Money Money Money

The Chinese invented paper, then printing, and then printed paper money. Under Kublai Khan, leader of the vast Mongol Empire, printed paper became an acceptable form of legal tender. The Chinese Ming Dynasty, under the Han, ruled China from 1368 to 1644 A.D., during which time China’s population doubled and external trade greatly increased, resulting in a desire to back the Chinese currency with silver.

The Catholic Habsburg King Philip II of Spain (1556 – 98), later King Philip I of Portugal (1581 – 98), ordered a Pacific expedition from the west coast of Mexico in 1565 to claim and settle a proposed new colony to be named in his honour – The Philippines. Thor Heyerdahl demonstrated by his famous 1947 voyage on the raft Kon Tiki that flotsam will drift from the west coast of  the Americas across the Pacific; the challenge was to return against the prevailing wind and currents. The Basque navigator Andrés de Urdaneta solved the problem by sailing north on his departure from Manila to the subarctic, where he picked up the high-latitude westerlies that blew him across to America. Then the coastal currents carried him south to California, hence the Spanish ports of San Francisco and Los Angeles, and on to a safe return to Mexico, at the soon-to-be Pacific port of Acapulco.

As a result Acapulco became the home of the famed Manila Galleons which sailed once or twice a year to Manila from 1565 to 1815 each carrying a declared average of 50 tonnes of bullion, the majority in the form of freshly minted gold and silver coins struck in Mexico City for the purpose of facilitating trade throughout the Pacific in Chinese luxury goods. The silver 8 reale coin, as struck between 1572–1734, was known in Mexico as maquina de papalote y cruz or more popularly as pieces of eight, the Spanish dollar.

China became the vast sink into which the world’s silver drained. The old world wanted what China had to offer through its sea borne merchants, principally spices, porcelains and silks, yet the Chinese wanted only one thing from the rest of the world, a recognised tradeable silver coin which could be treated as bullion with an acceptable known value to back their paper currency. China, a nation with only a few minor silver deposits, used copper coinage and silver ingots, sycees. The silver Spanish coins, taken in payment for goods sold at sea and returned in coin by traders to their shore-based suppliers in China, became the base line of trust in Chinese paper money.

Freshly minted gold.

Some even altered these Spanish dollars so they could be used as their local currency. Governor Macquarie, having trouble with paper promissory notes and without a bank until 1817, arranged with the British government in 1813 to bring into New South Wales £10,000 in the form of 40,000 Spanish dollars, or in English, pieces of eight.

To make it difficult for the coins to be taken out of the colony, and to double their number, the centres of the coins were punched out and both parts over stamped.

The punched centre, known as the ‘dump’, was valued at 15 pence, and the outer, known as the ‘holey dollar’, was worth five shillings.

The Spanish silver dollar was the coin upon which the original United States dollar was created, remaining legal tender in the United States until the Coinage Act of 1857.

The printed banknote of the 20th century was, until the Great Depression, still backed by minted gold and silver coinage, the redeemable metallic equivalent. Britain went off the gold standard and the right to redeem Bank of England banknotes for gold ceased in the Depression of 1931. The silver three penny weights and six penny weights of my childhood were later withdrawn. The magic of the Christmas pudding was lost once a sixpence melted for more than the face value of the coin.

On the death of my grandfather in 1954, a former Master of a City of London Livery Company, I inherited his white tie and tails, Inside the jacket pocket was a neatly folded large white 1950’s, printed to one side, 5 pound note; his emergency money. This while as a cadet at Sandhurst in 1960 I was paid 27 shillings (A$2.35) a week all found, and my father gave me an allowance of 100 pounds (A$180) a year, now only a day’s wages. Yet, I survived with some comfort.

Gold Standard

I mention this as being indicative of how the printing of money has been rife throughout my lifetime. The appeal of a gold standard is that it arrests the issuance of money by politicians. The physical quantity of gold held by a nation’s central bank becomes a limiting factor. The goal of monetary policy is to prevent inflation and deflation and promote a stable monetary environment in which full employment can be achieved. A history of the U.S. gold standard shows that when such a simple rule is adopted, inflation can be avoided. The problem faced by our politicians is that strict adherence to a gold standard creates economic instability and political unrest and their chief aim is to hold on to the reins of power.

With World War I, political alliances changed, international indebtedness increased, and government finances deteriorated. While the gold standard was not suspended, it was in limbo. This created a lack of confidence in the gold standard that exacerbated economic difficulties. As the gold supply continued to fall behind the growth of the global economy, the British pound sterling and U.S. dollar became the global reserve currencies. Smaller countries began holding more of these currencies instead of gold. The result was the consolidation of gold as bullion in the vaults of a few large nations.

The stock market crash of 1929 was only one of the world’s post-war difficulties. The pound and the French franc were out of kilter with other currencies; war debts and repatriations were stifling life in Germany; commodity prices were collapsing; and banks were overextended. Many countries tried to protect their gold stock by raising interest rates to entice investors to keep their deposits intact rather than convert them into gold. These higher interest rates only made things worse for the global economy. In 1931, the gold standard in England was suspended, leaving only the U.S. and France with large gold reserves to back their currencies.

Then, in 1934, the U.S. government revalued gold from US $20.67/oz to US $35/oz, raising the amount of paper money it took to buy one ounce to help improve its economy. As other nations could convert their existing gold holdings into more U.S dollars, a dramatic devaluation of the dollar instantly took place. This higher price for gold increased the conversion of gold into U.S. dollars, effectively allowing the U.S. to corner the gold market. Gold production soared so that by 1939 there was enough gold in the world to replace all global paper then in circulation.

Today, in anticipation of a disaster to come, gold has crossed the line at A$2000 an ounce. I suggest that it still has a long way to go. As World War II was coming to an end, the leading Western powers met to develop the Bretton Woods Agreement, which would be the framework for the global currency markets until 1971. Within the Bretton Woods system, all national currencies were valued in relation to the U.S. dollar, which became the dominant reserve currency. The dollar, in turn, was convertible to gold at the fixed rate of $35 per ounce. Hence the global financial system continued to operate under a gold standard, albeit in a more indirect manner.

The agreement has resulted in an interesting relationship between gold and the U.S. dollar over time. Over the long term, a declining dollar generally means rising gold prices. In the short term, this is not always true, and the relationship can be tenuous at best. Generally, as the dollar rises, gold typically declines.

The American Federal Reserve has pumped over US$3 trillion into the system under Trump, even promising never-before-seen levels of money printing and so-called quantitative easing almost to infinity through an unlimited bond-buying program.
This printing by the Trump administration should produce out-of-control inflation and the dollar’s displacement as the world’s funding currency, resulting in the complete destabilisation of the U.S. financial system.

Australian Debt

Tony Abbott.

When Labor lost government in Australia, the Monthly Financial Statements for September 2013 showed that the net Australian debt was A$175 billion.

A debt ceiling, on how much the Australian government could borrow, existed with a statutory limit set by the Rudd government before the GFC in 2007 at $75 billion, later increased to $300 billion in May 2012 as a result of the GFC. The GFC cost Rudd government over the catch cry by the Abbott Liberals of ‘Debt and Deficit’.

In November 2013 the Liberal government requested Parliament’s approval for an increase in the debt ceiling to A$500 billion resulting in the parliament voting to remove the ceiling altogether. All that remains is a self-imposed Liberal government ceiling of A$600 million.

The Liberals however realised that it is easier to get and stay elected by printing money than raising taxes.

The Morrison government has now broken its self-imposed $600 billion debt ceiling as the virus-induced global economic slowdown begins to bite. Desperate to take fires, floods and climate change off the front pages, they have pushed debt and deficit into the stratosphere, a Depression looms and there is no exit policy and no line of retreat. It seems unlikely that we will spring into summer.

On 30 March 2020 Australia broke through the A$750 billion marker at which point the National Debt per citizen is A$30,00 for an Australian population of 25 million. It will soon be A$40,000 or A$160,000 per family with two children. The National Debt of Australia is the debt of the government of the Commonwealth of Australia. The debts of Australia’s states are not included.

Australian governments are not alone, all the Western show ponies have done the same.

Expenditures by governments in response to the GFC and now the global coronavirus outbreak have increased budget deficits exponentially. Separately, in response to the GFC and the coronavirus the central banks have reduced interest rates and increased liquidity in their economies by quantitative easing (QE).

It was the economic crisis of 2007-09 that drove the European, British, American and Australian central banks to try QE. They also reduced interest rates to unprecedented levels, but this did little to increase bank lending, consumption, or investment. By the turn of the decade, they realised their economies were caught in a similar liquidity trap to Japan, which had pioneered its own QE programme since the late 1990s.

Nothing like this has been seen on a global scale since the world wide Depression of the 1930s.

As Reserve Banks print more and more money, you would expect to see inflation increase as paper money becomes worth less. However, in exceptional circumstances – such as a Liquidity Trap, a Recession or a Depression – it has proved possible to temporarily increase the money supply without causing inflation.

German children playing with money made worthless by inflation. Circa 1937.

If a country prints money and causes inflation, then, ceteris paribus, the currency will devalue against other currencies. If all countries print money at the same time as is happening now the crunch time will come when confidence returns, and too much recently-printed paper money starts to chase the few remaining goods.

I suggest that now the paper tiger is out of the worldwide bag, it will prove impossible to catch and put it back when a vaccine to the virus appears and some form of confidence returns.

As this scenario has never happened before, what will the outcome be?

The outcome will depend on how governments and central banks approach the hard tasks ahead of both: achieving budget surpluses to reduce the level of government debt; and reducing the high level of liquidity in their economies.

In the aftermath of World War I, Germany faced punishing reparation payments to the victorious Allies. In 1923 to meet the demands of the victors, the government started printing money so that German firms could continue to pay workers as the nation was denuded of capital. This led to an explosion in the rate of inflation and a complete loss of confidence in paper money and the rise of Hitler.

Will the printing of money bring down the financial world as we know it or save us from the debt mountain via high rates of inflation when confidence returns?

The Liberals have now exceeded a debt of A$750 billion, with more to come. The Liberals have doubled the National Debt every two years since 2013. This is some achievement for a nation of less than the population of Greater London, with more resources per head of population than any other nation on earth, all while running a boom economy. A fossil fuel, coal-carrying treasurer, now prime minister, who opposed the taxing of our mining industry, who has allowed mining profits to be taken off shore in tax havens, who has allowed our refineries to close and transfer profit and watched our motor car and manufacturing industries vanish, is the man in charge for the duration.

We should be so lucky.

John Hawkins was born and educated in England and now calls Tasmania home. He is the author of ‘Australian Silver 1800–1900’ and ‘Thomas Cole and Victorian Clockmaking’ and ‘The Hawkins Zoomorphic Collection’ as well as ‘The Al Tajir Collection of Silver and Gold’ and nearly 100 articles on the Australian Decorative Arts. He is a Past President and Life Member of The Australian Art & Antique Dealers Association. John has lived in Australia for 50 years.