue its currency, as Britain did in 1967. Such action makes imports more expensive, deterring them, and exports cheaper, thereby encouraging them, though this does not appear to be the case initially as a result of the so called J Curve. But, such action was frowned upon, and government's undertook them only reluctantly, as it was seen as a failure of economic management, and also provoked hostility from other countries, some of whom would retaliate with their own devaluations, or other trade measures. How far devaluation itself is a means of resolving such imbalances is another discussion.
No comments:
Post a Comment