The secret history of gold

This book is not only for those interested in economics or finance, but also for anyone who wants to gain a deeper understanding of the history of human civilization, the nature of currency, and the subtle forces at work in the modern world.

“Gentlemen, in applied mathematics you must specify the units” - Isaac Newton1.

With groundbreaking contributions to mathematics, optics, mechanics, philosophy, astronomy, and alchemy, including the laws of motion, the theory of gravity, and the reflecting telescope, Isaac Newton, along with William Shakespeare, Leonardo da Vinci, and Aristotle, must surely be considered one of the most intelligent individuals in human history.

As if that weren't enough, he is also credited with designing the gold standard, the world 's primary monetary system for over 200 years.

But this remarkable system was discovered by chance.

Let's go back to where the problem began.

In 1695, counterfeit money accounted for at least 10% of the currency in England.

Who would use good money if it could get rid of counterfeit money? This is especially true when it comes to paying taxes, and that is precisely why many Britons use counterfeit money. That year, the Treasury reported that for every hundred pounds collected, no more than ten shillings of good money were received. Bad money was driving good money out of circulation.

There were two types of coins in circulation at the time: one type was hand-minted before 1662, and the other type was machine-minted after the Royal Mint introduced its minting machines. Trimming the edges of coins, especially older coins, was a serious problem.

Meanwhile, silver coins virtually disappeared from circulation. On the European continent, silver was more valuable as a precious metal to be melted down and sold than it was in England as currency, so arbitrageurs melted down coins, shipped the silver abroad, and sold it for gold. Both Jews and the French were blamed for this, and by 1695 it was almost impossible to find legal tender in circulation.

This led to a shortage of money, which, of course, hindered trade. The 19th-century historian Thomas Babington Macaulay, who served as Paymaster General, stated that in just one year, bad money had harmed the British nation more than “in twenty-five years by bad kings, bad ministers, bad parliaments and bad judges”4.

Meanwhile, King William needed a stable currency if he wanted to continue his wars on the continent, and in 1695 he nearly had to beg the House of Commons to respond to the currency crisis.

At that time, the Treasury Secretary William Lowndes wrote to what were considered the most insightful figures in England for their advice: the philosopher John Locke, the architect Sir Christopher Wren, the political economist Charles Davenant, the bankers Sir Josiah Child and Gilbert Heathcote, the lawyer John Asgill, and the scientist Sir Isaac Newton. Quite an impressive list indeed.

[...]

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The gold standard. Photo: internet.

With the establishment of the Bank of England, Newton recognized the possibilities that paper money opened up. “If interest rates are not low enough to benefit trade,” he wrote, “then the only proper way to lower interest rates is to expand the paper instruments of credit, until we have more money in circulation through trade and business.”5 He understood that conventional value and intrinsic value are not necessarily the same.

Newton also clearly saw that currency criminals acted very rationally. As long as there was profit to be made, they would continue to embezzle money, counterfeit currency, and sell precious metals abroad. Smuggling gold and silver in bars was punishable by death, yet it still happened. Coercion alone would not be enough to stop it. The market itself needed to change.

He proposed two measures. First, to address the problem of coin embezzlement: all coins minted before 1662 had to be recalled, melted down, and re-minted into coins with uniform edges. Once hand-minted coins were no longer in circulation, embezzlement would become much more difficult. However, reminting all the coins in the country, at a time when machinery was still very rudimentary, was no small undertaking.

Secondly, to address the silver issue: the silver content in coins needs to be reduced so that the amount of silver contained in a coin corresponds to its face value.

Newton's second proposal was not widely accepted, particularly by John Locke. A pound equals twenty shillings, so a shilling should contain a corresponding amount of silver. Newton may have argued that conventional value was more important than silver content, but the landowners and Parliament (whose members were largely landowners) believed that reducing the silver content by 20% would also reduce the real value of their property by 20%. In 1696, Parliament approved the reminting of coins, but stipulated that the new coins must retain the same weight. Newton warned that the outflow of silver would continue: and indeed it did.

Despite their disagreements on the aforementioned issue, Locke and Newton remained friends, and for many years Locke tried to find Newton a position. He influenced one of his protégés, the Chancellor Charles Montague, who in March 1696 sent Newton a letter informing him that the king intended to appoint him Warden of the Mint. Two days later, Newton left his home in Cambridge for London, beginning his new career.

[...]

Newton performed so well as Mint Officer that in 1699 he was promoted to Master of the Mint. After England and Scotland united to form the Kingdom of Great Britain in 1707, he directed a reminting in Scotland, paving the way for a new currency of the new kingdom.

He solved the problem of embezzlement, helping to overcome many counterfeiting issues, yet silver continued to cross the English Channel, just as Newton had predicted. By 1715, almost all of the coins Newton minted between 1696 and 1699 had left the country.

Newton's studies shifted from tides, planetary movements, and pendulums to gold markets. He devised a very detailed examination of foreign coins, through which he realized that gold was cheaper in the newly opening markets of Asia than in Europe, and thus silver was not only drawn out of England but also out of Europe itself to India and China to be exchanged for gold.

Meanwhile, the world's next major gold rush has begun.

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1. Paterson, I., The God of the Machine (United Kingdom: Taylor & Francis, 2017), p. 204.

2. Levenson, T., Newton and the Counterfeiter (Boston, MA: Houghton Mifin Harcourt, 2009), p. 63.

3. Levenson, T., Newton and the Counterfeiter, p. 112.

4. Levenson, T., Newton and the Counterfeiter, p. 112.

5. Levenson, T., Newton and the Counterfeiter, p. 243.

Source: https://znews.vn/khac-tinh-cua-bon-lam-bac-gia-post1658470.html