The Power of Gold by Peter L. Bernstein & Paul A. Volcker

Author:Peter L. Bernstein & Paul A. Volcker
Language: eng
Format: epub
Publisher: Wiley
Published: 2012-02-29T16:00:00+00:00

Lord Lansdown was right: the fall was slow and gradual, but inflation ultimately took hold in Britain. Prices in 1802 were lower than they had been in 1800, but they climbed 30 percent between 1802 and 1807 and by another 15 percent over the next three years. Prices had doubled from their 1797 level when Napoleon succumbed at Waterloo in 1815.14

The inflation was associated with a substantial increase in money and credit. No longer constrained by the gold supply, the Bank’s loans to business—so-called commercial bills under discount—more than quadrupled between 1797 and 1810. The Bank has never supplied the financial markets with such an explosion of credit except during the extraordinary conditions of the two World Wars of the twentieth century. By no coincidence, the Bank’s note issue expanded from approximately £10 million to £25 million over the same period of time, with half the increase having occurred just since 1807, while deposits at the Bank were increasing at about the same pace. The Bank’s holdings of coin and bullion fluctuated with the fortunes of war but were at no point equal to as much as 50 percent of the Bank notes outstanding; in 1794, before all these troubles began, the gold reserve had been equal to 70 percent of the outstanding notes.15

Beginning in 1808, the price of gold began a rapid ascent. By 1809, the gold in a guinea was fetching £4 10s an ounce in the marketplace, well above the price of £3 17s 10½d that had defined the value of gold when Isaac Newton was pondering the matter back in 1717. Sterling was also losing value relative to the currencies of other nations—toward the end of 1809, the pound was exchanging in Hamburg, Amsterdam, and Paris from 16 percent to more than 20 percent below its official par values.16 The result was a 50 percent decline in the Bank’s holdings of gold coins and bullion between February 1808 and August 1809, even though these holdings had been replenished since the low point at the enactment of the Bank Restriction Act in 1797. The restoration of convertibility appeared further off than ever.

The financial community was outraged.17 On August 29, a 38-year-old stockbroker as spokesman for this community submitted the first of three letters on this matter to the Morning Chronicle, complaining that the public “do not seem to be sufficiently impressed with the importance of the subject, nor of the disastrous consequences which may attend the further depreciation of the paper.”18 His name was David Ricardo, and this was the first time his name had appeared in print. The letters and additional commentary subsequently appeared as a tract titled “The High Price of Bullion.”

Ricardo was born in 1772, when Adam Smith was fifty years old and Thomas Malthus, Ricardo’s beloved friend and unremitting intellectual opponent, was six years old; Ricardo first met Malthus in 1809 at the very moment he was sending in his letters to the Morning Chronicle.19 Ricardo’s father was a Jewish merchant banker and

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