Archive for the ‘Gresham's Law’ Category


Thursday, May 16th, 2013

By Mark Rogers

In the Seventeenth Century, “[t]he financial system of England had staggered through the disturbances of the Civil War and had grown worse during the inefficiency and corruption of the Stuarts … the current money had deteriorated to a state of confusion.” (Louis Trenchard More, Isaac Newton: A Biography (first published 1934), Dover Publications, Inc., New York, 1962)

This state of confusion resulted from the mutilation of money, rendering its recoinage a matter of urgent necessity. In the 17th century counterfeiting and adulterating the coin of the realm was so common that a coin worth its original face value was extremely rare. Both crimes were capital offences.

Louis Trenchard More describes the debauched currency and its consequences:

“The standard currency of the country was silver; and till the reign of Charles the Second the minting of the coin had been carried on by the process introduced by Edward the First in the thirteenth century. The metal was cut with shears and then shaped and stamped by the hammer. Coins made thus by hand were not exactly round nor true in weight and, as they were neither milled nor inscribed on their rims, they were easy to clip, or file, without detection. Clipping thus became one of the most profitable kinds of fraud. The custom had become so detrimental that, in the reign of Elizabeth, it was treated as high treason [hence the death penalty M.R.]. At the time of the Restoration, a large proportion of the coins had been more or less mutilated. To remedy this condition, a mill worked by horses was set up in the Tower which stamped the coins accurately and inscribed their edges with a legend; as, however, the old money was kept in circulation, the remedy was useless. The new coins were either hoarded, or melted down and shipped abroad; the old coins persisted as the medium of business, and they continued to shrink in weight and value. In the autumn of 1695, it was found by actual and careful test that the average value of a shilling had been reduced to six pence. Every transaction was accompanied by a bitter altercation between the buyer and the seller; the former insisting on estimating the coins by tale, and the latter by weight. Every Saturday night, all over the country, was a period of riot and bad feeling between employer and employee. The labourer and the clerk might receive the stipulated number of shillings, but for their purchases they acted like sixpences or less. We have, as a startling witness of these troubles, the complaints of Dryden that his publisher, Tonson, on one occasion included forty brass shillings in a payment of clipped money, and at another time the money was so bad that all of it was returned. If the foremost writer of the day was so treated, we can easily imagine the distress of the common people. … During even a most disturbed and evil rule, the common people manage to pursue their personal affairs, but such a state of the money as then existed affected every moment and every transaction in their lives.”

The situation was worse than impossible, and in 1695 King William III, addressing Parliament, recommended that the coinage be reformed. Thus, Charles Montague, the Chancellor of the Exchequer, prepared a Bill to this effect.

Charles Montague

Montague was the fourth son of a younger son of the first Earl of Manchester; he was later ennobled as Lord Halifax. Although Isaac Newton’s junior by nineteen years, Montague struck up a deep and lasting friendship with the great philosopher, then Lucasian Professor of Mathematics at the University of Cambridge, when he, Montague, matriculated at Trinity College as a Fellow-Commoner.

Montague was a man of superlative ability and quickly impressed himself upon the political life of the nation. His highest achievement, the great recoining, came about after his appointment as Chancellor of the Exchequer in 1694. He also instituted the Bank of England, as a private body. As a result of his friendship with Newton, he secured the latter the position of Warden of the Mint in 1696. It was this partnership that was to carry out the new minting. According to Montague, the success of this project was due to the administrative work of Newton.

The Great Recoinage

The first remarkable aspect to note of the proposed recoinage, was that this was to be done at a time of war: this was the war between France and the League of Augsburg (known as the Nine Years’ War 1688-1697, or the War of the Grand Alliance), which King William III joined soon after becoming King of England with his wife Mary as Queen, on the occasion of the Glorious Revolution of 1688. The North American theatre of this war, known as King William’s War, finally settled the issue of the American colonies between France and England in the latter’s favour.

To embark on the wholesale refashioning of the national coinage, and to complete it in a short time, at a time like this was a remarkable feat and owed everything to Charles Montague’s fortitude and eloquence. Although the Jacobites tried to discredit the government and the Whigs advised half-hearted measures, Montague managed the House of Commons so adroitly that the Bill was passed into law on the King’s signature on 1st January, 1696.

It provided for the recoining to be to the old standard of weight and fineness, and for all new coins to be milled. The public exchequer was to bear the loss on the clipped coins. Most expeditiously, the time at which no mutilated money could pass ever again was set at 4th May 1696: this great task, therefore, was to be carried out in a mere four months. We must assume that such was the pressing need to address this huge task as Montague and Isaac Newton, the new Master of the Mint, understood it, that no time was to be lost.

This new coin was the cause of the window tax, which was not as unpopular as legend has suggested. It came about like this: the loss to the exchequer referred to above was not easy to estimate, but Montague obtained a loan from the Bank of England which was secured by the new tax levied on the number of windows of the houses; however, inhabitants of cottages were to be exempt from the new tax in compensation for the cruel harassment they had undergone at the hands of the assessors of the now defunct hearth tax.

A month after the bill became law, the recoining had begun. Furnaces were erected in the gardens behind the Treasury and vast quantities of mutilated money were melted in them and cast into ingots which were at once conveyed to the Tower for minting. Although there had at first been widespread panic at the thought of money, however bad, being withdrawn from circulation, its relative scarcity did not become a serious factor and the panic soon subsided.

Isaac Newton assumed responsibility for the work in March, and under his direction branches of the mint were set up in several towns, thus easing the passing of the old money in exchange for the new throughout the country.

4th May

Loius Trenchard More describes the result:

“The real agony began in May when the clipped coins were no longer received by the government in payment of taxes. There was little of the old money which would pass the test and the new money was just beginning to trickle from the Mint; but, by means of barter, of promissory notes given by merchants, and of negotiable paper issued by the Exchequer, the summer slowly wore away. It was not till August that the first faint signs of returning ease in the money situation appeared, and there is no doubt that the able administration and indefatigable industry of Newton shortened this period of distress. He wrote peremptorily to Flamsteed that he would not be teased about mathematical things nor trifle away his time while he was about the King’s business. The Wardens of the Mint had previously been fine gentlemen who drew their salaries and rarely condescended to do any work.”

But work Newton certainly did: “It had been considered a great feat to coin silver to the amount of fifteen thousand pounds weight a week; but under the energetic management of Montague and Newton, the weekly coinage soon rose to sixty thousand pounds, and finally to a hundred and twenty thousand pounds. But even this rate was inadequate, and normal conditions were not restored till the following spring.”

Thus on 4th May 1696, mutilated money was finally abandoned for true coins, which were far harder to counterfeit, and a proper system of milling and guaranteeing the standardised value of the coinage came into being, overseen by one of the greatest scientific minds of all time, Sir Isaac Newton. We shall see what he thought of debasers of currency below.

“When was the last time you read your money?”

The question is posed by the analysts Daniel Brebner and Xiao Fu in their report for Deutsche Bank, London, Gold: Adjusting for Zero (discussed here). They go on:

“It is useful to do so as it will call attention to its subtle warnings. A £20 note reads: I promise to pay the bearer on demand the sum of twenty pounds. Two immediate questions arise: 1) 20 pounds of what? 2) Who is I, and can he/she be trusted? The US dollar bill is more prosaic, its nebulous message being: This note is legal tender for all debts, public and private. Our only comment would be that since fiat money is inherently a form of obligation (liability) that it is simply a tool for exchanging debts of different riskiness and thus underscores that there is an inherent risk in such an instrument.”

That risk is well brought out in a passage I have quoted in an earlier article. It is by C.H.V. Sutherland (then Keeper of Coins at the Ashmolean Museum, Oxford, in “Gold: Its Beauty, Power and Allure”)

“Collapse of the gold standard was followed by the era of credit currency. We accept a bank-note for the payment of £1, but in accepting it we receive in fact only the bank’s promise to pay £1. We accept a cheque, similarly; but a cheque again is no more than its drawer’s promise that his bank will pay us another bank’s promises. The growth of ‘money’ in this sense – and of course it is not money at all, in any true sense, but an extension of credit – is one of the most remarkable features of economic life since 1914 [emphasis added].”

The risk is presently underscored by quantitative easing and low interest rates: capital/worth is fiercely undervalued, with millions of pounds being wiped off pensions and savings.

In other words the promise on a modern English banknote is meaningless, and as such is a breach of trust with the general public. At one time the note was no more than a convenient substitute for gold and silver coins, and the strength of the currency depended on knowing that should anyone wish to hold the “I” to account, the promise on it would be redeemed in actual gold/silver coin or bullion. Knowing this was sufficient to keep the notes rather than coins in circulation; the trust was reciprocal in that the Bank of England did not dare print more of them than could be practically redeemed, thus keeping faith with the general public that the value stated on the note was a real value.

Mutilated Money Now

While the mutilation of the imperfectly guaranteed silver coinage in the seventeenth century was obvious to all, hence the squabbles in trading and on payday that an English note is itself mutilated money is not so obvious. The comparison can be made with the PAYE system: the vast majority of people in work in this country is on PAYE and as such receives their salary/wages net of tax, it having been deducted by the business they work for before the wages are paid over. In other words, not having to write out a cheque to the Inland Revenue, most people are only aware of the taxes they pay in the abstract – it is not a painful moment of reckoning each time tax is paid as it is for those of us who are business owners or freelance.

In this sense, the promise on a bank note represents mutilated money at one remove: we take it on trust that we can proffer these notes in exchange for goods and services, so we tend to think of the notes themselves as money. But they are not: I have remarked before that QE is the state forging its own currency, but without gold backing, even before QE, the actual “currency” in circulation is fake. And of course the coins we use are made of base metals and not precious ones, and are therefore far easier to forge. Indeed it was estimated earlier this year that three in every £100 pounds worth of pound coins is counterfeit.

This is the denouement of the situation described above by Keeper Sutherland.

Hang Them

As observed in above, counterfeiting and adulterating the coin of the realm were capital offences: death by hanging in these instances. It is interesting that the public did not approve: although the debased coinage was an economic disaster which enveloped everyone, the act of skimming a few shreds of precious metal from a handful of coins seemed, in itself, too insignificant for such a draconian punishment. “The sympathy of the people extended to the malefactors: juries would not sentence except in flagrant and wholesale cases, and judges would not sentence; while the evil effect of the practice spread its poisonous influence throughout the trade and life of the nation.” (Trenchard More)

The gallows did nothing to curb the practice because it was too easy to perform, thus ensuring that many people of course went undetected. While he was Warden of the Mint, Sir Isaac Newton had the fate of a counterfeiter drawn to his attention. He was firmly on the side of upholding the existing law, and the short letter in which he does so is worth quoting in full:

Newton to Lord Townshend

My Lord,

I know nothing of Edmund Metcalf convicted at Derby assizes of counterfeiting the coin; but since he is very evidently convicted, I am humbly of the opinion that it’s better to let him suffer, than to venture his going on to counterfeit the coin and teach others to do so until he can be convicted again, for these people very seldom leave off. And it’s difficult to detect them. I say this with the most humble submission to His Majesty’s pleasure and remain,

My Lord, your Lordship’s most humble and obedient Servant,

Is. Newton, Mint Office Aug. 25, 1724

Of course, the problem is in many ways worse now because whereas the counterfeiters and adulterers of yore were common criminals and ordinary folk on the make, and the problem was the cumulative result of the individual acts of hundreds of people, the debasers of the currency today are government ministers and state officials: debasement is official policy, the inevitable consequence of fiat currencies.

Is hanging too good for our lords and masters today?

A Statue Commemorating Sir Isaac’s Service to his Country as Master of the Mint on the Fourth Plinth at Trafalgar Square:

Among the ideas for a permanent memorial on the plinth at the North West corner of Trafalgar Square, there have been from time to time suggestions that the statue should be of a notable civilian.

In keeping with the other statues – one King, two generals and one Admiral – a life which contained some signal service to the country at large ought to be the guiding principle on which such a civilian should be chosen.

It is suggested here that an eminently suitable candidate for this honour is Sir Isaac Newton. Apart from Sir Isaac being universally known for his astonishing scientific achievements, his claim to notice in the context of a public statue in Trafalgar Square is the heroic effort he put into the Great Recoinage of the debased gold and silver currency which eradicated mutilated money and thus put an end to the argument and riot that habitually took place when pay day drew nigh or payments fell due.

For the raison d’être of these articles on read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS

For background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST

For a series of articles on the pernicious effects of progressive tax regimes: THE MORAL DILEMMA AT THE HEART OF TAXATION

For a review of one of the most important books on the financial crisis published last year: THE MESS WE’RE IN: WHY POLITICIANS CAN’T FIX FINANCIAL CRISES


Sunday, November 4th, 2012


By Mark Rogers

After all the froth over tax evasion, in a remarkably short space of time the taxman is doing a deal: “Hundreds of tax evaders … will escape prosecution and keep their identities secret under immunity deals offered by Revenue & Customs,” reported The Times on Friday, 2nd November, in a front page story. The idea is not to waste Court time and further expense if so-called “secret account-holders” simply stump up their taxes and pay penalties. There has already been one prosecution for “serious fraud” and there will be a select few more.

The newspaper also quotes a former taxman who now works for a law firm as saying: “It is those at the lower end of the social scale who go to prison. There is no immunity for benefit cheats.”

In a development in Greece, a journalist who published 2,000 names of Greek “secret account-holders”, which include industrialists, financiers and politicians, was acquitted of breaching privacy laws, after the prosecution offered no witnesses. The journalist Kostas Vaxevanis is quoted, in a separate story on page 8, as suggesting that the list detailed “groups of people stealing from the Greek state”.

The HMRC deals are being offered to those British people who turned up on a list of account holders at a Swiss branch of HSBC, which list was stolen two and a half years ago by an employee of the bank – thus violating bank-client confidentiality – which was given to the then French Finance Minister, Christine Lagarde (now head of the IMF). She in turn gave HMRC 6,000 names of UK citizens (500 of whom have so far been investigated for fraud).

HMRC, Evasion and the Mis-spending of Savings

Before looking at the moral dilemmas of what has recently happened, and in particular the unfortunate view of Mr Vaxevanis, let us look at some of the more straightforward economic practicalities.

HMRC is assuming that the Lagarde list contains people who do not have a cash flow problem i.e., the deals, which as noted save precious court time, are possible because both the tax and the fines are assumed to be achievable. A deal, to work, requires the agreement of both parties as to what is feasible, whereas justice demands that one party has justice visited upon it in the name of the law, as pursued by the aggrieved party.

As it is deals that are being offered, the back taxes and the fines must come out of savings. This gets to the heart of the problem, which is that among the reasons for the evasion in the first place is the perception that the state misapplies resources, and therefore the taxing of successful businessmen is to mis-spend savings which would otherwise have been applied as investments. This is also another reason, of course, for not sending the majority of these so-called evaders to jail: they are after all a productive element in any economy, producing goods, services and jobs. The problem of UK taxpayers’ assets being held abroad is the simple recognition that the tax regime is too onerous in the UK and that government wastes money.

Deals and assets

So there is at least a tacit recognition that these individuals play a productive part in economic life. What is required is the further recognition that when a tax regime becomes too complex, and the welfare state, which inevitably requires big government, is all-pervasive, then the problem is the government, not the so-called evader.

But these deals usher in another confusion. Hitherto, most of the fuss has been about legal tax avoidance (as discussed for example here, Cowboy Accountants – or Lone Rangers?). Now it transpires that the Lagarde list exposes the problem of hidden assets. This is indeed only, from an anti-Keynesian point of view, the reverse side of the problem of the initial evasion, the hidden assets being on the Keynesian view “hoardings”.

This is the operation of Gresham’s Law in the welfare state economy: bad money/bad monetary policy driving out good money, either into Swiss bank accounts, or, as another aspect of the tax furore initiated by the Chancellor revealed, into good works – this was the attempt by the Chancellor to cap charitable giving; this attempt revealed that many rich donors, who use the tax exemption schemes drawn up by HMRC, actually give more to charity than the exemption is worth!

Whistleblowing? Accountability?

The term “whistleblower” entered the political lexicon largely to describe a civil servant who has come across corruption and incompetence in government and decides to risk all by exposing it – the biggest two in the UK in recent years being the utter incompetence of the immigration department and the corruption of the MPs’ expenses scandal.

So why is the private employee of a private institution being called a whistleblower for sneaking on his employer’s clients? The answer lies in the vexing view of Vaxevanis, the Greek journalist who believes that asset hiders are “stealing from the Greek state”.

That is the welfarist assumption in a nutshell: that private citizens’ money actually belongs to the state. However wasteful the state, and however much that waste prompts the operation of Gresham’s Law, those who avoid taxes, in the hope that more productive times might return (after all, with interest rates so low, why invest?), are branded thieves – for hanging on to their own money.

This view of the vexing Vaxevanis reverses the idea of accountability – as I have remarked before, the state needs to be very sure that taxpayers are getting value for money before accusing citizens of being in effect criminals (and see here for further implications for constitutional government).

Real cheats

Which brings us back to the idea that there are two modes of justice: one for the rich, even when they save their money against government waste, incompetence and malfeasance, and another for those poor who cheat on the benefits system. It is however, wholly commensurate with the idea of justice that the latter are punished: they have devised ways to make claims on hardworking taxpayers’ money to steal what does not belong to them. As the actions of HMRC have implicitly acknowledged, all that “evaders” and “hoarders” have done is to hang on to more of what is actually theirs.

A benefit cheat is breaking the criminal law, a long-sanctioned element of the English Common Law. A tax avoider is simply breaching legislation, often passed in fits of class antagonism “against the rich”, that allows the state to snatch a portion of his wealth, that allows the state to believe that all our incomes belong to it – see the Orwellian notion of “the taxpayer’s allowance”.

This is a morally corrosive view, which leads to constitutional vandalism. That, not tax evasion, is the real problem of our times.

Readers curious as to why articles of this nature should be appearing on a gold investment website should read: GOLDCOIN.ORG: MIXING POLITICS AND NUMISMATICS 

And for background on the writer: CONFESSIONS OF A LAW AND ORDER ANARCHIST


Wednesday, October 31st, 2012

By Mark Rogers

A discussion of Gold: Adjusting for Zero by Daniel Brebner and Xiao Fu, Deutsche Bank, London, 18 September 2012

2008 did not just happen. The financial squalor of recent years is the culmination of several long-standing factors, the most important being cultural, the “group think” of the Keynesian consensus. To begin with the analysts’ conclusions: while their report explains that a return to the gold standard is feasible, they are not sanguine that it will happen:

“The world economy has, over the past century, morphed into a highly integrated, government dominated system guided by conventional wisdom (group think). The self-reliant individualism of the free market has been left behind in favour of a ‘new age’ of coddled consumerism. Culturally this represents a very powerful force … one which minimises creative options/solutions to economic impasses.” (p. 16)

“Many economists shudder at the notion of a gold standard; this is understandable given the school of thought to which most adhere: Keynesian or Keynesian derivative.” (p. 14)

High on the list of Keynes groupies who are in powerful positions is Ben Bernanke, Chairman of the Federal Reserve: it would take a conversion of Damascene proportions to get him to change his view of gold, and where he leads, many other central bankers and finance ministers willingly follow.

The authors of the report are therefore to be congratulated for their sombre realism in discussing this issue.

Zeroing in

As we approach Keynes’s ideal of 0% interest rates, “[m]oral hazard continues to be encouraged … The financial system in fact remains oriented to encourage further leverage and risk-taking.” This has an important consequence that goes a long way to explaining the crises that engulf us: investment is made simpler “in the sense that one only needs to look to what is ‘easiest’ rather than what is ‘right’.” If probity is at a discount, and an extravagant one at that, then why should politicians and policy makers even care about the consequences of their decisions? The Libor scandal (here and here), for instance, is an almost inevitable consequence of such moral insouciance.

A pertinent consequence for investors of quantitative easing is, as the report points out, the increasing price of gold. This is in fact simply another version of Gresham’s Law: as bad “eased” money increases so true value is driven into gold, forcing its price upwards given its relative scarcity. This is not to say that quantitative easing is good for gold, that is, easing does not contradict their assertion that a return to the gold standard is desirable given that this would prevent any such easing. It is simply a recognition of the fact that bad money always has this consequence: a return to the gold standard would be a restraint, allowing money to have a secure measure of value and preventing the arbitrary manufacture of money that destroys value.

Human Effort

The most remarkable aspect of this report is not the advocacy of a return to the gold standard – after all others are making the same case. What is interesting is the space the authors devote to the fons et origo of value: human effort. They devote two and a half pages (9-11) of what is after all a very short analysis to this concept and make this extremely important point: “if capital is stored effort, then debt is borrowed effort: either someone else’s or your own estimated future output.” The effect of exceptionally low interest rates is therefore to devalue your future effort by selling it to yourself, if you borrow, at a discount.

It is in this context that a return to the gold standard must be judged as essential: the moral hazard that the authors identify as being at the heart of the crisis cannot be allowed to continue.

The full report is available here.