Deflation Made Simple (Part II)

A falsely vilified phenomenon (Entry 150)

The 13th Precept of sound money has been left for special treatment as it reflects directly the false principle upon which the Bank of England (BOE) was founded and what initially gave rise to the abomination of the institution of money-ex-nihilo. Although the 13th Precept is redundant in common law, a little redundancy in a matter that has resulted in so much tragedy across several centuries cannot hurt.

The 13th Precept

As money-in-use is the property of its owner, only the owner can assign it to its user. Further, there can only be one user, and if there are more, then all are treated as one before the law.

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An historical note of clarification with regard to coinage in 17th century London is also worthy at this time.

As you read, keep in mind the The Exchange Bank (Wisselbank) of Amsterdam and compare it with the BOE. These two banks served fundamentally different purposes in all but one respect that was not even compatible — namely, the standardization of currency. By definition, currency includes money, but the converse is not true; money does not include all forms of currency, and certainly not money-ex-nihilo! The Amsterdamsche Wisselbank sought to standardize money-in-exchange and money-in-use; the BOE attempted something very different. Substituting counterfeit paper for real money was an openly committed act of deceit (Entries 142-147) — an English folly all of its own!

In the past, the weight of a minted coin was inherent to the coin, and the weight did not appear on the coin’s surface. What did appear were all of those things that gave praise to the owner of the mint that produced the coin — usually, but not necessarily, some noble lord, royal monarch, or the like (Images 3, 4, 5, 7 and 8). Also, one could find, but not always, a number that reflected a fractional multiple of some arbitrary standard.

By way of example, there are 20 shilling in a pound, and 12 pence to the shilling. So, 240 pence make a pound-sterling. The pound-sterling was the arbitrary standard. The amount of silver that it contained could have been any amount. Once set, however, it needed always to be the same. The epithet sterling referred to the fineness of the silver with which the coin was minted.

Accordingly, a coin might then read 10 shillings, 6 pence, 1 pound, etc.

Between 1668 and 1753 the Five Guinea piece was the commonly struck, gold coin of England. It was also called the Five Pound coin, because one Guinea was originally designed to be worth 20 shillings of sterling silver.

As silver and gold were merely market commodities with a special use, their relative market value was determined by a variety of factors, and the relative price of gold and silver was forever changing. This said, there was a need for standardization — a topic that we have discussed in a variety of different contexts in addition to the one above (Images 1, 26, 44, 75, and 77). Indeed, it was believed that one could fix the relative price of two independent commodities that often substituted for one another in trade without important market ramifications for the supply of each. This was fundamentally wrong! (Anonymous deposit slips of the type discussed in Entries 129 and 131-32, as well as in the now formally established 13 Precepts, were still relatively new to Londoners, and, as noted, often abused anyway (Entries 129 and 131-32). What is more, the slips generally failed to indicate the amount of metal; rather, they tended to indicate the market value of the coin or bullion — a much larger unit of gold or silver designed more for the purpose of storage and transport than fluid market transaction.)

Silver was more plentiful than gold, but gold was more coveted because of its enduring luster, so both were used side-by-side as money — gold for more expensive transactions and silver for less expensive trades and change. Unfortunately, fixing the relative value of gold and silver coin was a foolish endeavor that often led to the gradual disappearance of either and a relentless demand for what would nearly always become worthless paper. Alas, money changers, who were often Jews, but not exclusively, would buy the one coin with some fixed multiple of the other in one locality, and then sell it in a different locality where it would fetch a price higher than the fixed relative price assigned to it by government decree in the locality in which it was purchased.

This problem was compounded when many traders clipped or shaved the coins of their metal before passing them back into circulation with their purchases. Recall Image 86 and Entry 125. Shaving and clipping were simply different, alternative forms of monetary debasement (Images 3, 5-9, 11-12, 26, and Entries 113, 125, and 128). Eager to sell their wares merchants would accept these deformed coins at their fixed value or discount them when they saw that they had been too badly damaged. The clipped or shaved metal would then be melted down, formed into bullion, and sold to money-changers (Images 5-6, 12, 29) who would sell it again — often in another country — for a profit.

In 1695, between the months of May and July, 572 bags of silver coin were collected by the Bank of England in the form of deposits. Each bag contained the nominal equivalent of 100 pound-sterling. This amount had nothing to do with the metallic weight of the coins; rather, it referred to the number of schillings contained in each bag. The coins appeared in different schilling amounts, and when totaled, they came to 2,000 schillings or £100.

The Exchequer was asked to weigh the full amount of all bags and compare it with the weight expected, if all of the coins had been freshly minted. Based on this expectation the total weight should have been 18,451 English pounds (lbs). The actual weight was only 9,480 lbs. In other words, 8,971 pounds had been either shaved away or clipped off, melted down, reformed, and sold somewhere else in exchange for gold or something else. A coin shortage — one that could have been overcome with the 13 Precepts — was developing in London.

The basic problem with regard to (real) money is that those who understand it are able to benefit from those who do not. So, they remain quiet when they have an opportunity to eliminate its imposters, and even go out their way to obscure the truth about how money (real money) works. Instead, they rename it base money, build a world of counterfeit on top of it, and then call everything currency that we then mistakenly call money. It is this confusion that gave rise to Ludwig von Mises’s book Theorie des Geldes und der Umlaufsmittel (1912) in which Geld refers to money, and Umlaufsmittel refers to currency that is misleadingly translated into English as credit in the title The Theory of Money and Credit. Credit is an issue that can be treated entirely divorce from currency. Indeed, credit is what money-in-use is all about!

Alas, in exchange for the aforementioned 9,480 lbs of sterling silver (money-in-exchange) the Bank of England had passed out £572,000 worth of BOE banknotes (money-ex-nihilo).

The guildsmen-bankers who had bought into the bank and now held shares in its future were furious. And this, for the simple reason that they knew that this silver would be melted down, remolded, and stamped for a market worth of only £293,890. In order to vent their anger, they purchased as many BOE banknotes they could and presented them all at once to the bank’s management team for redemption in specie (gold and silver). The team was forced to close its doors to its own shareholders! This embarrassment sent a ripple through London society and nearly ended the bank’s existence. Unfortunately, this was only the beginning of a long series of important tragedies of which bankers have rarely ever been the victims.

Indeed, it has been a centuries long history of sheer dishonesty that has allowed the Bank of England to exist up to this today — not something of which any Englishman should be proud, unless, of course, he puts more value in the trick of Halloween than its treat.

In liberty, or not at all,
Roddy A. Stegemann