Santayana’s Curse – Union Victory, Union Defeat

Over the next few days, we will be publishing excerpts from Chapter 2 of Santayana’s Curse, which is now available for Kindle.

… it is now barely remembered, but the year 1865 saw the formation of a precursor of our own European Monetary Union, called the Latin Monetary Union. Comprised initially of France, Belgium, Italy and Switzerland, this was later joined by, among others, Greece, Spain, and several East European statelets. The group was also, for many years, engaged in active negotiations with Britain and the US in the attempt to forge a universal standard with the aim of securing a furtherance of trade and the facilitation of cross-border investment.

The roots of the movement lay in the great gold strikes made in California in 1849 and Australia 1851-2 which proved so prodigious that, coupled with a British decision to refuse the use of gold in payment of taxes in the Raj, they soon began to upset the precarious balance between the two metals and threatened to push silver, once more, out of use. In response to this, Switzerland – with a certain irony, given that the ’49 strike took place on the property which Swiss émigré John Sutter had patriotically named ‘New Helvetia’ – took the decision to lower the fineness (the silver content) of all its coins of less than 5 francs face value from 0.900 to 0.800, essentially reducing them to token status. Two years later, the Italians did much the same and the new, light coins started to flood across the border into France and from thence into Belgium where, despite their ‘light’ status, they were nonetheless freely accepted.

As a raft of note-issuing banks sprang up everywhere in a Germany enthused by the successful inauguration of the Prussian Bank in 1846, the new institutions were in clear need of a means of restoring some semblance of 19th century rectitude to their shrivelled reserve ratios. So, as the French, British, and Americans kept their mints humming in the attempt to disperse the rising tide of gold, specie was soon flooding across the Rhine. Chaos was therefore in prospect.

Thus it was that the first of the great monetary conferences was summoned in 1865 at the behest of Louis Napoleon of France. Here, the participants sought to regularise the regime which had sprung up between them. Gold coins would continue to be struck by all members (at a 15.5:1 mint ratio), while all the 5 franc silver coins would be ‘full-bodied’ at 0.900 fineness, with all subsidiary coins retaining a token status at 0.835. In order to preclude a race to secure seigniorage gains from these latter (i.e., to turn a useful fiscal profit at the mint), a strict per capita limit of six francs was instituted.

Two years later, the conference reconvened in Paris with wider ambitions amid a growing penchant for gold alone to provide the cornerstone for a worldwide system of free exchange. Adding to the possibilities for expanding the scope of international harmony, it was noted that the US Gold half-eagle would differ by just 3 1/2¢ per $1 from a proposed LMU 25 franc coin, while the British sovereign would be even more closely aligned, having just a 2d (1/120) difference to address. Somewhat huffily, the pre-eminent British monetary authority – Lord Overstone – dismissed even such a trifling change as ‘fraud’ (would that his successors had observed such niceties) and agreement everywhere foundered on a series of such petty chauvinisms expressed by the delegates.

With this failure, the moment was lost forever, for having embarked upon the whole process in order to accommodate a flood of gold, it was silver which would henceforth be in structural oversupply.

For the first few years, as silver production had ramped up at the prodigious Comstock lode in Nevada and as employment of the new, more efficient, electrolytic refining process spread, the effects were muted by the fact that the Yankee blockade of the Confederacy had given rise to a sufficiently large demand for substitute Indian cotton that this naturally silver-hungry country had absorbed all of the intervening increase in global supply.

With the Northern victory, however, the full force of the new output would be felt undampened on world markets. Aggravating the shift, the post-Mutiny shake-up in India enforced upon the subjects of Her Majesty’s Imperial government the payment of a hefty tribute in the form of the so-called ‘Home Charges’. These essentially recycled the subcontinent’s chronic trade surplus by offsetting much of the drain associated with Indian exporters’ bills on London with a countervailing inflow from the tributary India Council Bills and, thus, greatly reduced the need for silver in settling the accounts.

The final nails were driven into the coffin by the war-torn process of German Unification under Prussia. At its successful conclusion and flush with the indemnity it had just extracted from the defeated French, the questions arose of how to complete the homogenization of the new Reich and what should be its relation to the wider world. It seems as though the decision was a close-run one, but ultimately Bismarck listened to Ludwig Bamberger and his then-allies among the Liberals and opted for a mono-metallic gold standard, arrogating to himself the right to dispose of the nation’s silver at will. Swiftly joined by its satellites in Scandinavia, who formed their own gold-based Monetary Union between 1873 and 1875, the silver overhang and the threat of sustained German sales became too much and the price began a prolonged and disruptive fall.

However, lest we become too alarmed by the sometimes apocalyptic treatment this depreciation received from contemporary commentators, we should note that, over the next two decades, silver shed some 35% of its gold value – an annual rate of loss of barely more than the 2% which today’s central bankers see as some kind of Holy Grail of ‘price stability’. Standards – monetary and otherwise – have clearly fallen a long way since then.

Bismarck would come to regret his choice. After his decisions had helped unleash a fabulous boom which seized almost the whole of Europe – the famed Gründerzeit of frantic company formation and soaring stock markets – the inevitable reaction set in, as crash and depression followed from 1873 onward. “The next time we beat the French,” he once remarked to a visiting American diplomat, “we’ll make them accept an indemnity from us.”

Writing six years later, Charles Holt Carroll could only agree:-

It is ignorantly and generally believed here that without this paradox of holding while lending—having your cake and eating it too, in the bank deposit—there would be no such business as banking. It is owing to this principle that Germany has been financially ruined, by receiving the war indemnity of $1,100,000,000 which France paid without feeling it. Germany used this money to increase the capital of her old banks, and more than double their numbers in chartering new ones, and the false money they produced was used, as such money always is used, in creating debt, and in promoting extravagant enterprises and wild adventures, that have fallen to ruin.

Still grumbling, amid the straitened monetary times of the later 1870s, the Iron Chancellor likened the gold standard to ‘a blanket too small to cover all those who wished to sleep under it’ and even flirted briefly with the idea of a return to bimetallism, to the intense excitement of that period’s soft money lobby in the US. Finally eschewing such a change as harmful in Germany’s struggle for world markets, he nonetheless left a poisonous legacy in the shape of his response to this period of economic difficulty and to the political threats it threw up.

Now it was that he broke finally with Bamberger and Delbrück, his old Liberal collaborators, and turned inward to a protectionism (‘the marriage of iron and rye’) soon matched by both French and Americans, adopting what is now euphemistically termed ‘industrial policy’ as its complement. This was also the fateful point where he inaugurated the suffocating blanket of the Provider State as the very embodiment of de Tocqueville’s nightmarish vision of an ‘immense and tutelary power, which takes upon itself alone to secure… [Men’s] gratifications and to watch over their fate’.

Alarmed by Wilhelmine Germany’s challenge to their own, long-accustomed dominance, the British elite of New Imperialists would soon copy many of these dire innovations, further inspiring their American Progressive counterparts to argue for much the same and also spawning a notable degree of imitation among the modernisers of Meiji Japan. In this way, the body politic lost the hard-won habits of minimal intervention, sturdy self-reliance, and balanced budgets, its simple vigour succumbing to an infestation with the same demoralizing and deficient institutional parasitisms which so many nations are belatedly struggling to eradicate in our own afflicted era.

Continue reading: Timeo Danaos (et Romanos).