Saturday, July 6, 2013

Newton and the Gold Standard

My limited knowledge of Newton's involvement with the Gold Standard, as the Master of the Mint, came from Barry Eichengreen's discussion in Globalizing Capital [a book that is very influential in spite of his claim that a variation of Hume's specie-flow is still the best view of balance of payments adjustment; for a critique go here or here; mind you the book is the best description of the mainstream views of balance of payments adjustment in historical perspective]. In that book he suggests that Newton got the price of silver incorrectly against gold, a too low gold price for silver, with the consequence that Britain moved effectively into a Gold Standard by accident. In this view, the new supply of Gold from Brazil, and the undervalued price of silver explain the slow move into a Gold Standard.

The more recent book by Thomas Levenson, not an economist (that's often good), Newton and the Counterfeiter, which is more of a police story, suggests that Newton was well aware of the correct exchange rate between gold and silver, but was prevented from changing it by political reasons. He cites two reports by Newton an early one from the mid-1690s arguing that gold was cheaper in France leading to silver scarcity in England, and another one from 1717 or so suggesting that the problem was that gold was much cheaper in China and India, and that arbitrage opportunities moved silver eastward. Other than that Newton seems to have been favorable to paper currency an other financial innovations (getting famously entangled in the South Sea Bubble).

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