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Friday, May 24, 2013

The hard-money response

The bulk of the eighteenth century response to the doctrines and failures of John Law, however, was understandably to return to and redouble devotion to the original continental tradition of hard money, a tradition now challenged by the new institutions of central banking and fractional-reserve banking. One of the earliest and most brilliant responses, which cannot be limited to the term ‘hard money’, was that of Law's former partner and sceptic in the Mississippi bubble, Richard Cantillon, who virtually founded modern economics in his remarkable Essay written about 1730. (On Cantillon, see Chapter 12.)

The most immediate hard-money reaction to Law in England was also one of the most remarkable. Isaac Gervaise (d. 1739) was born in Paris of a French Protestant father who owned a firm manufacturing and trading in silk. Gervaise senior moved to London, where his son Isaac was employed in the family firm. In 1720, Gervaise published a brief but extraordinary pamphlet of less than 30 pages, The System or Theory of the Trade of the World.32\\ In the course of attacking Law's doctrine of bank credit and monetary expansion, Gervaise arrived, before Cantillon and Hume, at the process towards international monetary equilibrium, or the specie-flow-price ‘mechanism’. Without artificial bank credit expansion, Gervaise pointed out, the supply of money in each country would tend to be proportionate to its production or volume of trade. Each nation's consumption and production, and its imports and exports, would tend to be in balance. If this equilibrium should be disturbed, and, for example, ‘excessive’ gold or silver flow into a particular country, then this excess would be spent on imports, the balance of trade would tilt and imports exceed exports, and this excess would have to be paid for by an outflow of specie. This outflow, in turn, would reduce the excess of money and return the country to a monetary and foreign trade balance.

But, Gervaise charged, schemes such as John Law's upset this balance: bank credit, serving as substitute money, artificially and unnaturally increases the money supply, expanding consumption including imports, raising domestic prices and lowering exports, so that the increased bank credit will cause an outflow of specie. The artificial credit can bring no lasting gain. There is also a strong hint in Gervaise that the credit expansion will only manage to divert investment and production from those ‘natural’ fields serving consumers efficiently into those areas that will prove to be wasteful and uneconomic.

Gervaise's analysis of the effects of monetary expansion was also significant in being more akin to Cantillon, by stressing the expansion of money inducing people to spend more, than to Hume, who confined his analysis to the increased money supply causing rising prices – neglecting the outflow of specie caused by greater monetary spending, on imports as well as on domestic products.34
From his analysis of natural law, trade, self-equilibration on the market and their disruptions by government, Isaac Gervaise proceeded to a strong recommendation of all-out free trade, free of any distortions or restrictions by government. Gervaise's uncompromising free trade conclusion was all the more remarkable because his own firm enjoyed monopoly privileges conferred on it by the English Parliament. But Gervaise courageously concluded that ‘trade is never in a better condition, than when it's natural and free; and forcing it either by laws, or taxes being always dangerous; because though the intended benefit or advantage be perceived, it is difficult to perceive its contrecoup; which ever is at least in full proportion to the benefit’. Here Gervaise anticipated the keen insights of the nineteenth century French laissez-faire economist Frédéric Bastiat, who stressed that government intervention stemmed from the fact that the benefits of subsidies or privileges are often direct and immediate, whereas the greater unfortunate consequences are more remote and indirect. The former are ‘seen’ whereas the latter are ‘unseen’, and therefore the seeming benefits get all the attention. Gervaise concluded with a plea for freedom and natural law that would anticipate Turgot and other French laissez-faire thinkers of his century: ‘Man naturally seeks, and finds, the most easy and natural means of attaining his ends, and cannot be diverted from those means, but by force, and against his will’.35
Isaac Gervaise wrote no more on economic questions, but he did become a distinguished Anglican clergyman, which makes it all the more puzzling that his exceptional and innovating pamphlet exerted no influence whatever on English opinion. It was lost to the world until resurrected by historians in the twentieth century.

Another hard-money advocate who developed a theory of international monetary equilibrium was a timber merchant of Dutch extraction, Jacob Vanderlint (d. 1740), in his tract, Money Answers All Things (1734). Despite the title, Vanderlint's theme was that money is distributed properly and optimally on the free market. There is a tendency on the market for all nations’ prices to be equal, and if one country should acquire more money, its higher price level would soon draw the money out of the country until prices are back in equilibrium. It doesn't matter, then, how much specie a nation may have, since prices would adjust. Thus, if a nation had little specie, its prices would be low and it would outcompete other nations, with gold and silver consequently flowing into the country. Indeed, so concerned was Vanderlint to keep prices low and competitive with other nations that he unknowingly replicated Cantillon's advice for rulers or other worthies to hoard their gold and silver so as to keep national prices low.

Vanderlint consistently carried over his hard-money analysis to the problem of expanding bank credit. Bank credit, Vanderlint pointed out, expands the money supply, and so, ‘as the Price of things will hence be rais'd, it must and will make us the Market, to receive the Commodities of every Country whose Prices of Things are cheaper than ours... [and hence] turn the Balance of Trade against us...’.
Vanderlint, like Gervaise, was thus a severe critic of inflation and fractional-reserve banking, as well as an analyst of the international harmonies of money, prices and the balance of trade on the free market. Like Gervaise, Vanderlint was also an advocate of unrestricted free trade, concluding ‘In general, there should never be any restraints of any kind on trade, nor any greater taxes than are unavoidable’. Attempts to fix the price of gold and silver or to prohibit the export of coin are also futile: ‘it's no less absurd for the government to fix the price they will give for gold and silver brought to be coined, than it would be to make a law to fix and ascertain the prices of every other commodity’. Vanderlint also deplored the rise, during the eighteenth century, of the war-making state, and of the high taxes and public debts which war brings in its wake. Indeed, for Vanderlint, free trade and free markets, and international peace, go hand in hand, while war is the enemy of freedom. War, warned Vanderlint, is ‘one of the greatest calamities to which mankind can be subjected; the end of which none can well foresee, and the burdens of which (i.e. public debts and taxes) are seldom discharged in one generation...’. Eloquently, Vanderlint concluded that ‘it's monstrous to imagine,  the author of this world hath constituted things so as to make it any ways necessary for mankind to murder and destroy each other’.

The culminating hard-money theorist in eighteenth century England was Joseph Harris (1702–64), who published a massive two-volume Essays Upon Money and Coins (1757–58). Harris began life as a country blacksmith, but then went to London, where he became a prominent writer on navigation, mathematics and astronomy. He was an employee at the Mint, and was made assay master of the Mint in 1748.

Harris was a hard-money critic of debasement or fractional-reserve banking and bank credit expansion. He was an explicit follower of Cantillon's analysis of money flows. Thus he saw, with Cantillon, that international monetary matters tended towards an equilibrium, but he also saw, with Cantillon, that inflows or increases of the money supply did not simply raise prices; they also necessarily affected the distribution of money, benefiting some people at the expense of others. Hence the flows of money, though self-adjusting, would cause economic harm, especially during the adjustment process. As Hutchison sums up Harris's view: ‘Inflows of money enrich some at the expense of others, and such processes may for a time cause distress’. Sudden fluctuations of money, therefore, whether flowing in or out, ‘would be pernicious while it lasted and for some time afterwards’.

As a result of his analysis, Harris was determinedly opposed to any alteration whatever of the monometallic monetary standard of a country (Harris favoured silver over gold as being more stable). As Harris emphatically warned: ‘The established standard of money should not be violated or altered, under any pretence whatsoever’.

Austrian Perspective on the History of Economic Thought (2 volume set)

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