Money and Market

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Feb 1, 2010 - See the example of communism, as an alternative economic system to the market based one. ...... that would be available later in time, such as a promissory note or bill of ...... on in earnest until the nineteenth century.
Money and Market in the Economy of All Times

Money and Market in the Economy of All Times another world history of money and pre-money based economies

Liviu C. Andrei

Copyright © 2011 by Liviu C. Andrei. Library of Congress Control Number: ISBN: Hardcover Softcover Ebook

2011901934 978-1-4568-6558-0 978-1-4568-6557-3 978-1-4568-6559-7

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to my son, Ionuţ

Around the next corner there may be lying in wait apparently quite novel monetary problems which in all probability bear a basic similarity to those that have already been tackled with varying degrees of success or failure in other times and places. (Glyn Davies)

Contents An Introduction: Some Points To Be Developed Onwards............... 13 0.1 Money, as a paradoxical concept.............................................13 0.2 A synthesis of the history of money........................................15 0.3 Money, versus no money........................................................16 0.4 The gold standard and international monetary system (IMS)..........................................................20 0.5 Money out of its metal base: IMS, floating, banking system and currency areas.........................................22 0.6 The postwar Europe: a “special” case......................................27 0.7 Money is an endless story. So, the future stays open...............28 References:...................................................................................29 Part one: what has been before the money-based economy ?............ 31 I.1 Basics of the natural economy.................................................31 I.2 The primitive barter................................................................33 I.3 The self-consumption farm, as natural economy.....................43 I.4 The primitive barter: a simple mathematical model.................49 I.5 Related history: the ancient communities................................57 I.6 A conclusion...........................................................................68 References:...................................................................................69 Part two: barter, as advanced, versus primitive................................. 74 II.1 Advanced barter: the second mathematical model..................74 II.2 Related historical references: the ancient merchants...............80 II.3 Commodity money...............................................................87 II.4 Related history: the “great trade” of the antiquity..................96 References:.................................................................................109 Part three: money and monetary system as pre-modern and modern........................................................... 113 III.1 A transitory history: the Middle Ages.................................113

III.2 The early money: money and political authority. An analysis...........................................................................118 III.3 The modern money............................................................124 III.4 Concluding remarks...........................................................138 References:.................................................................................139 Part four: a crucial point in the money history: gold standard and bimetallism.................................................. 142 IV.1 Gold standard: basics and general description.....................142 IV.2 The gold standard: description and functioning (explaining principles)..........................................................154 IV.3 Bimetallism.........................................................................189 IV.4 Related history (explaining facts)........................................197 IV.5 Related polemics.................................................................220 References:.................................................................................226 Part five: the post-gold and contemporary money era.................. 2239 V.1 The thirties: the interwar international money disorder....................................................................239 V.2 1944-1971: the Bretton Woods International Agreement and Monetary System.........................................250 V.3 The whole post-war era: the monetary policy.......................266 V.4 The seventies: confusion and reformism...............................278 V.5 The eighties: the external debt crisis.....................................290 V.6 1985: the “LaPlatza-Louvre” Agreement and international money re-stabilizing in a non-IMS picture............................................................292 V.7 The nineties: “OCA” versus IMS.........................................295 V.8 The two-thousands: the European integration and common currency model...............................................303 References:.................................................................................329 VI. Conclusions.........................................................................333 Selected Bibliography..................................................................... 337

Abbreviations: BD—(State) budget deficit BE—budget exceeding BR—budget revenue BS—budget spending CAP—the Common Agricultural Policy of the European Community and Union DM—Deutsche Mark EBS—European Banking System EC—European Community and European Communities ECA—Euro Currency Area ECB—European Central Bank ECU—European Currency Unit EMI—European Monetary Institute EMS—European Monetary System EMU—economic and monetary union ERM—Exchange Rates Mechanism (see I and II) EU—European Union FDI—foreign direct investments FED—American Federal Reserves (the central bank of the US) GDP—gross domestic product IMF—International Monetary Fund (also called sometimes in text as the Found and Institution) IMS—International Monetary System LMU—Latin Monetary Union M—money supply MC—money in circulation MR—money reserves NATO—Northern Atlantic Treaty Organization OCA—optimum currency area OECD—Organization for Economic Cooperation and Development OECE—Organization for Economic Cooperation in Europe P—(general) price level PPP—purchasing power parity (theory) SDR—Special Drawing Right SEA—Single European Act SMU—Scandinavian Monetary Union 11

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T—taxation UK—United Kingdom US(A)—United States (of America) VAT—value added tax

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AN INTRODUCTION SOME POINTS TO BE DEVELOPED ONWARDS The story below is about money. Jesus said once not to love money, as (time) as you love God. The interpretation of this might though be a limited one in the human perception, see not love money “in your pocket”. Or, this story is different than that, namely another way to “love” money. So, can I be sure about the limited interpretation of the words of Jesus? If yes, money can become a kind of a character in a book, a really divine character, as there will be seen below. If not, if money are not to be loved in any way, so this is exactly the opposite. It is dealing with devil just observing our character in the book. And this might be linked to the idea that the man has already walked out of God once building his own civilization.

0.1 Money, as a paradoxical concept And money is the human civilization1, as nobody can deny it and as essential for all human development(s). In such a context, money starts with three paradoxes of its own (Andrei 2007, pp. 15-17). First, it is man made, written matter and old enough. All the other writings, philosophies and philosophical systems, architecture, civilizations, as human creations, die one after another. They may be the older the more highly valuable, but vestiges at the same. On the contrary, money, as a so old creation, is still and very vivid and working. But there is not its long life2 already its extraordinary point, but the aspect that the money existence looks endless,

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As a concept agreed by Encyclopaedia Britannica, Inc., 956. Credit is older than money, as for instance, and this will be developed below, but money are older than the written history (Davies 2002). 13

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as seen from both the oldest times and today. And this is for money, as so similarly to  .  .  . the Scriptures. Plenty of coins, banknotes and other money pieces are subjects of numismatics, but money is still not a vestige. On the other hand, there was once an ideology claiming that money was an economic relation among subjects which would end ones time, in a predictable future. That was communism and recent enough—but it was the communism ending first. The second paradox of money is that it measures what? The market value, isn’t it ? And this is for the long thousands of years that it is. Or, the market value, as a concept, was almost clarified in . . . the nineteenth century, by Marxism and marginalism, two currents of thinking of the same age and geographical origins3. I say the value concept, as almost clarified, because the two scholar thoughts saw the value sources in some opposite ways: the Marxian view was finding this source in labour—so, in a factor of production, in the production itself, as opposite to consumption —, whereas marginalists here identified utility and rarity—so, it was market and consumption leading this process. The further these irreconcilable theories in the history of economics, in their turn, the less clear the value concept for the next following 20th century—and that whereas money does its job without any interference of basic economics. All the more, every State, since the ancient times, declares its metric system of measuring, see length, volume, and money market value. Finally, the third paradox here comes when considering the market value measured by money, as a social convention qualified under another concept—I mean the one of the experiment. Money is an experiment of a really special condition from at least two points of view. Firstly, it is an experiment not made, as usually, just once for some other application to come, but an experiment repeated from its very beginning for its own purpose, as implemented. Nobody doubts about the length, volume or electricity that are measured by our conventional specific units, as much as these dimensions are very material—but nobody doubts about money, as measuring value either, in the same circumstances. Secondly, let us admit that all experiments base and develop from fields

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It is about the so-called “German ideology”, birth and consuming itself in the second half of the nineteenth century. Actually, Marignalism meant three Schools in Europe: (i) the German and Austrian one, that is here referred (Menger; Bohm-Bowerk); (ii) the Swiss one (Leon Walras; Vilfredo Pareto); (iii) the British one (Alfred Marshall).

Money and Market in the Economy of All Times

of science, as individuals. In which conditions, money is agreed to result from the economic field. But then, two problems arise. The first is that the economy and economics, correspondingly, are not quite appropriate to laboratories and experiments4, as the exact sciences are likely to be developed, in their turn—experiments in economy are very rare and exceptional5. But, let us admit an experiment like money, on a so large scale, as an equally exceptional success. Then, another problem remains: money was born as an experiment of economics, whereas economics were coming to become a very science a long time afterwards.

0.2 A synthesis of the history of money Let us admit that money is economy, as seen from the historical moment in time when these lines are here written, as much as all things will be here below seen from the position of such a moment of the human knowledge and thinking. Then, there becomes necessary to define the basic idea of all developments below, as for the money issue. It is about something that every manual of economics asserts in the most highly general terms: “. . . previously, people were bartering. The inconvenient content of barter cleared the way for using money, as the exchange instrument . . .” 6 Firstly, in such a view the story of money below actually comes to be another history of money. But, there will be a different one. One in which there will not be the historical database, as crucial, and there won’t be just about an economic history of money developments. There will be equally about what was before the money existence and acting. Descriptions will try to understand how money was coming to be born, acting and working, as with their economic dimension and basing on the market process—then, the market requirements, connections and separate development. Market was one description before the money birth, it developed and now results into a different description nowadays, when money equally evolved, money and market are supposed to work and keep dynamic connections with each

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Economics are, on the contrary, a science of experience (Hardwick 1992). See the example of communism, as an alternative economic system to the market based one. It resulted into a few decades economic development ending as a disaster. Nevertheless, economic experiments on the narrow scale might not always result into disasters. Wikipedia. Free Encyclopedia. 15

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other—and that will be our “another” history of money. The economic system concept is also here involved in a similar dynamic with money and market. Secondly, let us briefly analyze the above content of the manuals’ assertion about the history of money. Manuals say that barter could meet the money alternative, whereas money has no alternative, as a market exchange tool, a fact partly explaining one of the above described paradoxes of money—the one that money looks endless life. Or, this is certainly true—as true as all assertions of the basic manuals of economics. Nevertheless, there is not to be omitted, when talking about manuals, that the same manuals are specifically required to collect a considerable amount of truths on a very large scale of debate, but within a limited paper dimensions, as acceptable for all manuals. What I here mean is that this above truth stays very general and as limited as getting superficial at deeper sights and analyses, even threatens by fallacies. Or, this is what our history below will try to offer: a detailed description about the passage between no money (barter etc.) and money, as watching barter and the whole natural economy description and followed by the “real” money development in the modern times.

0.3 Money, versus no money And finally, let me have a brief description of facts that will be detailed in the paper below. There will be first about “barter preceding money”. Or, there comes a debate in the literature. There are authors simply admitting this (Davies 2002), whereas others argue that “contrary to popular conception, there is no evidence of a society or economy that relied primarily on barter” (Mauss 1925, pp. 36-37). This primary historical aspect actually introduces the so called gift economy in the early times. So, there is one more reported system to talk about: besides the barter versus money report, the gift economy versus the barter one. There might be seen a more complex reality coming even in the early times, for which the popular view might have thought that things were enough simple, as compared to the modern world days. Barter had not only the money alternative Another aspect coming on barter is bringing even more complexity in. This might be about at least two successive (but distinct) stages of barter. The first might be figured out for the early days of goods encountering each other within the market space, as trying to build up a price system including all of these—we can call it the primitive barter, despite that literature keeps silent about such a distinction. 16

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The next barter stage, more debated in the literature, has already been called the commodity money one—some selected goods were getting used as medium of exchange. Or, there are some new aspects to debate about, some of them interesting enough as challenging the general truth exposed above. The medium of exchange was, first, supposed to be a good becoming traditional in its exchange, here meaning an important time-interval to be admitted since the primary barter time. Then, authors say “all goods have played such a role” (Guitton & Bramoulé 1987). But concomitantly, the commodity money was becoming a much different system, differently working, as compared to its precedent of primitive barter, while similarities with the primary barter stay in its direct current operating. The above controversy about “no existing reference” about barter just evaporates, since barter meats both an inferior (primitive barter) and an advanced stage, the last represented by commodity money. Then, even the “all goods . . .” stage was coming to be replaced, in its turn, especially in the metals era. Metals—as replacing shelves, cowries, green ochre as on a long list of items—for medium of exchange on market were working in the bar form (in the ancient Egypt) and later on paved the way for the activity of coinage. Coinage was not money yet—as much as banknotes in China certainly were (Davies 2002) —, but this way the commodity money period was (slowly, but certainly) approaching the next stage of money. It is through the metal medium of exchange that barter not only proven a more complex system than earlier thought, but also the idea of “barter, versus money “was vanishing, as similarly to the one of “no reference” for barter. A more obvious separation, instead, appears rather between the two of barter stages, whereas in reality these were preserving in common a unique market exchange principle in the absence of money. Coinage was preceding money and money shown up some six-seven centuries BC, in Lydia (Turkey), and much later on, in the Roman Empire7, it was starting an uninterrupted career up to the modern era. But the most important aspect here coming is that whether there can be identified, at last, the moment of replacement of barter by money, as above asserted by manuals. No, there can’t, but things are more and more complicated. Money historically began by a lot of different signs in different parts of the world. They were all metal based and up to the flat coins they passed through other different stages. Even the flat coins were different metal

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See especially the below Part One and Part Two for details. 17

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based in a moment in which the most certainly reached point was not yet the one of money replacing barter, but just the one of metals replacing the other commodity money. Gold and silver were becoming token coins since early times, but the gold standard and bimetallism were yet far away, as concepts of the modern era. So, what was really happening in the metal based medium of exchange and early money era? In our view, as the very finding of this paper, there is to talk about a large selection process between metals and their precedent mediums of exchange, as later on, among individual metals, in similar conditions. It was a kind of a sui generis market competition. This selection process finally leads to the bimetallism and gold standard of the modern era (see Part Four below). And let us stop a bit to think about this. As time as the commodity money had been so plural, from the very beginning, there were many mediums of exchange and so each of them a partial one. At the opposite side, gold was just one medium of exchange and standard of value, so a general medium of exchange, in the modern era. Some times—as detailed in the below paper—the gold standard was completed by bimetallism. Or, that was proving that the selection process of the mediums of exchange was continuing—and there was played between the gold and silver metals a kind of a “final” game. It is also true that the bimetallism was representative for other aspects as well—the analysis in the below text will provide details about. Or, the economic history here proved to have a real sense, and even as starting from a so earlier historical time—this is rare that economy moves into a single sense for so long centuries and even millennia. But, besides, in the same modern era the gold standard was international, meaning at least another two aspects. Both are linked to a process regarding not money or the mediums of exchange, but the market issue. First, the selection among the mediums of exchange and market extending from narrow to larger areas were parallel in time. Authors notice that, for instance, this selection was relatively quick in time—if it was so, that was enough beneficial for different market spaces to unify between8. When international gold standard was in place, market was Ricardian9 (international) and post-Ricardian10 (national and international) structures. Gold standard has got helped by the international economy. And that

http://history-world.org/reforms_of_urukagina.htm McKenzie & Lionel (1954); Jones (1961) 10 Dornbusch; Fischer; Samuelson (1977); Matsuyama.( 2000) 8 9

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because, second, the advanced market economy of the 19th century was requiring a unique standard of value (Marx 1958). In reality, as much as the economy of the 20th and 21st centuries were later coming to encounter hard inflationary and money devaluation pressures, the economy of the precedent 19th century was still fighting with the money signs plurality engendering a vicious plurality of price systems on the same market spaces. Now, the answer to the above question: it was not money leading the economic game since the antique Roman Empire to the British modern Empire, but still the barter system—that is the continuing selection of the mediums of exchange process up to the international gold standard era. The gold metal won a large scale “championship” certainly by some qualities that it proven, qualities meaning both nature (physical and chemical properties11) and economy (high value by unit of quantity, due to high extraction costs). It is also true that the same gold standard then was also helped by the existent modern economy to stay stable also for a good while. Despite some marginal remarks, the literature fails to make obvious that the essence of the specifically barter selection among the mediums of exchange was properly and well understood. In our view, unlike the primitive barter the commodity money brought in a specific market contradiction, as counteracting the new advantages, as reached. The individual commodity money was a market good, on the one hand, serving as a medium of exchange due to its natural value, as resulting from its natural utility; on the other hand, the medium of exchange acts like a new artificial utility, undermining the natural utility and its primary natural moving way (flow) on market12. Not too many qualities were proven by the commodity money items, as for mediums of exchange. Even metals, later on, were finishing one by one by exceeding market supply, so decreasing marginal utility. We then can assert that the gold standard was coming to be the last and highest stage of the barter system. It equally helped building the modern See an easy divisibility, for physical qualities, and chemical inertia for chemistry—gold makes the less number of chemical reactions, as appropriate, and that means almost no corrosion in time (details in Part Four). 12 I give the “ice cream example” to my students. So, let us consider an icecream as a medium of exchange on market. The question is for how long will the ice cream be able to interchange other goods ? The answer is that it will make it up to its melting moment or so. And so, the conclusion is clear: our ice cream is called for this assigned utility due to its natural utility, but finally the new artificial utility makes the old natural utility run out. This will then be the same for the artificial utility, as medium of exchange. 11

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monetary and financial system, as both national and international, so its exemplary stability might have arisen from its double reality, as barter and (modern) money. In such conditions, only with the gold standard money replaced barter, in a much complex economic and historic reality.

0.4 The gold standard and international monetary system (IMS) Once more, the money’s lifetime shares into the earlier (non-modern) and the advanced (modern) periods, as previously the barter system had similarly done. As a common feature for all money, it assumes a monetary system (primitive or modern), as much as the seniorage concept13, a monetary policy of the issuer, as well as the link between the monetary and the fiscal and State budget policies. The passage between pre-modern and modern monetary systems is not only the one to the national-international status of money, but also the one of money joining credit., and, so, the banks. As for money matter—so, leaving the barter conditions, as devolving from—the modern gold metal based money is compulsory both national and international. As national, the monetary system was basing on the State’s commitment on exchanging each unit of currency into a declared and fixed quantity of metal—and this was supposed to be ensured through the institution of minting (Part Four). Besides, the State accepted the free gold market in the area, as well as the whole home free market. The freedom of the gold market was even extending to all quantities of gold passing over the national boundaries. This was the synthesis of every State enacted monetary law basing on the gold standard. Or, there is to be noticed that such State monetary laws might be differently reported in facts, as much as their principles were remaining exactly the same—none of the few principles applied could here be escaped or, on the contrary, enriched by supplementary ones. On the other hand, the international gold standard was claimed to have formed the first international monetary system (IMS). This is equally true that the issue of gold based IMS brought in the highest controversy point This was originally called the “right of the senior”, and for this instance is about the privilege of issuing paper money invested with value that is not intrinsic—the value relation behind is supposed to come when the money flow is done, meaning when the same paper value comes back to its issuer.

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in the literature. As for instance, the British philosopher and economist David Hume was explaining the gold capacity in such a way (Jinga 1981), whereas David Ricardo, in the next generation of British scholars, was mentioned as part of a project of replacing gold, as basing prices(Rist 1938, p. 380-381). This Hume-Ricardo controversy of the late eighteenth and early nineteenth centuries lasted up to late twentieth century, as between the French Jaques Rueff—in favour of remaking the gold standard— and the American Robert Triffin—for an IMS without gold (Meutey 1984). But, what about the concept of the IMS, as introduced into debate by the one of the gold standard? This is containing several components like: (1) one single basic value, as stable and reliable for all prices developing within; (2) a mechanism working for the external equilibrium of each national economy (see, the external balance of payments/EBP equilibrium); (3) a State’s engagements for keeping the monetary gold standard principles; (4) as consequently, the money exchange rate, as fixed, and (5) no monetary policy, in the sense of controlling the money supply. As for the mechanism of the EBP equilibrium, it is the so called “price-specie-flow” mechanism explaining it for the gold standard, as through the correlation between the EBP disequilibria and domestic prices behavioural reaction, as expressed into the price of gold and skipping any presumable exchange rate movement. In the Hume’s theory (Jinga 1981), the exchange rates were fixed by definition—as expression of fixed ratios between quantities of gold basing the money units of each State —, the price movements were acting on the short term within the economy, whereas the EBP plus and minus sold was influenced and moving on longer periods. The author was here recognizing the difference between the three dynamics of stabilizing: the exchange rate one, as instant, the EBP one, as on medium-long terms, so defining rather a convergence trend in time, and the price one, as devolving equally from the gold standard relation to barter and the EBP equilibrium remade. Of course, the theory was controversial from the very beginning. But whether the gold standard quite looks like described by its adepts, there comes the interesting aspect that its macroeconomic type equilibrium ensured get similar to the much later on picture of Jan Timbergen (Hardwick 1992), except for the labour market component. The gold standard was not linearly evolving. It passed from barter to money, the money and monetary system brought the modern financial system in—here including the currency and foreign exchange markets —, it strengthened by its international dimension and finally was agreed and 21

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supported by the great British Empire (see Part Four). Besides, during at least the nineteenth century, it was a real culture: Marx (1958) was obsessed by a “basic value source”, as for a left side political culture and philosophical system14, whereas the opposite liberal thinking here, in this monetary system, saw the non-intervention and free market competition picture. All the people of this century thought they had the value substance in the gold money that they were carrying or stocking. And all these seem enough consistent with that the same gold standard stays related to all there had been market related economy every since the ancient world.

0.5 Money out of its metal base: IMS, floating, banking system and currency areas The gold standard came to be destructed as world-wide by the big economic crisis of 1929-1933—some authors, on the other hand, even accuse it for having provoked this crisis15. The great economic powers at the time, Great Britain, France and the US have left the system between 1931 and 1933. The gold standard era was going to be followed by what was called international monetary disorder16, for which the main symptom was the floating exchange rates. The human specie was going to encounter a Second World War in the next fourties. But what was important is the fact that the international economy could not stand the floating exchange rates and preferred a new IMS, even a differently built one. Nevertheless, the second IMS17 (1944-1971)18 was built on the same above IMS theory requirements: the basic value became the US$, the EBP equilibrium was coming to be ensured by the specialized institution of the International Monetary Fund (IMF) and the exchange rates were fixed, as by international rule, controlled by the same IMF. The new IMS was supporting much larger It doesn’t matter that that “value source” was finding elsewhere, in the Marx’ thinking. 15 See Eichengreen (1992) and details in the below text. 16 See Meade (1951), Triffin (1973), Mossé (1987) and McKinnon (1993). 17 Stated by the so-called Bretton-Woods Agreement in 1944—after the name of the locality where the Agreement was negotiated and signed by the member States, nearby Washington DC. 18 The adversaries of the gold standard argue that this IMS was the first one, just neglecting its gold standard precedent. 14

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money and capital amounts transferred among the member countries, as compared to the previous gold standard (Triffin 1964). A huge amount of internal contradictions during its two and a half decades time was then undermining and destructing the IMS of the Breton Woods Agreement (1944). The result apparently was similar to the precedent one of some four decades earlier: the exchange rates came back into a new floating era. Results were different on the longer time, but just remember that there was already about the money era—the “true” money, as getting off their metal base for good. Projects on remaking the IMS, as the real international money order ensured, were coming up, some of them with interesting points, but the development on the ground was going to be different this time—the fixed exchange rates hypo these was getting controversial itself, as of principle. Money out of gold was floating value as of principle, as much as the gold money had been, on the contrary, fixed exchange rates as of another well defined principle. Each national currency reflects a matrix of home prices and prices are freely moving as of principle equally, in the new modern economy. As the result, no more chance for a new IMS basing on the same fixed exchange rates. So that, similar constructions to the old IMS were weakening their bases—nevertheless, the European example for the European Monetary System (EMS/1979-1999) deserves to be also here considered (see Part Five). In such circumstances, the floating exchange rates is no longer a monetary disorder symptom, but as appropriate to the postwar period, as the fixed exchange rates had been appropriate for the previous gold standard era. But, first of all the postwar monetary system of all modern States was coming to reach a new formula: it is about the home banking system, basing on a central bank, among and versus the plurality of commercial banks. The last develop a much larger area of business, as compared to the same banking activity in the previous gold standard, plus competition among banks reinforced in a similar pace. The central bank is a new non-liberal formula which proven appropriate to the new economic world. It cooperates with all commercial banks on the base of managing the monetary policy19— the money issuer and the home price stabilizer is comprised by this new concept. The (big) central bank is the very retort of the (little) minting house The central bank is concomitantly: (1) the commercial bank for the Government, (2) the supervisor of the banking activity in the national defined area and (3) the monetary policy maker (Patat 1991). See also Part Five.

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of the gold standard, when there was no monetary policy, as in the current definition of it (Part Four). The minting house was just transforming (turning or tailoring) the money demand into money supply, and so did not control the money supply in the area—on the contrary, the central bank is issuing money according to its own formula of the needed money supply. Moreover, the central bank both strengthens its power in the new banking system—since the commercial bank cash flow becomes more and more complicated and makes banks vulnerable—and serves its monetary policy objectives of managing money supply and price stability by a set of instruments, as the interest rate, bank reserves, exchange rate and open market operations. Back to the international area, since the “sickness” of the IMS theory, face to the new context, in mid eighties the international money did look to start remaking its order—see, tempering the exchange rate floating—in the absence of an IMS and gold metal constraint on money issuing, in the previous definition. See the La Platza-Louvre Agreement (1985)20, as international, among the central banks of several important States, just for intervening in favour of diminishing the exchange rates floating—and it was a real success. But, just notice some more aspects about this event (Part Five). First, see the international formula and arrangement, as a very retort to the precedent Breton Woods Agreement. Situation was different after four and a half decades: the States were giving up any propensity for a new IMS—see, a new control about international money—for an arrangement on a much narrower scale. The new context was becoming much more liberal and States obviously preferred to limit their interventions in the area. But this was the result of a reducing floating, as compared to the early seventies, when—as similarly to the early thirties, in the aftermath of the gold standard bankruptcy—floating was a new monetary shock, as international. Second, at the time of the new successful Agreement, as much as previously, in the early seventies, the exchange rate floating concept rather limited about the US dollar depreciation, as against the other important currencies. In reality, once the dollar depreciated, the very problem was passing on the other national economies’ condition. With or without IMS, the US dollar was staying as the nominal anchor of all national currencies McKinnon (1993).

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and prices world-wide. On the one hand, this is the common “unique basic market value”, as common to all modern market, as money of barter based and pressures on the dollar stay very similar to the ones of the former mediums of exchange in the advanced barter system. Third, the floating was strictly regarding the dollar, versus other important currencies, so that these important currencies were successfully supporting the rest of international money substance. The substance of the floating phenomenon is not hanging on all national currencies, but it restricts to just a few of them—so, there is to imagine here a kind of retort to the previously defined IMS construction: a kind of a “tree-shape” international money construction, for which dollar might be the “trunk” and some of the important currencies stay dollar-based like the “basic branches”. Finally, the “basic-branches” of the international money-tree were basing all the rest of national currencies, as less important individually—as for the principle defined as each national currency meats the system just basing on other national currencies. The “tree-shape” construction is equally connected to another important aspect of the today international money, when the coming question is: what is the significance of the basic money “branches”? In other words, how do the dollar and the other currencies become important? The answer is given by another theory as proven able to successfully replace the one of the IMS—this is the optimum currency area (OCA) theory (Robert Mundell 1961 and Ronald McKinnon 1993). A currency area is formed as an international region around a strong national currency with international status and movement, called, as already above, a nominal anchor—all national currencies get “anchored” on, whereas the same nominal anchor produces a regional price system. The currency area is a multi-country region of stability in terms of prices and market flows, with appropriate consequences on costs, wages and labour internal migration and it becomes optimal when such benefits overpass corresponding costs. An OCA is, though, limited life, due to the market pressures on both the nominal anchor and the country-anchor, as issuer of this freely moving value in the area. In such conditions, there is not—according to authors—about the IMS, its States’ engagements and compulsorily fixed exchange rates to talk about, but about properly building OCAs. Plus, authors give some more explanations about the international money working. As for instance, they so explain why each IMS had fallen once and that due even to the country-anchors which previously had supported the same system. 25

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Moreover, the Breton Woods IMS was once an OCA of the US dollar, as similarly to the OCA of the pound sterling bankrupted in early thirties. The international money disorder results, in general terms, from the nominal anchor bankrupted as such—and not automatically from “no-IMS”. And so, the OCA supporters get on the side of the adversaries of the gold standard theory and concept—they argue that the pound sterling OCA was the “real” international gold standard instead. The pound sterling failed as world-wide nominal anchor, in 1931, but the British currency then reduced to the same qualification on a narrow international area including some of the British colonies and the Commonwealth. The OCA might extend world-wide or shrink to some regions—here recall that the gold standard had kept its extending trend, according to its previous theory, so the OCA terms were finding the international money factor as equally able to divide the world market area into separate regions. Once in the past, the gold standard was supposed to support globalizing, whereas now, in the postwar period, money was failing of supporting globalization—the last was elsewhere based, in the financial world, as a separate one. On the other hand, since 1971—the bankruptcy of the Bretton Woods IMS—the OCA moved from world-wide to narrower region-wide extents, as the result of some national currencies reinforced through dollar national reserves (see the model common to the Japanese Yen and the Deutsche Mark) and of remaking the old currency areas of pound sterling and French Franc. Besides the US dollar—as preserving a large area world-wide, despite the IMS fallen —, the Japanese Yen, Deutsch Mark, French Franc and Pound Sterling were forming their currency areas on the world map (see also Guitton & Bramoulé 1987). There are reported some dynamics and events in this picture of the monetary world after seventies. Once, in early seventies, the international oil crisis equally produced a phenomenon of leaving a currency area for another one—this was the case of Kuwait, as leaving instantly the pound sterling area for the dollar one, when the country adopted the dollar price of oil (Guitton & Bramoulé 1987). Two decades time later, in 1991, the ex-Soviet Russia did the same with its own oil and gas reserves, ending the former trade agreements with the ex-communist countries in the Eastern Europe area—the result was similar to what had happened in Kuwait earlier, but much extended on several neighbouring countries of Russia: Ukraine, Moldova, Poland, Romania and Bulgaria. Then, Bulgaria, in its turn, encountered a severe financial crisis in 1995-1996, and decided to 26

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adopt the extreme political measure of Monetary Council (Andrei 2005)– so depriving the central bank from its monetary policy competence, but equally leaving the US Dollar area for the Deutsche Mark (DM) one. Later on, in the early two thousands, all Central and Eastern Europe countries, as subjects of the European integration were leaving the dollar and DM areas for the Euro currency area.

0.6 The postwar Europe: a “special” case But for Europe, as a “special” economic area, the most interesting events were coming on the West side. The Western Europe had been integrated into the European Community since the end of the World War II. Much later on, in 1999-2002, the first common currency (the Euro) was ever implemented world-wide, as a result of an advanced integration process that the European countries had freely agreed to build. Europe was so becoming a kind of a “different economic world” and economic model. Plus, the old “iron curtain” fallen helped the rest of the European countries to join the western origin European Union. In reality, Europe was “different” even before these events of the twenty-first century. A common currency for several nations is certainly a newly interesting subject of debate, but such an undertaking dates from the early seventies and the Breton Woods IMS falling, once more. When the world economy entered the post-IMS floating exchange rates (1971), the European Community quickly drew the “Monetary Snake” arrangement for keeping the dollar exchange rates into the European currencies under some control. But Europeans hardly understood their monetary dependence on America even when the latter was providing crisis, instead of the previous Marshall Plan help. So, a European Monetary System (EMS) in place was needed and it was coming in 1979. Then, McKinnon (1993) noticed the paradox that this EMS was just a copy of the old Breton Woods (1944) IMS—enough criticized since 1971 —, but the American professor’s opinion was actually coming in favour of his OCA theory—the EMS’ terms were actually dictated, irrespective of the strong Europeans’ will to do otherwise. The united Europe was becoming really different issue—here including, in monetary terms—when adopting its unique common currency (see the first EU Treaty in 1992, but especially in 1999-2002, when the euro came to be in place). It is perfectly clear that the EU authorities intended to 27

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comply with the update OCA construction, and so they left forever an EMS structure condemned to bankruptcy for a new currency management requirements. In other words, the EU preferred to replace the nominal anchor of the DM by a common responsibility on the European money. Europe was a “special case” even in terms of money and for both the IMS and OCA terms: (1) the EMS did not come to fall down, but it have been replaced by the common currency in a Programme context; (2) as for the OCA, the European region was a DM area even before the EMS and euro, whereas at least the French Franc and Pound Sterling were benefiting from their own currency areas outside Europe. And now, when Euro is already ten years old, problems arrived and these will regard especially the integration process—especially, the direct economic, but also political and legal relations between the member-States and the Union’s authority, as naturally reinforced. As well as, back to the international area again, the new European currency has absorbed at least the currency areas of the old French franc and German mark. The Japanese Yen area indirectly gets out of the question, so does the current British pound. The international money picture has been deeply reformed since the late twentieth century, as the one between the two poles of dollar and euro. The current world of international money might become the one of a competition between two monetary philosophies behind currencies. The dollar nominal anchor, currency area and international market preserve the old “benign negligence” (of the FED’s authority21) behind, whereas euro is internationally sustained by the European Central Bank (ECB) in a rather classical thinking.

0.7 Money is an endless story. So, the future stays open It is very difficult to say whether euro will be (or not) the “new international nominal anchor” as replacing dollar, as in the above McKinnon’s view. But not only—how strong will euro prove to be in the next future and further on ? Will its currency area really enlarge to Russia and its region, to Africa and Asia, and so on ? Which will be the role of China, in such a context (there will certainly be one) ? Will euro provide more price and exchange rates stability world-wide ? And what The US and their monetary authority, as apparently “no interested” in the dollar devaluation throughout the world market.

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about its stability in the domestic European area ? No one can contradict a presumable crack down of the “great” new currency home. This is money, as a so old character and an endless story. See all of the above in some details and explanation in the lines and chapters below.

References: Andrei, Liviu C (2007): Euro. Second edition revised. Editura Economica Bucharest. 2007 Book written in Romanian Glyn, Davies (2002): A history of money from ancient times to the present day, Cardiff University of Wales Press, 2002 Hardwick, Philip & Bahadur Khaan & John Langmead (1992): An Introduction to Modern Economics. London-New York. Ed. Langman. 1992 Mauss, Marcel (1925), The Gift: The Form and Reason for Exchange in Archaic Societies, ISBN  0-393-32043-X  . pp. 36-37. Originally published as Essai sur le don. Forme et raison de l’échange dans les sociétés archaïques. Lewis Hyde calls this “the classic work on gift exchange”. Guitton, H & Bramoulé, R (1987): La monnaie. Paris. Dalloz. 6th edition. 1987 Marx, Karl (1958): Contribution à la Critique de l’Économie Politique. Paris. Dunod. Translation by Laura Lafargo. 1958 McKenzie, Lionel W. (1954): Specialization and Efficiency in the World Production, in: “Review of Economic Studies”, 21(3): 165-180. McKenzie, Lionel W. 1956 Specialization in Production and the Production Possibility Locus, Review of Economic Studies, 23(3): 56-64. Jones, Ronald W. 1961 Comparative Advantage and the theory of Tariffs; A Multi-Country, Multi-commodity Model, Review of Economic Studies, 28(3): 161-175. Dornbusch, R.; S. Fischer; P. A. Samuelson 1977 Comparative Advantage, Trade, and Payments in a Ricardian Model with a Continuum of Goods, The American Economic Review, 67(5): 823-839. Matsuyama, K. 2000 A Ricardian Model with a Continuum of Goods under Nonhomothetic Preferences: Demand Complementarities, Income Distribution, and North-South Trade, Journal of Political Economy, 108(6): 1093-1120. 29

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Jinga, Victor(1981) : Moneda si Problemele Ei Contemporane. Editura Dacia. Cluj Napoca. 1981. Book written in Romanian. Rist, Christopher (1938): Histoires des Doctrines Relatives au Credit et à la Monnaie. Paris. 1938 Meutey, P(1984): L’Or Paris. A dialogue between Robert Triffin and Jacques Rueff, p. 292-3. 1984 Meade, Jones(1951): The Balance of Payments. London. Oxford University Press. 1951 Triffin, Robert (1973): Our International Monetary System. Yesterday, Today and Tomorrow. Yale University Press 1973 Mossé, Robert: Les Problèmes Monétaires Internationaux. Études et Documents. Payob. 1967 Eichengreen, Barry (1992): Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. Preface. Triffin, Robert (1964): The Evolution of the International Monetary System: Historical Reappraisal and Future Perspectives. Princeton: International Finance Section, Princeton University, 1964. Patat, Jean Pierre (1991): La Politique Monetaire, in «  Problemes Economiques » No 2231 of 6 June, 1991 Mundell, Robert (1961): A theory of optimum currency areas, “American Economic Review”(51), New York. November 1961, p. 509-517 McKinnon (1993): International money in a historical perspective, in “Journal of Economic Literature” (29) New York, p. 1-45. March, 1993. Andrei, Dalina(2005): Foreign Direct Investments and the integration of Bulgaria and Romania in the European Union—in the Volume entitled “The European Union in 2005. Candidate Countries’ Perspectives” (Sofia 2005), edited by the “Bulgarian European Community Studies Association” (BECSA) and comprising studies elaborated by several young scholars from the candidate countries for the EU, under the auspices of the “Jean Monnet” Programme, in 2005. Editors: Georgy Genov, Julia Zahareva and Krassimir Nikolov. Pag. 327-345. ISBN 954-9543-07-2

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PART ONE WHAT HAS BEEN BEFORE THE MONEY-BASED ECONOMY ? The most comprehensive concept here admitted by the literature is the one of the natural economy.

I.1 Basics of the natural economy The natural economy refers to a type of economy in which money is not used in the transfer of resources among people. It is a system that, firstly, instead uses the exchange of goods and services through direct bartering or trade, or the self consumption system. The Belgian economic historian Henri Pirenne noted that: “German economists have invented the term Naturalwirtschaft (natural economy), to describe the period prior to the invention of money. (  .  .  .) The writers who describe this period as one of natural economy obviously do not intend the term to be understood in any absolute sense. They are well aware that ever since its invention, money has been in continuous use among all the civilized people of the West, and that the Roman Empire handed it on without interruption to its succession states. Thus when the early Middle Ages are described as a period of natural economy, all that is meant is that the part played by money was then so small as to be almost negligible. Undoubtedly there is a good deal of truth in this contention; but in the same time we must be on our guard against exaggeration” (Pirenne 1936, p. 103-104). The term had also been used by Karl Marx in his economic writings such as Grundrisse and Capital. Marx comments as follows: Natural economy, money-economy, and credit-economy have ( . . .) been placed in opposition to one another as being the three characteristic economic forms of movement in social production  .  .  .  . these three forms do not represent equivalent phases of 31

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development22. Secondly, the classics of the communist type economy here involve in the debate by considering three levels of understanding the concept. All three are both historically and economically defined. The first level regards the antique family farm, as self sufficient. This is the one that will be separately described below, in the I.4 paragraph. The second meaning of natural economy is for workers who work for themselves and for the exploitation of the direct consumption and production economy (Marx 1975a, p.898). The natural economy of this means is that from the nature of production, but mainly refers to the production of means of subsistence, not to all production activities. As for the third meaning, Marx pointed out: “. . . the natural economy, that is, all or most of the economic conditions or economic units in the production and economic units directly from the total products, compensation and reproduction. In addition, also industrial and agricultural rural households combine the premises” (Marx 1975a, p.896). This passage is known as the natural economic and political economics. Because commodity production is the “circulation as a medium of reproduction,” this is the place where it is different from the natural economy. Given the complete self-reproduction of the natural economy, the necessary means of production are basically provided by the economy, as well. That is the “economic units”. Lenin said: “In the natural economy, the society is composed of many single economic units (patriarchal peasant family, the original village, the feudal domain) composed of each of these units engaged in various economic work, from mining a variety of materials, up to the final consumer of these raw materials into manufacturing” (Lenin 1970). For this classic, the “patriarchal peasant family”23 is the transition from the clan commune to slavery in the patriarchal family. Marx here adds: “Cottage industry labour and handicraft factory labour, as agriculture (which is the foundation) of the sideline, in the ancient and medieval Europe . . . the economy (that) is built is the natural mode of production conditions.” Plus, the medieval Europe is the natural economy, these words including the then city. Because “although the city is in essence the exchange of handicrafts and the creation of the basis of exchange value, but here’s the direct production of the main purpose is to ensure that artisans, handicraft masters of survival, and therefore value, not to become rich, not the exchange value as exchange value”(Marx 1975a, p. 886). The Western European feudal territory is a See: Capital Vol. 2, Chapter 4 In the “Complete Works” of Lenin, this is translated as “peasant families were the rule of law”.

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typical natural economy indeed. It is in addition to farmland, but also has a large number of public rangelands, grasslands, forests and even the fishing grounds. Cattle industry is relatively developed, self-sufficient in wood and some territories even salt or iron to the charge of serfs. Battle rent on behalf of farmers, in addition to fabrics, furniture, honey, wine, eggs, fruits and vegetables, there are tools, tools, construction materials. Briefly, the common scope of the above three levels of understanding the natural economy here includes: using value for the purpose of all production, or to obtain the value for the purpose of exchange. Plus, sometimes, it here also includes the economic unit and its self sufficiency and entire self reproduction. Thirdly, the natural economy regards an alternative separation from either (just) money-base—see barter—or (moreover) from market, as entirely—see both the self-consumption economy of antique farms and the so called gift economy. All of these will be debated below, one by one, in this chapter.

I.2 The primitive barter Unlike the other natural economy components, barter is a method of exchange by which goods or services are directly exchanged for other goods or services without using a medium of exchange, such as money (O’Sullivan&Sheffrin 2003). As correspondingly, the currently accepted definition of the barter economy is: an economy that lacks a commonly accepted currency, so all exchanges must be made with goods and services because money does not exist in these economies24. In fact, barter economy had given birth to a kind of trade called “barter”, which are both bilateral and multilateral in nature—see the “triangular” trade, as a familiar instance of multilateral barter trade. Very basic economic theories, which do not consider currency as a medium of exchange, regard barter economy as the “mother” of all market economy concepts prevalent today. Commodities and services are considered to be the means of all exchanges, as money was unknown to man in ancient times. Barter economy is so supposed to have a previous and long history of evolution. It was introduced in the pre-historic times for the systemization of the production and distribution of commodities and services among the existing population. In recent times, this age-old economic concept is widely prevalent among pre-market Wikipedia. The Free Encyclopedia, citing the name of Mike Moffatt, former About.com Guide

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and pre-capitalist economies. A deep sense of reciprocation, together with substitution of the redistribution for market exchange characterizes barter economy currently25. As a matter of fact, the two concepts of ‘currency’ and ‘barter’ do not match with each other. Barter economy either can exist in society where the concept of money is totally unknown, or it may prevail in countries as money economy based, but suffering from severe financial instabilities, owing to hyperinflations. I.2.1 Barter: the basic concept Barter and the barter economy will be enough deepened below, so this paragraph will limit to a full definition, plus some basic remarks of the literature. The last notices in the first place several disadvantages or limitations of the barter economy: (i) need for presence of double coincidence of wants: for barter to occur between two people, both would have to have what the other wants and want what the other has—an unlikely occurrence; (ii) absence of common measure of value: in a monetary economy, money plays the role of a measure of value of all goods, so their values can be measured against each other; this role may be absent in a barter economy; (iii) indivisibility of certain goods: if a person wants to buy a certain amount of another’s goods, but only has for payment one indivisible unit of another good which is worth more than what the person wants to obtain, a barter transaction cannot occur; (iv) lack of standards for deferred payments: this is related to the absence of a common measure of value, although if the debt is denominated in units of the good that will eventually be used in payment, it is not a problem;26 (v) difficulty in storing wealth: if a society relies exclusively on perishable goods, storing wealth for the future may be impractical. However, some barter economies rely on durable goods like pigs or cattle for this purpose. Of which, the key concept certainly remains the double coincidence of wants. This phrase-term was first used by Jevons (1893): “. . . the first difficulty in barter is to find two persons whose disposable possessions mutually suit each other’s wants. There may be many people wanting and many possessing those things wanted; but to allow of an act of barter there must be a double coincidence, which will rarely happen.” That is, paraphrasing Berntsen & Rocheteau (1993, p 26), the double coincidence is the situation where the supplier of Wikipedia. The Free Encyclopedia Wikipedia. The Free Encyclopedia

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good A wants good B and the supplier of good B wants good A. Where, let us just remark a kind of “psychosis” of defense of such a theory against barter, and especially about its specific economy, as today inherited from the Marginalists of the late nineteenth century. The entire above list defines (indicates) just “limitations”, paving the way for turning barter later on into the “emergence of money”. As for instance, the difficulty created by the no-double coincidence of wants is made very obvious, as compared to the later on money based alternative implemented, whereas some advantage of the same, on the other hand, escapes the theory’s view. This might be the one in which the satisfaction of just one utility boosts the market activity by several transactions (see the above mentioned triangular trade) involving several goods (utilities) and subjects, and so becoming an efficient and internal motor for the economy. Plus, this aspect might be better noticed when not considering the money availability alternative, whereas the theory ignores it. This is the reason in our view that the current standpoint of the literature is supposed to be the first one to be changed in order of a complete and correct view on economic history. In reality, as equally considering the other referred forms of the natural economy, that will be described below—as previous to the money economy, in historical terms and chronology of facts—barter might not be the “oldest” or the “mother” economic concept. On the contrary, it is the closest issue of the antique economy to the money economy and to the nowadays market economy. For both barter and money economies, market is pre-existent, together with its appropriate concepts of private property, free option for goods and services exchange, so the social economy and economic system27. I.2.2 The “gift economy”, versus barter Contrary to popular conception, there is no evidence of a society or economy that relied primarily on barter (Mauss 1925). Instead, non-monetary societies operated largely along the principles of gift economics. When barter did in fact occur, it was usually between either complete strangers or would-be enemies (Graeber 2001). On the contrary, An economic system is the system of production, distribution and consumption of goods and services of an economy. Alternatively, it is the set of principles and techniques by which problems of economics are addressed, such as the economic problem of scarcity through allocation of finite productive resources (The New Encyclopedia Britannica, v. 4, pp. 357-58. NA 2007). “economic systems”. See also Conklin (1991).

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in the social sciences, a gift economy (or gift culture) is a society where valuable goods and services are regularly given without any explicit agreement for immediate or future rewards(Cheal 1988), or, ideally, simultaneous or recurring giving serves to circulate and redistribute valuables within the community (Kranton 1996). And this could be even better explained in context by another issue used by anthropology and sociology: the one of reciprocity. This is a way of defining people’s informal exchange of goods and labour; that is, people’s informal economic systems. It is the basis of most non-market economies. Since virtually all humans live in some kind of society and have at least a few possessions, reciprocity is common to every culture. Sahlins (1972) identifies three main types of reciprocity. Firstly, the generalized reciprocity is the same as virtually uninhibited sharing or giving. It occurs when one person shares goods or labour with another person without expecting anything in return. What makes this interaction “reciprocal” is the sense of satisfaction that the giver feels, and the social closeness that the gift fosters28. Between people who engage in generalized reciprocity, there is a maximum amount of trust and a minimum amount of social distance. Balanced or symmetrical reciprocity occurs when someone gives to someone else, expecting a fair and tangible return at some undefined future date. It is a very informal system of exchange. The expectation that the giver will be repaid is based on trust and social consequences29.Balanced reciprocity involves a moderate amount of trust and social distance. Finally, the negative reciprocity includes what economists call barter—and this is the way that the two issues essentially have got in the common context. To many scholars, barter was the basis of all economies before the invention of money. Others argue that before money arose, generalized and balanced reciprocity along with redistribution simply replaced exchanges in most cases. A person gives goods or labours and expects to be repaid immediately with some other goods or labour of the same value. Negative reciprocity can involve a minimum amount of trust and a maximum social distance; indeed, it can take place among strangers. In industrial society this occurs mainly between parents and children, or within married couples. In other cultures generalized reciprocity can occur within entire clans or large kin groups, for instance among the east Semai of Malaya. 29 That is a “mooch” who accepts gifts and favours without ever giving himself will find it harder and harder to obtain those favors. In industrial societies this can be found among relatives, friends, neighbours, and coworkers. 28

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Negative reciprocity was a prevalent form of exchange to establish friendly relations in non-industrial societies between different groups. Economist Steven Suranovic (2001) says that negative reciprocity occurs when an action that has a negative effect upon someone else is reciprocated with an action that has approximately equal negative effect upon another. If the reaction is not approximately equal in negative value, or worse, the reaction has a much greater negative effect upon the first person, then the reaction will likely be judged unfair. Negative reciprocity fairness requires that negative actions be reciprocated in kind; a “quid pro quo” type of response. Various social theories concerning gift economies exist. Some consider the gifts to be a form of reciprocal altruism; another interpretation is that social status is awarded in return for the gifts30. According to Lewis Hyde(1982-3) a traditional gift economy is based on “the obligation to give, the obligation to accept, and the obligation to reciprocate,” and that is “at once economic, juridical, moral, aesthetic, religious, and mythological.” The author describes the spirit of a gift economy (and its contrast to a market economy) as: the opposite of “Indian giver” would be something like “white man keeper” . . . [W]hatever we have been given is supposed to be given away, not kept. Or, if it is kept, something of similar value should move in its stead . . . [T]he gift may be given back to its original donor, but this is not essential . . . The only essential is this: the gift must always move. Hyde also argues that there is a difference between a “true” gift given out of gratitude and a “false” gift given only out of obligation. In the Hyde’s view, the “true” gift binds us in a way beyond any commodity transaction, but “we cannot really become bound to those who give us false gifts.”(op. cit., 70). Actually, this was the retort to the above sociologist Marcel Mauss‘argument that gifts entail obligation and are never ‘free’. According to Mauss, while it is “easy to romanticize a gift economy”, humans do not always wish to be enmeshed in a web of obligation. Mauss wrote: “the gift not yet repaid debases the man who accepts it”31 (op. cit., 67)32. Consider, for example, the sharing of food in some hunter-gatherer societies, where food-sharing is a safeguard against the failure of any individual’s daily foraging. This custom may reflect concern for the well-being of others, it may be a form of informal insurance (http://www.context.org/ICLIB/IC41/PinchotG.htm). 31 Marcel Mauss cited at Hyde (op. cit., p. 69). 32 The author here adds more scholars’ names like Carol Stack and Peter Kropotkin (1902/1998), the last seeing in the hunter-gatherer tribes that he had visited the paradigm of “mutual aid.” 30

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Whereas Hyde is seeing the origins of the gift economy in the sharing of food (op.cit. p. 22), an equally interesting argument comes from the anthropologist Marshall Sahlins (1972) 33, who writes that the Stone Age gift economies were, as evidenced by their nature as gift economies, “economies of abundance, not scarcity, despite modern readers’ typical assumption of objective poverty”. Hyde argues that the gift is something that must “perish”, but many societies have strong prohibitions against turning gifts into trade or capital goods, as against another anthropologist’s view. That was Wendy James, who was writing that among the Uduk people of northeast Africa there was a strong custom that any gift that crosses subclan boundaries must be consumed rather than invested (op. cit., p. 4). In other societies, it is a matter of giving some other gift, either directly in return or to another party. To keep the gift and not give another in exchange is reprehensible. “In folk tales,” Hyde remarks: “the person who tries to hold onto a gift usually dies”(op. cit., p. 5). Here closely related to, Hyde argues that when a primarily gift-based economy is turned into a commodity-based economy, “the social fabric of the group is invariably destroyed” (op. cit., p. 5). Much as there are prohibitions against turning gifts into capital, there are prohibitions against turning gift into exchange, as barter34. “Commercial goods can generally become gifts, but when gifts become commodities, the gift . . . either stops being a gift or else abolishes the boundary . . . Contracts of the heart lie outside the law and the circle of gifts is narrowed, therefore, whenever such contracts are narrowed to legal relationships” (op.cit., p. 15, 61, 88). Finally, a gift economy normally requires the gift exchange to be more than simply a “back-and-forth between two individuals”35. This notion of Also cited by Hyde (1982-3, p. 22). Among the Trobrianders, for example, treating Kula as barter is considered a disgrace. The Kula ring still exists to this day, as do other exchange systems in the region, such as Moka exchange in the Mt. Hagen area, on Papua New Guinea. Native Americans of the Northwest Pacific (primarily the Kwakiutl), practiced the potlatch ritual: leaders give away large amounts of goods to their followers, strengthening group relations. By sacrificing accumulated wealth, a leader gained a position of honor. Pacific Island societies prior to the nineteenth century were essentially gift economies. This practice still endures in parts of the Pacific today—for example in some outer islands of the Cook Islands (Crocombe, coord. 2003). 35 Here, there is given the example of a Kashmiri tale tells of two Brahmin women who tried to fulfill their obligations for alms-giving simply by giving alms back and forth to one another. On their deaths they were transformed into two poisoned

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“expanding the circle” can also be seen in societies where hunters give animals to priests, who sacrifice a portion to a deity (who, in turn, is expected to provide an abundant hunt). The hunters do not directly sacrifice to the deity themselves (op.cit., p. 18). There are enough other points in the debate about this subject, but some ideas are already able to be extracted from above. The first one is that the gift economy leads all research to leaving economics for anthropology36, which seems to be something more than economics and economy. For both economics and anthropology, the time sequence of facts is just one: first there was the gift economy and barter was coming in the aftermath of this, the two corresponding to Paleolithic and Neolithic. This historical aspect is as obvious as the common status of gift economy and money, as alternatives to barter. The opposition of the two standpoints here comes as an interesting point. Anthropology sees gift economy turning into barter as a degradation of the primary altruism in the inter-human relationships—the same way that the human civilization built equals the man’s separation (walking away) from God. Anthropologists implicitly recognize economics—and here, implicitly the market system, including barter—as closer to civilization, as in the basic view of Adam Smith, with his capital book37. Economics, on the other hand, feel easier to see the same barter alternative to gift economy as the result of the Paleolithic groups, bands and clans enlargement to the larger communities of the aftermath. The old altruism and trust among the narrow clan members here came to be replaced by larger relationships, here including business and even institutions. Exchanges came to replace the old gifts on larger spaces and so more complex economic flows were born and wells from which no one could drink, reflecting the barrenness of this weak simulacrum of giving. 36 Economic anthropology is a scholarly field that attempts to explain human economic behaviour using the tools of both economics and anthropology. It is practiced by anthropologists and has a complex relationship with economics. There are three major paradigms within the field of economic anthropology: formalism, substantivism and culturalism. See Prattis, J. I. (1982),  Polanyi(1968),  Gudeman (1986) and  Hann (2000). 37 Adam Smith: The Wealth of Nations (Smith 1904), the single book written by the “classic of all classics” economist of all times. It was the first treaty on economics and some of the Smith’s ideas are even reflexively recalled ever since. The one of these is that economics help scarce resources turn into satisfying rather unlimited utilities and another one is that the economic development goes hand in hand with the civilization development. 39

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started developing within communities. Another aspect comes back to the gift economy, but keeps on the economics side of analysis—this is the question of: yes or no economic system of the gift economy (?). Or, this answer might be yes, with an important reservation. It is yes, when figuring out the labour division 38 among the individual members of the clan. But, on the other hand, all economy, as flows, stays subordinated and controlled by the same community and its proper limits of existing and acting. As so, the community really bases a macro-system, as in the today view of this concept. Then, another aspect there comes from the above numerous examples of the gift economy, as born in the oldest times, but surviving up to modern times and to present. Gift economy loses its ability to design an economic system, but it survives, coexists with barter and so on. There is the other characteristic (strength) of the gift economy which compensates its weakness (as regarding a presumable capacity of founding economic systems)—this is its strongly reproductive capacity in a large variety of forms, as for contexts, times, technical, social, economic and even institutional environments. I.2.3 Related history: the Paleolithic and hunters-gatherers A hunter-gatherer society is one whose primary subsistence method involves the direct procurement of edible plants and animals from the wild, foraging and hunting without significant recourse to the domestication of either. Hunters-gatherers obtain most from gathering rather than hunting: up to 80% of the food is obtained by gathering (Wikipedia  .  .  .). The earliest human species, Homo habilis, beginning some 2.5 million years ago, probably lived primarily on scavenging, not actual hunting. Early humans in the Lower Paleolithic lived in mixed habitats which allowed them to collect seafood, eggs, nuts, and fruits besides scavenging. Rather than killing large animals themselves for meat, they used carcasses of large animals killed by other predators or carcasses from animals that died by natural causes39. And so, the labour division appears more closely related to all communities, when talking about economy and economics, whereas the popular view sees it rather on the market environment side. All gift, family farms and barter economies keep the division of labour in common. 39 The Last Rain Forests: A World Conservation Atlas by David Attenborough, Mark Collins 38

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Main civilizations in Paleolithic © Hachette Livre et/ou Hachette Multimédia

Hunting and gathering was presumably the subsistence strategy employed by human societies beginning some 1.8 million years ago, by Homo erectus, and from its appearance some 0.2 million years ago by Homo sapiens. It remained the only mode of subsistence until the end of the Mesolithic period (some 10,000 years ago), and after this was replaced only gradually with the spread of the Neolithic Revolution. Starting at the transition between the Middle to Upper Paleolithic period, some 80,000 to 70,000 years ago, some hunter-gatherers bands began to specialize—concentrating on hunting a smaller selection of (often larger than had previously been hunted) game and gathering a smaller selection of food. This specialization of work also involved creating specialized tools like fishing nets and hooks and bone harpoons (Fagan 1989). The transition into the subsequent Neolithic period is chiefly defined by the unprecedented development of nascent agricultural practices. Agriculture originated and spread in several different areas including the Middle East, Asia, Mesoamerica, and the Andes beginning as early as 10,000 years ago. However, meanwhile many groups continued their hunter-gatherer ways of life, although their numbers have perpetually declined partly as a result of pressure from growing agricultural and pastoral communities. Many of them reside in arid regions and tropical forests in the developing world. Areas which formerly were available to hunter-gatherers were (and continue to be) encroached upon by the settlements of agriculturalists. In the resulting competition for land use, hunter-gatherer societies either adopted these practices or moved to other 41

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areas. In addition, such an activity induced a decline in the availability of wild foods, particularly animal resources. Some authors argue that in North and South America, for example, most large mammal species had gone extinct by the end of the Pleistocene, because of overexploitation by humans, but this is not an unanimously accepted thesis (Diamond 1998). As the number and size of agricultural societies increased, they expanded into lands traditionally used by hunter-gatherers. This process of agriculture-driven expansion led to the development of complex forms of government in agricultural centers such as the Fertile Crescent, Ancient India, Ancient China, Olmec, and Norte Chico. As a result of the now near-universal human reliance upon agriculture, the few contemporary hunter-gatherer cultures usually live in areas unsuitable for agricultural use. Hunter-gatherer societies tend to be relatively mobile. Individual band societies also tend to be small in number (10-30 individuals), but these may gather together seasonally to temporarily form a larger group (100 or more) when resources are abundant. In a few places where the environment is especially productive, such as that of the Pacific Northwest coast or Jomon-era Japan, hunter-gatherers are able to settle permanently. Hunter-gatherer settlements may be permanent, temporary, or some combination of the two, depending upon the mobility of the community. Mobile communities typically construct shelters using impermanent building materials, or they may use natural rock shelters, where they are available. Hunter-gatherer societies also tend to have relatively non-hierarchical, egalitarian social structures. This might have been more pronounced in the more mobile societies, which generally are not able to store surplus of food. Thus, full-time leaders, bureaucrats, or artisans are rarely supported by these societies (Gowdy 1998; Dahlberg 1975; Erdal & Whiten 1996). In addition to social and economic equality in hunter-gatherer societies there is often, though not always, sexual parity as well. Hunter-gatherers are often grouped together based on kinship and band (or tribe) membership (Kiefer 2002; Gowdy 1998). Others, such as the Haida of present-day British Columbia, lived in such a rich environment that they could remain sedentary, like many other Native Americans of the Pacific Northwest coast. These groups demonstrate more hierarchical social organization. Violence in hunter-gatherer societies is usually caused by grudges and vendettas rather than for territory or economic benefit. (Kiefer 2002). A vast amount of ethnographic and archaeological evidence demonstrates that the sexual division of labour in which men hunt and women gather wild fruits and vegetables is an extremely common phenomenon among hunter-gatherers worldwide, but there is a little number of documented 42

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exceptions to this general pattern. A study done on the Aeta people of the Philippines states: “about 85% of Philippine Aeta women hunt, and they hunt the same quarry as men. Aeta women hunt in groups and with dogs, and have a 31% success rate as opposed to 17% for men. Their rates are even better when they combine forces with men: mixed hunting groups have a full 41% success rate among the Aeta (Dahlberg 1975). It was also found among the Ju’/hoansi people of Namibia that women helped the men during hunting by helping them track down quarry (Biesele; Barclay 2001). Moreover, recent archaeological research suggests that the sexual division of labour did not exist prior to the Upper Paleolithic and developed relatively recently in human history. The sexual division of labour may have arisen to allow humans to acquire food and other resources more efficiently (Lovgren 2006). It would, therefore, be an over-generalization to say that men always hunt and women always gather. Historians particularly recognize that mutual exchange and sharing of resources (i.e., meat gained from hunting) are important in the economic systems of hunter-gatherer societies (Erdal & Whiten 1996), as well as that hunting-gathering was the common human mode of subsistence throughout the Paleolithic (Portera & Marlowe 2007). Finally, the transition from hunting-gathering to agriculture is not necessarily a one way process. It has been argued that hunting and gathering represent an adaptive strategy which may still be exploited, if necessary, when environmental change causes extreme food stress for agriculturalists (Lee & Daly 1999). In fact, it is sometimes difficult to draw a clear line between agricultural and hunter-gatherer societies, especially since the widespread adoption of agriculture and resulting cultural diffusion that has occurred in the last 10,000 years.

I.3 The self-consumption farm, as natural economy I.3.1 Self sufficiency and social inequality Evidence of social inequality is still disputed, as settlements such as Catalhoyuk reveal a striking lack of difference in the size of homes and burial sites40. Families and households were still largely independent economically, This is suggesting a more egalitarian society with no evidence of the concept of capital, although some homes do appear slightly larger or more elaborately decorated than others.

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and the household was probably the center of life41. There is a large body of evidence for fortified settlements at Linear Ceramic cultures sites along the Rhine, as at least some villages were fortified for some time with a palisade and an outer ditch (Fuller 2006)42. This supplanted an earlier view of the Linear Pottery Culture as living a “peaceful, unfortified lifestyle”43. Control of labour and inter-group conflict are characteristic of corporate-level or “tribal” groups, headed by a charismatic individual; whether a ‘big man’, a proto-chief or a matriarch, functioning as a lineage-group head. There is no evidence that explicitly suggests that Neolithic societies functioned under any dominating class or individual, as was the case in the chiefdoms of the European Early Bronze Age. One more self-sufficient farm concept of the natural economy of farm-households comes from the Ancient Greece (Finley 1985/1999). The ancient Greek philosophers argue that all natural, that is reasonable, should be affirmed. The natural economy for the ancient Greeks is “family management”, as getting supplied of natural and reasonable things. This is so-called natural, according to an Aristotle’s explanation, is in line with the human and the nature of things. The division of labour is here in place, as well, due to the nature of human talent (such as male and female), and it feeds the family as well as the natural available resources do(Ya Lishiduode 1965). Theories to explain the apparent implied egalitarianism of Neolithic (and, of course, of Paleolithic) societies have arisen, notably the Marxist concept of primitive communism. Marx discusses about the ancient Greeks for the premise that there is such a primitive commune, “which is composed of community self-sufficient farmers, freedom and equality within  .  .  . continued existence of the commune . . . is supposed to self-sufficiency . . . (for) . . . all members of the commune of farmers reproduction”. Just apart, However, excavations in Central Europe have revealed that early Neolithic Linear Ceramic cultures (“Linearbandkeramik”) were building large arrangements of circular ditches between 4800 BC and 4600 BC. These structures (and their later counterparts such as causewayed enclosures, burial mounds, and henge) required considerable time and labour to construct, which suggests that some influential individuals were able to organize and direct human labour—though non-hierarchical and voluntary work remain strong possibilities. 42 See also: Tewari, Rakesh et al. (2006): “Second Preliminary Report of the excavations at Lahuradewa,District Sant Kabir Nagar, UP 2002-2003-2004 & 2005-06” in Pragdhara No. 16 “Electronic Version p.28” 43 xxx“Stone Age,” Microsoft Encarta Online Encyclopedia 2007 © 1997-2007 Microsoft Corporation. All Rights Reserved. Contributed by Kathy Schick, B.A., M.A., Ph.D. and Nicholas Toth, B.A., M.A., Ph.D. Archived 2009-11-01. 41

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for Germans living in the forest, far away from each other, “each unit of the family is an economic as a whole”; So for the German people, workers were” self-sufficient commune members.”(Marx 1975, pp. 476, 477, 481). But, the point is that a family self-sufficiency is limited. In the long primitive society, it is a collective labour, a common distribution, but certainly not the family self-sufficiency. At a closer look, the “few acres” can not produce the image of family self-sufficiency for a too long historical time. So, in both ancient Greece and Germany, the old family management came to its destruction, together with (internal) relationships among the community members. Concomitantly, in the China’s feudal society, the peasant family self-sufficiency has got even more badly. Feudal society in China, the Ming Dynasty, is also common “class servant to farming.” There seems that all over and especially from the ancient time to the Middle Ages, the society turned into “exploiting and exploited” social classes44. First of all, this is a real image in history and economic history, a true reality which cannot be denied, as there was above the case of barter, as historically controversial. Moreover, despite all these above, it seems that the family management with its self sufficiency was once the dominant economy45, and this will also be debated below. This kind of economy is not a social one, does not dispose of any market or economic system, in the today view either46. Contrary to such aspects, the self-consumption and self-sufficient households make the most highly obvious their private property concept, which is common to barter and even to the gift economy, up to a certain point. Plus, such an aspect is able to place the self consumption economy origins in the late periods of the antiquity and to explain (through its economic aspect) even the bases and picture of the modern today household. In other words, this family community of the late antiquity might have similar numbers of individual members to the clans of Paleolithic, but the qualitative difference between

**“China and the Chinese Communist Party” Selection “Volume 2, People’s Publishing House in 1966, this horizontally, the first 586-587 pages. 45 As for instance, there might be clear already that any presumable goods exchanges were consisting in a “marginal” activity of these households, so barter will be supposed to come on a secondary place in the order of the economic significance, at least in these ancient times. The here subsequent truth is that there was not yet a specialized trade activity to talk about—that was going to be later than that. 46 Recall from above The New Encyclopædia Britannica, v. 4, p. 357 for “economic systems”.2007) and also: Conklin (1991). 44

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the two gets highly obvious47. Finally, to be equally noticed the less clear aspect related to the self-consumption family of the late antiquity and on—it is about its insertion in the larger community of those times (see city, village and so on), except for very casual contexts48. I.3.2 Related history: some more about Neolithic and farming After Paleolithic and during most of the Neolithic age, people are related to have lived in small tribes of 150-2000 members that were composed of multiple bands or lineages (Aikhenvald; Dixon 2006).

Neolitisation in the Middle East and in Eruope © Multi-media Carte Hatchet/Hachette Livre 8000 with 2600 av. J.—C.

There is little scientific evidence of developed social stratification in most Neolithic societies—social stratification is more associated with the later Bronze Age (Hassan 2002). Although some late Neolithic societies formed complex stratified chiefdoms similar to Polynesian societies such as And the details of such historical descriptions will also come up in the below paragraphs. 48 As the case of “patriarchal peasant family” evolving up to the early Middle Ages (Lenin 1966) or, back to the Ancient Greece, the village communities feeding population of the cities around( Finley 1985/1999 ). 47

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the Ancient Hawaiians, most Neolithic societies were relatively simple and egalitarian(Aikhenvald; Dixon 2006). However, Neolithic societies were noticeably more hierarchical than the Paleolithic cultures that preceded them and hunter-gatherer cultures in general (Shillington 2004). The profound differences in human interactions and subsistence methods associated with the onset of early agricultural practices in the Neolithic have been called the Neolithic Revolution49. There might be this revolution, as actually an agricultural revolution or “Fertile Crescent” to talk about, as for the large view, but more precisely it was the domestication of animals (circa 8000 BC) which has resulted in a dramatic increase in social inequality. Possession of livestock allowed competition between households and resulted in inherited inequalities of wealth. Neolithic pastoralists who controlled large herds gradually acquired more livestock, and this made economic inequalities more pronounced50. A significant and far-reaching shift in human subsistence and lifestyle was to be brought about in areas where crop farming and cultivation were first developed: the previous reliance on an essentially nomadic hunter-gatherer subsistence technique or pastoral transhumance was at first supplemented, and then increasingly replaced by, a reliance upon the foods produced from cultivated lands. These developments are also believed to have greatly encouraged the growth of settlements, since it may be supposed that the increased need to spend more time and labour in tending crop fields required more localized dwellings. This trend would continue into the Bronze Age, eventually giving rise to towns, and later cities and States whose larger populations could be sustained by the increased productivity from cultivated lands.

A term coined in the 1920s by the Australian archaeologist Vere Gordon Childe. Hirst, K. Kris (2005): “Mehrgarh”. Guide to Archaeology

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Reconstruction of a Cucuteni-Trypillian hut, in the Tripillian Museum, Ukraine

Reconstruction of Neolithic house in Tuzla, Bosnia and Herzegovina

Neolithic peoples were skilled farmers, manufacturing a range of tools necessary for the tending, harvesting and processing of crops (such as sickle blades and grinding stones) and food production (e.g. pottery, bone implements). They were also skilled manufacturers of a range of other types of stone tools and ornaments, including projectile points, beads, and statuettes. But what allowed forest clearance on a large scale was the polished stone axe above all other tools. Together with the adze, fashioning wood for shelter, structures and canoes for example, this enabled them to exploit their newly won farmland (Barker 2009). One potential benefit of the development and increasing sophistication of farming technology was the possibility of producing surplus crop yields, in other words, food supplies in excess of the immediate needs of the community. Surpluses could be stored for later use, or possibly traded for other necessities or luxuries. Agricultural life afforded securities that pastoral life could not, and sedentary farming populations grew faster than nomadic. However, early farmers were adversely affected in times of famine, such as may be caused by drought or pests. Agriculture had become the predominant way of life, the sensitivity to these shortages could be particularly acute, and affecting agrarian populations to an extent that otherwise may not have been routinely experienced by prior hunter-gatherer communities (Barker 2009). Nevertheless, agrarian communities generally proved successful, and their growth and the expansion of territory under cultivation continued. Another significant change undergone by many of these newly-agrarian communities was one of diet. Pre-agrarian diets varied by region, season, available local plant and animal resources and degree of pastoralism and hunting. Post-agrarian diet was restricted to a limited 48

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package of successfully cultivated cereal grains, plants and to a variable extent domesticated animals and animal products. Supplementation of diet by hunting and gathering was to variable degrees precluded by the increase in population above the carrying capacity of the land and a high sedentary local population concentration (Bellwood 2004).

A Cucuteni-Trypillian culture deer antler plough

Neolithic peoples in the Levant, Anatolia, Syria, northern Mesopotamia and Central Asia were also accomplished builders, utilizing mud-brick to construct houses and villages. At Çatal höyük, houses were plastered and painted with elaborate scenes of humans and animals. In Europe, long houses built from wattle and daub were constructed. The peoples of the Americas and the Pacific mostly retained the Neolithic level of tool technology until the time of European contact.

I.4 The primitive barter: a simple mathematical model This is not an economic model in its common sense and reading the lines below do not require basic knowledge of econometrics or mathematics applied and have not to be expected for a very routine procedures. Plus, it is an atypical expression. I.4.1 Bases of the model The starting point of the debate below is the Walrasian theory51 of prices (Guitton & Bramoulé 1987). This theory might be shortly described by two contexts. Firstly, whenever the capital letters A, B and C individually Léon Walras is an economist of the nineteenth century, belonging to the Marginalist school of thinking.

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identify three market goods and the following equalities do exist: PA=PB ; PB=PC, where PA,PB  and PC are the corresponding good market prices, there automatically results that : PA=PC, as taking into account the unique restriction called the rational economy developing. As a corollary, when inequalities, instead of equalities: PA>PB ; PB>PC, there also automatically results that: PA>PC, of which, the above restriction remains the same and lonely one. Let us also have the other context: P B/C = P B/A / P C/A in which PB/C , PB/A and PC/A are the corresponding price ratios among the same three goods. This last above equality means that every good can operate on the same market as a price standard (medium of exchange) for the rest of goods52. To be noticed that the authors make clear a universal truth, meaning that these both are valid for all markets, from the most primitive to the modern market economy context ones; actually, from the barter exchange to the money base ones. This is equally significant that both postulates contain the prerequisites of individual property on every market good and free option of every owner about goods owned (to sell them or not on the same market). The Walrasian thinking about market prices of goods inspires our below analysis directly since we note at the same: A, B, C, . . ., M, N the totality of goods marketable in the considered area. Corresponding notations as: a, b, c, . . ., m, n will associate to the previous capital letters, as for quantities of denominated goods, all making a unique exchangeable value throughout the multiple equality: (I) aA ⇔ bB ⇔ cC ⇔ . . . ⇔ mM ⇔ nN In which ⇔ is proper to this model only. Let us explain that, primary This part of the Walrasian thinking will be specially referred and developed in the next Part Two.

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this is something more than the usual „= “sign for the basic Walrasian model. More than an equality or value equivalence, this sign indicates the double sense of the barter (direct) transactions between (at least) two corresponding goods, as for realising two utilities for the two users imagined behind each of the two sides of the transaction. Then, just notice that our model prefers to replace the above Walrasian notations of prices (P), by here identifying what is more apearent in the barter type transaction, namely the quantities of goods—or, this makes the distinction between this analysis and the basic Walrasian model. In a way, talking about prices directly in the barter type economy isn’t quite confortable, since no value standard (or, at least medium of exchange) available. In another way, prices, in our model, their behaviour is the very objective of the below study—in other words, prices are realised throughout the model’s functionning. Back to the ⇔ sign, there is to explain that it replaces, in our model, either the price notation (P) or the rational economy assumption. Our sign relates to the multiple equality of the model on the short and long terms, as distinctly. On the short term, the no-coincidence of wants is assumed, the way that the owner of good A (utility) looks for good N, the owner of B looks for A, the one of C looks for B, and so on . . . the way that the A utility realised implies the full range of successive transactions among the available goods up to N. And the same is occuring for goods, B, C, . . ., M, N. On the long term, either such a chain of transactions repeats and strenghtens the stability of the unique value realised throughout the basic (I) equality, or the order of preference of each good owner for the other goods might change the way that the ⇔ sign reveals that all items on its left have (at least) once meat the ones of the right hand side, and vice-versa. As consequently, the lenght of the transactions chain, plus its repetability on longer terms work out the rational economy, instead of the last’s presumable basic assumption. I.4.2 Explaining the model The (I) multiple equality finally makes explicit how the no-double coincidence of wants might turn, from the barter handicap face to the money based economy, to its advantage of reaching an internal “energy” for boosting the market transactions—there are, in this model, at least some Cn2 transactions to talk about, which might be embarrassing for an individual 51

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operator, but positive enough for the total of marketable goods. Besides, the horizontal chain of equalities really copies and reflects the horizontality of the economy, as in the today economists’ view—relations between A, B, C,  .  .  . M, N, as individual goods and industries of final goods. The here horizontality direct reported and transparent contrasts with a vertical view—successive transformation of natural resources within each industry design—which does not exist in this model. The explanation of such a missing consists in the so low (negligible) economic development of these related times—see the resource transformation and capacities of production. On the contrary, the lower significance of the vertical of the economy contrasts with the one of the horizontal design. As related to the horizontal design of the model, the above (I) multiple equality defines a very price system—that is the “mother” of all price systems of all times ever-since and it misses its vertical construction, keeping correlations among industries instead. And this is a real price system since the price stability definition of this economy. We have to stop here a bit for more explanations about. So, how exactly does the price stability here result? Once more, the price stability in the primitive barter context is resulting from the chain of transactions engendered by each utility realized (satisfied) in the no-coincidence of wants context; plus from reiterating the same transactions on longer terms. On the contrary, what about any price instability and its effects on the model? The price stability might be disturbed in (at least) two ways. First, from seasonal changes in the production environment—more or less abundance of some goods, as for example in agriculture—so, for natural causes and especially referring to goods already included in the system. Producers and owners of such goods will proceed to supply more or less quantity in exchange to the wanted utility, as compared to precedent periods (seasons). Second, other goods ask to enter transactions, so—in the primitive barter conditions—the chain of transaction is pushed to enlarge. This comes to be different, meaning no “natural causes”, no seasonality, but more economic significance—such a phenomenon might result from the very economic progress, meaning in the interest of both producers and consumers. Whether the “natural causes” and seasonal changes might lose relevance on longer terms, the economic progress might be supposed to reinforce and put increasing pressure on the existent market. Plus, the economic progress brings new goods in the system, and does not refer to the existent and transactional goods. To be noticed that this simple model here preserves the quantity 52

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and price of goods in the same basic order. They are equally important: quantity, as always determining price—all changes induced to the system pass through quantity changes —, and price, as resulting from the quantity evolving and reflecting the model result. Ultimately, by consequence of price system and its stability achieved, model (I) achieves what might be called (its own) value standard53—a special one, based on quantitative ratios among goods traded on market. I.4.3 The model result Given these above, the price stability gets correlated to the unchanged (constant) number of marketable goods and their corresponding quantities. On the contrary, changes in items and quantities induce price disturbances. The more significant the changes of quantity, the more harmful the disturbances of the price system and transactions will be suffering. In other words, the primitive barter works and goes well in the price stability conditions, as much as the latter result from an obvious closure (limit) of the market. The price stability is essential for the primitive barter and results on both short and long terms, whereas in the long term it becomes a price convergence trend. Then, as this way built, the price stability and convergence first defines the primary finding of this chapter—this is the highest price stability of all times—and there was found the very primary policy formula of preserving price stability in a region. And through this, as contrary to Mauss(1925), the primitive barter finds its specific economic system, as in the today view—for well defined market area, flows of resources allocation, demand-supply and so on. This is a macroeconomic system, as afferent to a restricted and closed market area. Everybody, so far, was associating the primitive barter to no money, no coincidence of wants and its resulting difficulties; now, we can see this as a landscape of narrow and completely closed cell-markets and macro-systems. The nowadays picture of the economy has certainly been supposed to have resulted from unifying among themselves, but first from enlarging those cell-markets in a way or another54. Secondly, the same price stability—especially on longer terms (see even generations) of time —, as associated to the closure of market, draws an Here corresponding to the future value standards basing or not the money units (see Parts Two and Three below). 54 And such aspects will be studied in the following chapters. 53

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opposite and even strange world picture for the current everyday life—this is for economy, but not only. Market is closed to narrow spaces, so distance communications with people suffering. Prices stay stable and production to be sold also stays rather unchanged, so a market with no technical improvement and no competition, as once more strange to the modern world. The production and consumption environments try to show us a world, a time and a life with rather no significant events or transformations, except for what nature around was providing. That seems to be the world and human specie life once upon a time—and our wish is to more closely define and find this time in the human history. As for this paragraph, there is just one more idea to be explored and explained. This is answering the question: what, exactly, might have induced these market limits, up to closure, to the primitive barter? Or, in our view three factors are there to be identified and debated. The first one consists in a result of a very general idea—this is the economic underdevelopment, and there is nothing more to mention about. The two other factors are much more interesting in this current chapter (Part One)’s context. Then, there comes the barter’s no economic domination, but coexistence with (at least) the alternatives of gift economy and farm (household) self-sufficiency, as above described in the previous paragraphs. This leads to two more remarks to be made. The one comes on the above controversy about yes or no barter economic system, as a historical fact. Our opinion has been given above, here to be added up that there is no any link between a presumable ability of barter to fulfill a distinct economic system and its coexistence with other alternative economic systems, as in a mixture of systems—contrary to an also presumable ability to dominate the economic environment or achieve a “pure” system. It is exactly the opposite: barter would be able to fulfill an economic system apart, whereas coexisting with other different systems, as another distinction that the old primitive economy keeps face to the modern world. Otherwise, barter is not market economy, in the today sense—if it had, it would be supposed (at least) to dominate once the antique economy. Or, there is already agreed that it did not, despite its ability for a specific economic system created. The other important factor of limiting and making the number of marketable goods and industries unchanged might consist in the ancient communities55. Or, this might be even the most genuine limit of developing This aspect will be deepen in the below last paragraph of Part One, in its historical dimension.

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a market space. In a way, this is not unprecedented—authors admit, as above mentioned in I.3, that gift economy had been strictly subordinated to the small communities of Paleolithic. Here recall that the historical origins of barter came later, when the old altruism of the gift economy was coming to be undermined and replaced by the “no-trust” of barter. There is to be read here the more complicated relationships among market operators in the later barter context, as compared to the ones among hunters-gatherers, as for the gift economy. On the other hand, barter was born when the same gift economy was existing, vivid and never in decline. Nevertheless, the social environment was already changed: the market operators of barter were already different than the members of the small clans of Paleolithic. They might be husbands of the self-sufficient households or so. The idea is that communities had already changed, namely community had enlarged enough for providing an individual market area. This market area is assumed to keep its limits, but there is no market area among too less people acting on. We are talking about cities, or, at least, villages56. Or, this is no Paleolithic any more, but the next Neolithic and on. The ancient cities were getting increasingly stronger, as basing on a diversity of factors, among which, however, the literature yet misses to mention the macroeconomic systems, as settled within. In our view, there might be even a kind of Marxian dialectic report between the community and its economic conditions—the economic system created by barter was coming to be one more factor of strengthening the community, and vice-versa: the communities already strengthen by several factors were helping the afferent market and reinforcing the barter complex support. As for instance, only when personalized community around, the barter settlement of the cell-market would get helped by elements like writing, collective memory, and educational institutions in this way (firstly on bookkeeping), as strongly necessary to all specific business—they were compulsory, on the other hand. In such a context, when we say “rather no economic development or progress” for barter, such facts show the opposite—barter was supporting progress, but in the indirect way which was going through the community. Plus, the primitive barter, as afferent to its community, despite the gift economy precedent, is qualitatively different than that and not less interesting. Barter essentially changes the gift economy environment, except for staying subordinated to the community—barter stays a community See I.7 below for historical details.

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type economy, despite the market creation. Barter stays subordinated to its community, but there are both a different community type and a different way of subordination, than for the gift economy case57. Ultimately, trade was born, in the primitive barter environment, but not as a specialized activity or profession. I.4.4 Some more description and clarifying These above bases of the model, in this paragraph, refer to the Walrasian theory of prices, by two components of it, of which just the first one has been developed in the (I) multiple equality. Our marginalist reference is actually a complete one for barter. The second part of this: P B/C = P B/A / P C/A — in which one of the goods in the transaction range of (I) takes over the role of medium of exchange—refers to the upper stage of barter—we will call it the advanced barter—and this will be debated in the next Part Two. There will be the complementary model: (II) aA ⇔ nN bB ⇔ nN cC ⇔ nN ( . . . .) mM⇔nN in which, actually, one marketable good item will chage status into a medium of exchange for the other good items, and the result is an essential change: there is no longer the horizontal chain of transactions, but a vertical range. There will be another debate below, at its appropriate time, whereas here there remains to add that the above horizontal (I) equalities see just the primitive barter, the one related to the ancient communities. In the next stage, barter remains the same on the ground details, see no money based reference and direct exchange between goods, but essentials will change as regarding the economic system—one more argument for considering barter as a real economic system. See in the next Part Two that barter will change this community reference in its later on development.

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Just adding our complete remark about the Mauss (1925)’s assertion above. The truth is that there is no historical reference about phenomena described in our above model. In other words, all the world histories see the ancient trade as starting by the „great trade” of the antiquity: the Silk Road, the Phoenicians’ and Greeks’58 carryings accross the Mediteranian sea and so on—nothing about the „little” trade within the antique communities. Or, in our view, this might be explained by all the above described factors embarassing the primitive trade, plus its vulnerability to progress, which one day has made it vanish. Despite this, the primitive barter—see, „little trade”—keeps its significance in the historical context.

I.5 Related history: the ancient communities Recall from the above I.3 that the Agricultural Revolution, beginning about 10,000 BC, saw the development of agriculture. Farming permitted far denser populations, this in time organized into States. Agriculture also created food surpluses that could support people not directly engaged in food production. The development of agriculture permitted the creation of the first cities. These were centers of trade, manufacture and political power with nearly no agricultural production of their own. Cities established a symbiosis with their surrounding countryside, absorbing agricultural products and providing, in return, manufactures and varying degrees of military control and protection59. I.5.1 Urbanization and cities The development of cities equated, both etymologically and in fact, with the rise of civilization60 itself 40,000 BC. Modelski (2004) finds three eras to talk about in the world history (i) the See II.4 in the below Part Two for details. See: Stearns & Langer (2001-09-24); Chandler(1987); Modelski (2004). 60 Civilization is a term used to describe a certain kind of development of a human society. A civilized society is often characterized by advanced agriculture, long-distance trade, occupational specialization, and urbanism. Aside from these core elements, civilization is often marked by any combination of a number of secondary elements, including a developed transportation system, writing, standards of measurement (currency, etc.), contract and tort-based legal systems, great art style, monumental architecture, mathematics, sophisticated metallurgy, and astronomy. Besides, civilization is often used as a synonym for the broader term “culture” in both popular and academic circles (see: Encyclopaedia Britannica 1974, for “Civilization” 15th ed. Vol. II, and Merriam-Webster.com). 58 59

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ancient, (ii) classical, and (3) modern61 ones. The same also represents distinct phases in the trajectory of the world system since about 3000 BC. Then the question arises about the characterization of these phases: could they in fact be phases of an evolutionary learning process of the world system62? The author here tests such questions against systematic data on major urbanization over the long period of five millennia brought together in a previously issued paper of him (Modelski 2003a). The today’s world is obviously much different from what it was one thousand years ago, sustains the author, or what we can imagine it to have been five thousand years ago. What is more, any even cursory look reveals a picture that can make sense only if we approach it via a form of evolutionary theory. For what body of knowledge if not evolution can explain humanity moving, in a space of five thousand years, quantitatively from less than ten million to a size now approaching ten billion members, and qualitatively, from a condition of small dispersed communities to one of a constellation of great metropoles?

Excavated dwellings at Skara Brae

(Orkney, Scotland63), Europe’s most complete Neolithic village And so, what does ‘phased’ urbanization reveal about world system evolution? Evolution everywhere, including in this particular case, changes This below lines will yet skip references to the modern world system. See also Modelski (2000) and Devezas & Modelski (2003). 63 Photograph John F. Burka. Very important archeological site located on the Western coast of the principal island of the Orkneys (north of Scotland). It understands the remainders of a Neolithic village which thanks to their hiding in sand spent the centuries without suffering important damage. 61 62

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the social organization of the human species and occurs in accordance with certain generalized Darwinian principles. Plotkin (1997:84) uses the term “heuristic”—a pattern that leads to discovery and invention—for the sequence of consecutive and continuous phases in the overall evolutionary learning process.

Machu Picchu, “the Lost City of the Incas” —the most recognizable symbol of Inca civilization

The Archaeological Site of Çatal Hüyük, in the Konya Plain, Turkey

In the urbanization process, humans began to relate to each in other ways that raised the possibility, and increasingly ever since, of species-wide organization (Modelski 2004). People begin living in man-made shelter huts in northern Punjab and central Asia (Bactria) 7,000 BC. There is evidence of people growing barley in this area and raising sheep goats. People begin living in mud-brick dwellings in villages; some of which are still in existence : first Sumerian civilization, in lower Mesopotamia (3500 BCE/ Ascalone 2007), followed by Egyptian civilization along the Nile (3300 BCE/ Grimal 1992) and Harappan civilization in the Indus Valley (3300 BCE/ Allchin 997; Allchin ed.1995). Elaborate cities grew up, with high levels of social and economic complexity. Each of these civilizations was so different from the others that they almost certainly originated independently. It was at this time and due to the needs of cities, that writing and extensive trade were introduced. Hence, viewed diachronically, across world time world system might be viewed as a process, in fact a learning process that we also call world system evolution, a process extending over long periods. That process continues and projects well beyond the future that is foreseeable by to-day’s social science methodologies. By the way, the author here assumes a “unitary” rather than plural or “multi-civilizational” conception of world system 59

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evolution. Civilizations may so be attributed for stages taken for some 2,000 years in duration and about equal to historical eras, each era lending distinct emphasis to a different evolutionary problem (Modelski 2004). In the civilized context, urbanization is how the world population comes to live in urban places. Quite evidently, it is social change on a major scale. Major urbanization, just as world population growth, is a phased process. It always takes some length (Modelski 2003a and Devezas & Modelski 2003), plus, the growth patterns of world cities are, of course, just one portion of urbanization64. For the ancient world cities (-3500 to—1000), the threshold criterion used is an estimated population of 10,000 or more; in the classical world (-1000 to 1000) it is 100,000, and in modernity (since 1000)one million65. I.5.2 Writing and calendars in the ancient world The distinguishing feature of that era resided in the launching of two major social innovations, cities, and writing and calendars, and these might jointly be interpreted as having laid down the learning-infra-structural basis for world system evolution. The human species could undertake the task of building the elements of social organization on a world scale. Without cities and writing the humans could not have continued with the project of the world system. Why do we regard cities, and writing and calendars, as the central elements of this stage of the civilizational process? A system of cities provided as it were the hardware making possible collective learning on a continuous basis; it was the platform for sustained and intense interaction with the The literature takes for granted population figures (the number of “millionaire” cities is currently in the 300+range, and attention has shifted to mega-cities of 10-20 million +) and seeks to distinguish among them in particular those that host major clusters of economic activity, such as headquarters etc. of transnational corporations. They can afford to take population figures for granted because they are now freely available, in contrast with the situation for most of the five millennia past (see also Modelski 2003b). 65 The surprise is that these simple criteria yield, for each era, a comparable number of entries: in the first two cases, a maximum of 26, in the first, and 27 in the second. In the modern era we reach 16 cases by 1900, but then urbanization explodes, and we find some 300 cases in our inventory, says the author. There are grounds for believing that this is an instance of a hidden order in the world of cities (as in the world system/ Modelski 2004). 64

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expectation of repeat experience, independent of the fate of any one city. The first cities arose around cult centers; city-states were the political basis of that system, and the nodes of networks of economic cooperation. World cities, and a fortiori, a system of cities (and not just one big cosmopolis of the classical thinkers) became the basis for the sustained generation of variety from which sprang innovation. Cities, too, are the cradles of writing (the organization and storage of information) and of calendars (the organization of time) which are the software of stable social interaction and learning. They made possible collective memory (we know that lists and records are the first forms of writing), and they enabled communication across space and time, thus programming complex human enterprises. When and where do world cities, and writing and calendars, appear on the world scene? Jean Jaques Glassner66, among others, has situated the “origin of writing” in Sumer in the century between—3400 and—3300. The data assembled demonstrate that a system of cities, the nucleus of the world city system, emerged in Sumer after about 3500 BC. That system was centered on Uruk as its largest unit. We also know that the oldest extant examples of writing concern Uruk, and also have been found in that city. The reason for that might well be that writing was invented there (though in a context that included wide-ranging contacts). In one ancient Sumerian text entitled “Enmerkar and the Lord of Aratta”, the invention of writing is indeed affirmed to be a human (rather than a divine) creation, attributed to the Lord of Uruk-Kulaba, also described as a founder of the city67.

Ptolemy’s world map, reconstituted from his Geographia

With the paper called “World Cities—3000—2000”, cited by Modelski (2004) The epics of Sumerian literature that took off about—2500 concentrate on the legendary rulers of that city, and in particular on Gilgamesh.

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The earliest, and the only substantial cuneiform finds of the earliest of the Uruk IV period (-3400 to 3100), consisting of 600 inscribed tablets, are recorded for that city (as compared to one for Kish).

Cuneiform script, the earliest known writing system

That means that we have good reasons for believing that the origin of writing coincided quite closely with the origin of the world city system, probably in a synergistic fashion. The cities of Sumer grew around ceremonial centers focused on temples, and temples also soon became the centers of writing, store houses of knowledge, and the locus of teaching. The main such center was Nippur. Evidence for specialized political or economic activities comes later. An incipient system of cities also appeared at about this time in (pre-unification) Upper Egypt, about Abydos, Nekhen, and Hierakonpolis; but on a smaller scale, and here too incipient writing has now been observed. Over time, cities and writing do appear also in Iran, in the Levant, and in the Indus Valley, in roughly similar circumstances. At the close of the ancient era, these have dispersed throughout a wide area, and Sumer is no longer the center of the system. By 1200 BC, a new alphabetic, form of writing is documented for the Levant coast (Modelski 2004). Parallel to the invention of writing has been the consolidation of concepts used for the management of time. The earliest tablets (Uruk IV) contain signs for such measurement: days, months, and years. That would seem to confirm that the lunar-solar calendar was probably invented in Sumer at about that time because the seven-day week may have evolved out of moon phases. The Egyptians (especially at Heliopolis) excelled in astronomical skills, and computed the length of the year at 365 ¼ days and it is their calendar that was the foundation of the Julian system introduced 62

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by Julius Caesar on the advice of an Alexandrian astronomer (-46), and that in adapted (Gregorian) form is still with us. In China, the lunar-solar calendar shows up in the oracle bones of the Shang period and in India, in texts at about—1000(Modelski 2004). I.5.3 Ancient cities in the religious context This period also saw the origins of a complex religious development (Gimbutas1989). Religious belief in this period commonly consisted in the worship of a Mother Goddess, a Sky Father, and of the Sun and Moon as deities (Turner & Coulter 2001). The same for Sun worship. Shrines developed, which over time evolved into temple establishments, complete with a complex hierarchy of priests and priestesses and other functionaries. Typical for Neolithic was a tendency to worship anthropomorphic deities. Some of the earliest surviving written religious scriptures are the Pyramid Texts, produced by the Egyptians, the oldest of which date to between 2400 and 2300 BC (Allen 2007). Besides, some archeologists very recently suggest, based on ongoing excavations of a temple complex at Göbekli Tepe (“Potbelly Hill”) in southern Turkey, dating from ca. 11,500 years ago, that religion predated the Agricultural Revolution rather than following in its wake, as had generally been assumed (Symmes 2010). Much later on, the so called “classical era” was associated with the development of major cultural and religious traditions see Buddhism, Christianity, or Islam. The German philosopher Karl Jaspers, in his book published in 1953, The Origins and Goal of History 68 here has the concept of the “axial period”. That is the period from 800 to 200 BC that on his view, constituted a major turning point in human affairs, and laid down the foundations from which all contemporary civilization derives. Because that is when, he argues, simultaneously and across Eurasia, the beginnings of the world religions, by which human beings still live were created. That is the time when Confucius lived in China, Buddha was active in India; Zoroaster taught in Persia, the prophets preached in Israel, and the philosophers argued in Greece. For Jaspers, the close simultaneity of these developments demonstrates the spiritual unity of mankind, but represents no “general law” but only “a specific historical, unique fact”. We might wonder how simultaneous a process can be that extends over a period of 600 years; we might also point out that Christianity and Islam appear on the world Cited by Modelski (2004). See also Eisenstadt (1986). 

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scene, on Jaspers’ account, as latecomers, well past the “axial period”. Modelski (2004) here proposes for Eurasia the following sequence: first, Confucianism and Taoism; second, Buddhism; third, Christianity, and fourth, Islam. Then, the author draws a table of “world cities” according to whether they might be regarded as influenced (or just colored) by one of these three religions communities. Confucianism comes first in this sequence, and it emerges as an official ideology first in the Han Empire, after—2000, with Changan or Luoyang as possibly its cities. It does become the public face of that empire, and of succeeding systems of Chinese governance, but has little transnational appeal as a more general system. Buddhism here comes with the city of Pataliputra at—200, seat of the 3rd Buddhist Council convoked by Ashoka (-250). Over time, the several tendencies of Buddhism rose gradually in their salience among the world cities, and in time, too, also reaching out across the major regions of Asia, generally following the Silk Road. Overland, the Central Asian route took Mahayana Buddhism to China, with one of the earliest foundations opening near Luoyang, then the Han capital, as early as (+)68, and assuming major importance in the Tang era and by 800 notable also in Korea and Japan; the other major movement occurred via the maritime routes, first to Ceylon, and then to Burma (see Myanmar69) and several other parts of Southeast Asia, also reaching South China. Cities prominent in transnational and/or commercial linkages such as Nanjing, Guangzhou, or Kyoto were particularly likely to assume Buddhist coloration. The origin and the initial impact of Buddhism was in India but it is its subsequent and far from secondary influence, as facilitating communications across Asia that arouses particular interest, and shows up well in our table.

Angkor Wat temple, Cambodia, early 12th century See the new country name given by the new military regime of this country since 2008-2009.

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The third phase is that of Christianity, appearing initially in the form of small communities in Antioch, Alexandria, and Rome but after 330 becoming the official cult of the Roman empire centered on Constantinople, and taking hold of up to one half of the then world cities. From about 330 to 632 the Mediterranean zone of the world system was saliently Christian, even though it was also rent by local divisions, heresies and persistent schisms. The fourth phase is Islamic and the table shows how rapidly the Christian cities of eastern Rome were taken over, and how quickly, after 700, the center of the world system thus turned into that direction. The Moslem world at that moment was becoming strongly urban, and trade oriented, and by 1000 more than four out ten (10/25) of the world cities were situated there. Constantinople was the only substantial urban center holding on in non-Moslem Europe, with Buddhist-influenced areas in the East completing the picture. Note, too, that the spread, or diffusion (as distinct from the origin and inception) of these religions is principally the product of regional developments of the second part of the classical era, after about—200. The first part saw the rapid growth of populations, growth of cities, and expansion of cultivated areas, especially in East and South Asia. But as this rapid growth, for several reasons, slowed down, religious diffusion assumed prominence. It served to promote the equalization of intra—and extra-societal differentials, and to smooth long-range communications. That process was also promoted by migrations, and hinterland incursions. In addition, each of these religious communities started in the competitive context of systems of independent city states: the Spring and Autumn, and the Warring states in China, the newly rising urbanized polities of the Ganges valley, the Hellenistic world of the Mediterranean, and the merchant cities of Arabia. Only after the movements formative of these communities were first launched were their universalistic tendencies taken up by great imperial formations as the themes that might lend them greater legitimacy: Confucianism by the Chinese centralized state; Buddhism by the Mauryan kingdom and later in China and Japan, Christianity by Rome, and Islam founding its own Umayyad, and then Abbasid caliphates. But each of these empires soon faded out. It was the religions communities that outlasted them as the glue that held together large portions of civilization, and shaped the regions wherein they flourished (Modelski 2004).

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I.5.4 Cities and empires Historians, political scientists, and sociologists pay much attention to the role of empires, as the most interesting, and as though ever-present, social structures of the pre-modern world system. Immanuel Walerstein (2004) regards empires as a “constant feature of the world scene for 5000 years”. What does the inventory of world cities reveal about those quite obviously prominent structures, and why do we need to under-emphasize, in an evolutionary account, the role of empires?

The Parthenon epitomizes: the sophisticated culture of the ancient Greeks

The importance of empires—those multi-level political organizations, seeking power monopoly mostly imposed by force upon diverse populations, yet also claiming universal authority at regional or world scales—is sometimes assessed by the extent of the territory they controlled. That measure is of questionable validity unless qualified by some index of value. The urban record reveals empires to have been not as important as historical memory would have it, if we measure that importance by the proportion of world cities controlled by them, at points of time captured in our record. In the ancient world, the two prominent multi-level political organizations with a claim to regional standing were those of Akkad (at—2200), and of the Third Dynasty of Ur (at—2100). At these dates, each controlled a significant portion of the world cities, that is about one half of the respective totals (Akkad, 13/21; Ur III 10/19), which means that they both controlled most of Mesopotamia and some neighbouring areas, but not Egypt, Central Asia, or the Indus Valley. Both were relatively short-lived: Akkad lasted about one century and a half, and Ur III just about one century. Neither was notably innovative because the great achievements 66

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of Sumer, cities and writing, antedated their activities and had little to do with them. Their overall impact was less positive than negative, despite bombastic claims from Akkad whose second king, Naram-Sin, fond of writing, famously claimed in his inscriptions, not just divinity but also rule “of the four quarters” of the earth, (probably the first recorded, but hardly last, claim to universal dominion) and the rationalizing administrative practices of Ur III. Both the wars of Akkad, and the collapse of Ur III rule under peripheral pressures paved the way toward the disappearance, at the hands of Babylon, of the civilization of Sumer in the following 2-3 centuries. But Hammurabi’s short-lived Amorite empire even less than that, it was substantially gone by—1700. Nor does Egypt’s New Kingdom have much claim to universal significance, despite important inroads in Nubia and the Levant. In East Asia, the rule of the Xia or the Shang may have laid out the basis for wider political system in North China, but we do not know enough about it70. In short, in the ancient era, empires71 were, at best, costly and short-lived experiments in political construction above the scale of city-states. Far from being continuously present, they were at best attention-getting incidents in a general picture of autonomous units. It was the systems of independent city states that served as the loci of innovations that shaped this ancient world, and the emerging world system. In the classical world, correspondingly, imperial regional organizations make a somewhat stronger impression, but not a truly positive contribution. The classical world showed minimal imperial structures in the early part of the era (at—1000 and—500), and maximum control at about mid-point, in year 1, with some three-quarters (18 out of 25) of world cities forming part of an imperial structure, that share declining sharply over the remaining period, such that by 1000, only about 1/5th of our world cities can be shown to have had imperial color (Modelski 2004). I.5.5 In summary Modelski (2004) gets ready to conclude about the human experience of the past 5000 years that it can be portrayed and narrated in one uninterrupted Modelski (2004) here cites Mark Edward Lewis, a scholar who had described these ancient Chinese empires as “an imaginary realm created” in the Han era “within texts”. 71 If that is the right word for the cases cited here. 70

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sequence72. As viewed through the prism of urbanization the world system evolution is neither linear nor random, but phased because at fairly regular intervals and at increasing levels of complexity it exhibits distinct phases.

I.6 A conclusion The economy starts, together with humanity, in the Paleolithic, by the gift economy, first promoted by hunters-gatherers. Gift economy always remains ever-since an interesting issue, by its anthropologic dimension and survival up to modern times. Except for its ability to design an economic system, which stayed at the Paleolithic and small group level, gift economy is never a story of rising and falling, on the contrary, it might paradoxically be much larger nowadays than in its ancient times of origin. The other antique economic systems and habits are supposed to be found many thousands of years later, in Neolithic, as resulted from the agriculture revolution of about 10,000 BC. They were, at least, the self-sufficient farms and barter—and so, barter is supposed to be located about 10,000 BC as origin, and be developed by important events of 5,000-3,400 BC related to the ancient communities existence, according to the literature. Actually, barter—as preceding the money-based economy of later on times—was producing a real economic system, as market-based, but it either remains just one of the elements supporting the edifice of community, or it coexisted with the other economic habits as for an economic mixture very specific to the ancient and pre-modern times. As summarizing for barter, its strengths consist in: producing price stability, coexisting by definition with the other economic habits and suiting its afferent community by market space and supporting important social values of it—see collective memory, writing, bookkeeping and the here corresponding educational institution. The barter’s weaknesses, on the other hand, consist in its significant stagnation, by definition, no admittance of the economic progress and market extension—and this aspect was going to completely destruct it in the aftermath. However, within this whole above chapter, we have called by barter only the primary (primitive) form of no money-based market. So, it was the primitive barter only relating to its community, as exclusively, and vanishing Except for the Americas in the classical age where such continuity may be in question.

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afterwards, whereas this kind of destruction will be analyzed in the following chapters and barter itself, in its larger sense, actually survived—that was the commodity-money later form of barter to talk about. On the other hand, the primitive barter might have been destructed once, but the community that it was related to was surviving, in its turn, on historical events. The ancient communities—as cities, world cities and city-states—have proven increasingly stronger in time, even “stronger” (see durable) than the old empires, as coexisting with. And that due to a specific multitude of factors, of which barter was just one character in a story actually belonging to the human specie and its communities, and not necessarily to economy and economic development.

References: Pirenne, Henry (1936): Economic and social history of medieval Europe. London: Routledge & Kegan Paul, 1936, p. 103-104 Marx, Karl(1975): “Capital”, Volume 3, p. 886; 896; 898. Lenin, V.I (1970).: :” Capitalist development “,” Selected Works of Lenin. Progress Publishers. Moscow. Vol 1, p. 161. O’Sullivan, Arthur; Steven M. Sheffrin (2003). Economics: Principles in Action. Pearson Prentice Hall. p. 243. ISBN 0-13-063085-3. Jevons, W. S. (1875/1893), Money and the Mechanism of Exchange, London: Macmillan. Berntsen, Alexander & Guillaume Rocheteau: Money and the Gains of Trade. International Economic Review. Vol. 44. Nmb. 1. February 2003. Economics Dept. WWZ. University of Basel. Switzerland and School of Economics. Australian National University. xxx The New Encyclopædia Britannica (2007) v. 4, pp. 357-58. NA (2007). “economic systems”. Conklin, David W(1991), Comparative Economic Systems,University of Calgary. Press, p.1. Mauss, Marcel (1925), The Gift: The Form and Reason for Exchange in Archaic Societies, ISBN  0-393-32043-X  . pp. 36-37. Originally published as Essai sur le don. Forme et raison de l’échange dans les sociétés archaïques. Lewis Hyde calls this “the classic work on gift exchange”. Graeber, David (2001): ‘Toward an Anthropological Theory of Value’. pp. 153-154. 69

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Cheal, David J (1988). “1”. The Gift Economy. New York: Routledge. pp.  1-19. ISBN  0415006414. http://books.google.com/books?id=owNAAAAQAAJ&pg=PP1&dq=Cheal,+David+J.+%27The+Gift+ Economy%27&ei=PKg5StboFZDakATHy-DFAw,M1. Retrieved 2009-06-18. Kranton, R.: Reciprocal exchange: a self-sustaining system, American Economic Review, V. 86 (1996), Issue 4 (September), p. 830-51 Hyde, Lewis: (1983), The Gift: Imagination and the Erotic Life of Property, ISBN 0-394-71519-5) Especially part I, “A Theory of Gifts”, part of which was originally published as “The Gift Must Always Move” in Co-Evolution Quarterly No. 35, Fall 1982. Kropotkin, Peter (1902; this edition 1987, 1993, 1998), Mutual Aid: A Factor of Evolution, Freedom Press, ISBN 0-900384-36-0 Sahlins, Marshall (1972). Stone Age Economics. Chicago: Aldine Transaction. ISBN 9780202010991. Suranovic, Steven(2001): “Negative Reciprocity“. In: “International Trade Theory and Policy”. The International Economics Study Center. The George Washington University. Aug. 2001. Retrieved from “http://en.wikipedia.org/wiki/ Reciprocity_(cultural_anthropology)” Crocombe, Ron & Crocombe, Marjorie Tua’inekore, ed., Akono’anga Maori: Cook Islands Culture, 2003, ISBN 982-02-0348-1 Prattis, J. I. (1982). “Synthesis, or a New Problematic in Economic Anthropology”. Theory and Society 11: 205-228. doi:10.1007/ BF00158741. Polanyi, K. (1968). The Economy as Instituted Process. in Economic Anthropology E LeClair, H Schneider (eds) New York: Holt, Rinehart and Winston. ISBN  Gudeman, S. (1986). Economics as culture : models and metaphors of livelihood. London: Routledge. ISBN  Hann, C. M. (2000). Social Anthropology. London: Teach Yourself. ISBN 9780340724828. Smith, Adam(1904): Wealth of Nations. London. Methen and co. 1904 Fagan, B (1989): People of the Earth, pages 169-181. Scott, Foresman, 1989. Diamond, Jared. (1998). Guns, Germs and Steel. London: Vintage. ISBN 0-09-930278-0.

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Gowdy, John (1998). Limited Wants, Unlimited Means: A reader on Hunter-Gatherer Economics and the Environment. St Louis: Island Press. pp. 342. ISBN 155963555X. Dahlberg, Frances. (1975). Woman the Gatherer. London: Yale university press. ISBN  0-30-02989-6. http://books.google.com/?id=eTPULzP1 MZAC&pg=PA120&dq=Gathering+and+Hominid+Adaptation. Erdal, D. & Whiten, A. (1996) Egalitarianism and Machiavellian Intelligence in Human Evolution in Mellars, P. & Gibson, K. (eds) Modelling the Early Human Mind. Cambridge MacDonald Monograph Series Kiefer, Thomas M (Spring 2002): “Anthropology E-20”. Lecture 8 Subsistence, Ecology and Food production. Harvard University. http:// www.suluarchipelago.com/E20Website2002/default.htm. Retrieved 2008-03-11. Biesele, Megan; Barclay, Steve (March 2001). Ju/’Hoan Women’s Tracking Knowledge And Its Contribution To Their Husbands’ Hunting Success. African Study Monographs Suppl.26: 67-84 Lovgren, Stefan (2006):. “Sex-Based Roles Gave Modern Humans an Edge, Study Says”. National Geographic News. http://news. nationalgeographic.com/news/2006/12/061207-sex-humans.html. Retrieved 2008-02-03. Portera, Claire C.; Marlowe, Frank W. (January 2007). “How marginal are forager habitats?” (PDF). Journal of Archaeological Science 34 (1): 59-68. doi:10.1016/j.jas.2006.03.014. http://www.anthro.fsu. edu/people/faculty/marlowe_pubs/how%20marginal%20are%20 forager%20habitats.pdf. Lee, Richard B. & Daly, Richard, eds., ed (1999). The Cambridge Encyclopedia of Hunters and Gatherers. Cambridge University Press Finley, M. I. (1985/1999): The Ancient Economy, second edition. Berkeley: University of California Press. 1985. (Now available in an “Updated Edition” with a foreword by Ian Morris. Berkeley: University of California Press, 1999) Aikhenvald, AlexandraY; RMW Dixon(2006): Areal Diffusion and Genetic Inheritance: Problems in Comparative Linguistics p.35 [OUP Oxford (2 Mar 2006) ISBN 978-0199283088] Hassan, Fekri (2002): Droughts, Food and Culture: Ecological Change and Food Security in Africa’s Later Prehistory Springer (31 Mar 2002) ISBN 978-0306467554 pp.164 [3] Shillington, Kevin (2004): Encyclopedia of African History Routledge; 1st edition (18 Nov 2004) ISBN 978-1579582456 p.521 [4] 71

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Barker, Graeme (2009): The Agricultural Revolution in Prehistory: Why did Foragers become Farmers? OUP Oxford (22 Jan 2009) ISBN 978-0199559954 pp.292-293 [2] Bellwood, Peter (2004): First Farmers: The Origins of Agricultural Societies Wiley-Blackwell. ISBN 0631205667. Fuller, Dorian (2006): “Agricultural Origins and Frontiers in South Asia: A Working Synthesis” in Journal of World Prehistory 20, p.42 “Ganges Neolithic” Ya Lishiduode(1965): “Political Theory”, Commercial Press, 1965 edition, p. 15. Marx, Karl(1975b): “Critique of Political Economy”. See “The Complete Works of Marx and Engels” Volume 46, p. 476,477,481 Conklin David W. (1991): Comparative Economic Systems., University of Calgary. Press, p.1. 1991 Lenin (1966) : Capitalist development. Selected Works of Lenin, “Vol 1, p. 161 Guitton, H & Bramoulé, R (1987): La monnaie. Paris. Dalloz. 6th edition. 1987 Stearns, Peter N.; William L. Langer (2001-09-24). The Encyclopedia of World History: Ancient, Medieval, and Modern, Chronologically Arranged. Houghton Mifflin Company. ISBN 0-395-65237-5. Chandler, T. (1987): Four Thousand Years of Urban Growth: An Historical Census. Lewiston, NY: Edwin Mellen Press, 1987. Modelski, George( 2004): World Cities: –3000 to 2000. Washington, DC: FAROS 2000, 2003. Paper presented to the “Globalization and World System Dynamics” panel, annual conference of the International Studies Association, Montreal, March 18, 2004 Modelski, George(2000): “World System Evolution” in R. Denemark et al eds. World System History, New York: Routledge. Devezas, Tessaleno and George Modelski (2003): “Power Law Behavior and orld System Evolution” Tech. Forecasting and Soc Change November, 819-860. King, Paul L. and Peter Taylor eds. (1995) World Cities in a World-System, Cambridge : Cambridge University Press. Ascalone, Enrico(2007): Mesopotamia: Assyrians, Sumerians, Babylonians (Dictionaries of Civilizations; 1). Berkeley: University of California Press, 2007 (paperback, ISBN 0-520-25266-7). Allchin, Bridget (1997): Origins of a Civilization: The Prehistory and Early Archaeology of South Asia. New York: Viking. 72

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Allchin, Raymond (ed.) (1995): The Archaeology of Early Historic South Asia: The Emergence of Cities and States. New York: Cambridge University Press. Modelski, George (2003b): “Ages of Redistribution” Conference on “World System History and Global Environmental Change”, Lund. Gimbutas, Marija: The Language of the Goddess, Harpercollins, 1989, ISBN 0-06-250356-1. Turner, Patricia & Charles Russell Coulter (2001): Dictionary of Ancient Deities, New York, Oxford University Press, 2001. Allen, James (2007): The Ancient Egyptian Pyramid Texts. Atlanta, Ga.: Scholars Press. ISBN  1589831829. http://books.google.com/?id=6VBJeCoDdTUC &pg=PA1&dq=2353+-+2323+%22pyramid+texts%22 Symmes, Patrick (2010): “History in the Remaking: a temple complex in Turkey that predates even the Pyramids is rewriting the story of human evolution,” Newsweek, March 1, 2010, pp. 46-48. Eisenstadt, S. N. (1986): The Origins and Diversity of Axial Age Civilizations. SUNY Press. pp.  1-2. ISBN  0-88706-094-3. http:// books.google.com/books?vid=ISBN0887060943&id=OFGIYBK2hu 8C&pg=PA1&lpg=PA1&dq=intitle:Axial+intitle:Age+intitle:civilizati ons&sig=q1ep_bbzAp6bAwg5KgaTyVK9d1k. Walerstein, Immanuel (2004): World-Systems Analysis. An Introduction. Durham. North Carolina. Duke University Press. 2004

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PART TWO BARTER, AS ADVANCED, VERSUS PRIMITIVE II.1 Advanced barter: the second mathematical model As reluctant to progress, the primitive barter was supposed to leave the history and clear the way for another economic system. The moment was the one in which the old cell-markets—afferent to ancient (still small) communities—were forced to open for an increasing merchandise amount coming from outside communities, here including from other neighbouring communities. Or, this is for at least two alternatives of the above model (I): including the new merchandise in the existing form (impossible, when this new merchandise might be even more numerous items and /or higher amonts than previously existent) or here operating a radical change, at least in the still barter context. Andrei (2010) finds in the passage between the two models—as referred to the primitive and the advanced barter—a real antique precedent of the nowadays modern economy financial and economic crises: this might be a „crisis of goods valuation in a progress assertion conditions”. Plus, there was a human element here interfering: merchants73, as the new (and last) component of the antique division of labour. II.1.1 Bases of the model Recall from Part One that the starting point of our mathematical debate that we have tried is the Walrasian theory of prices (Guitton & Bramoulé 1987), as shortly described by two contexts of equalities-inequalities, of which the second part reports as follows: See below II.2.

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P B/C = P B/A / P C/A in which PB/C , PB/A and PC/A are the corresponding price ratios among three marketable goods, nominated as: A, B and C. Naturally, this above equality means that every good can operate on the same market as a price standard—so medium of exchange—for the rest of goods. As inspired by the Walrasian thinking, we drawn our own model, in which there are no prices, but corresponding quantities of goods, listed as: a, b, c, . . ., m, n, for the nominated goods: A, B, C, . . ., M, N, and providing equal values, as traded on the same market. As much as the primitive barter was attributed in the above Part One the primary model as: (II) aA ⇔ bB ⇔ cC ⇔ . . . ⇔ mM ⇔ nN in which the ⇔ sign represents both an equality of values between the referred goods and quantities and a transaction done, now all these description elements are preserved for the new circumstance in which N good will change status to what in this Part Two becomes medium of exchange, commodity money or price (value) standard for the other A, B, C, . . ., M list of goods, as in the basic Walrasian theory. So, this is starting a new model, as reflecting the new context of exchanges: (II) aA ⇔ nN bB ⇔ nN cC ⇔ nN ( . . . .) mM⇔nN which will so be complementary for the above (I) and so the two models will get able to cover the whole picture of barter, as primitive (I) and advanced(I) at the same. II.1.2 Explaining the model The basic principle of the model stays unchanged, as much as the barter (no money-based) exchanges on the ground. But, once one of the goods traded in the (I) chain is attributed such a role, the essential of this market functionning will dramatically change. The primary (and equally 75

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essential) result is that the old double coincidence of wants problem vanishes the way that the above (I) chain transactions lose their necessity and compulsory character: every transaction part (individual market operator) will prefer, for the sake of a more operational way of acting, the easier and more confortable way of selling her product on market for receiving a N good amount in exchange, and this will be going to be sold, as acceptable, for the (whichever) good needed. Or, this new manoeuvre is much less than the former chain of transactions encountered in order to access the marketable good needed by any individual. The primary result will come for the short term: the previous horizontal chain of transactions and mathematical design will turn into the „vertical” design of model (II). Meaning that the horizontal design dissapears for both the short and long terms—the previous price system vanishes as well for a new design. Nevertheless, the new vertical design of the price system, as so resulted, will no longer match the „economic vertical”, as in the today view of economists (even, much less than that). Several other aspects will come on the positive side of the new model. First, the price stability might be preserved, even differently based and for a really new economic context. Do not omit here the fact that both (I) and (II) models are carrying just one value along their specific equalities: on the transactions chain of (I), as well as on the series (column) of transactions (equalities) of (II). The (II) model does even more than (I) in such a concern: transactions between N and the other goods are now seen as independent from one another. In such a new context, any individual price/quantity change—see, more or less abundance of goods or cost variations—will be less harming the whole list of transactions—as compared to the previous (I), in which such phenomena were causing problems. Certainly, on the other hand the price stability becomes very dependent on the individual price stability and behaviour of N. The new model stops making all marketable goods share the generally comprehensive price stability amongst. Actually, as here reiterating the above Walrasian principle, the newly remade price system will (really) belong to good N—to its individual industry price determining conditions. Or, one might here account for a step-back from the previous price system conception. Concomitantly, barter here changes its former community-related definition by a new reference: the one much qualitatively different, which consists in a marketable good (and its industry behind) and professional traders (merchants) taking over such an activity on longer distances. Second, once obtaining this individual authonomy of individual 76

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transactions in a market system there will equally be admitted another phenomenon, the one that had made the previous (I) model both dependent on the limits of a community and not receptive to any market enlargement—see, economic progress. This is the ability of extending the list of transactions to talk about. In such an order, comparing a community with a market good item equals, in this respect, what makes the difference between what would keep the market closed and what ensures to the same market a capacity of extending and enlarging—the economic society has preferred even a long time ago, in the ancient economy, the open economy. Or, there are to be included another two consequences on both the mathematical and economic understandings. Mathematically, there is to be here admitted that the „n” number of goods, as previously considered in (I) model, is not the same for (II) model any longer, more precisely, there are „two” „n” numbers, of which the one of (II) is higher, as for sure—this is a model incapacity of making such an aspect transparent. However, on the other hand the double coincidence of wants problem vanishing will also throw out the so extended number of transactions needed by the (I) model for satisfying just one utility. Model (II) will be supposed to limit to just (n-1) transactions—as compared to the previous (I) model Cn2. On the economic side of understanding, model (II) might report an open economy, as opposite to (I)—which at least qualifies for defining a totally closed economy, as difficult to be imagined in any other way, as for both practice and theories-models. However, there is another important remark to be made. There are, actually, two levels of understanding the (II) model. The first level really regards an open economy, as able to extend from a primary inclusion of new goods up to enlarging on neighbouring market areas which use the same medium of exchange. This means a transitory stage of the commodity-based market, as dealing with partial value standards. But in the extending market dynamic context there might be also considered a fully comprehensive market, as the uppest limit of the process—this will be for either a new (re-) closed economy or for a general value standard. Such an economy is understood as opposite to the cell-market of model (I)—by containing all possible good items negociated on all markets—but the market closure will thus come back on an upper level.

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II.1.3 The model result Model (II) limits to the other barter economic system, but it succeeds to explain all: general value standard, open economy and price stability, as preserved in the open economy context. Despite its simplicity, it makes clear that the unique standard of value74 has been expected for a quite long time in the pre-modern periods of our history. Plus, its specific price stability was coming to be an essential issue, as the origins of this standard were basing on its relation with the oldest and highest price stability economy of all times. But the most important set of outcomes show, contrary to previous assertions that barter would be not existent or less important for the today economy, that barter has been a quite long life system, dealing with both the primitive markets and economies and the modern market economy. The advanced barter—as much as the economy itself—is searching for a unique value reference and extending to the world market, the single one as reconsidered as closed market. Contrary to its previous „conceptual” opposition to a money-based economy which would just „correct” some previous limits of barter functionning, the same barter could be able to have given birth to money since the above (II) model design: creating—actually, identifying—a money base on a marketable good’s value. Model (II) here explains that money might come up in any stage of the value standard reached by the market system: both the partial and the general value standard. Or, an obvious „rupture” might here occur, as between money issued by partial and by general standard: the partial value standards are here supposed to create money which either works on limited regions, or comes to be limited life, in the context of extending markets, plus selection of value standards. The money basing on the other value standards than the selected one for the general standard would be the first out of market. In other words, the primary money does not play internationally, but it comes to be played, in such a dynamic context, by the still strong barter system. On the contrary, the general value standard might here appear as a new economic substance. First, it certainly comes from an artificial selection as among several partial value standards, in which context, once again, barter instead finds a large area of development and evolving throughout See the gold standard, as international, that will be studied in the next Part Three and even the one of quantitative reports among marketable goods, in above Part One.

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long periods. Once more, money based on partial value standards stays in difficulty from this point of view. In such a context, it is proven not only that barter deals directly with the nowadays modern market economy, but equally that the modern economy money is international, even before being national, with national monetary systems. So, money arising from different levels of value standards was born of different destinies. On the other hand, the national monetary policy is a much more recent issue, the one which, though, deals with a history of money determined on the world-wide scale. Then, since modern money is internationally determined and its origins stay in the previous barter economy—as extended on the Ricardian and post-Ricardian world economy scale—the today monetary and financial systems might be considered for solid bases, even when crisis or any threat of collapse. II.1.4 What the model fails to explain (?) Then, let us notice that our model explains all of the above since the value standard—either partial or general—has (already) been chosen (selected). For this model, N might be any marketable good, the way that this social option might reduce to a problem of unanimous (or, at least, majority) option, as similar to the democratic free election result, as for instance. Or, such an image is completely false. However, as reality is, it is made much simpler for the society, as facing economy, economic development and related issues. Recall from above that the old model (I)—which made the price stability responsibility shared by all market items—came once to be replaced by model (II)—in which such a responsibility is re-directed to just one item, as a curious aspect for the „progress” here induced to the price system. Then, two questions asked. The first one is: which is this selected item, as for the general value standard ? Parts Three and Four below will be for a full answer to this question. The second one will be answered here, whereas it really might come on the first place: how is this artificial selection based? Or, our answer starts from the price system (here including its stability) supported by a single market item. The re-designed question will be: how much is the N selected good able to support an increasingly large price system ? But even this new question keeps too general for a quick answer. Then, Jinga (1981) here mentions the “Turgot’s axiom”, by which the market exchanges limit to objects with “value content”. Or, this value content 79

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means a basic utility to be satisfied. The very problem is a contradictory social maneuver that, on the one hand, is searching for N good’s utility, as natural, but this is for assigning it with a new (artificial) utility—the one making the other goods exchange with one another. The natural utility is essential for this option, but it equally comes to be undermined in the exchanges development context. A high economic pressure here results but, on the other hand, this reduces its space to the individual N item—for which such a pressure might become really harmful75, whereas the rest of goods, together with their transactions and individual operators behind, feel relaxed and free to do their business. Besides, the literature76 admit both that the N items have been historically numerous in the early stages of the commodity money era and that the selection process was coming to be not quite long—in such a context, this economic pressure was rather beneficial: the N market goods becoming commodity money were fast enough reducing number the way that market spaces could correspondingly speed-up their enlargement. The artificial selection among commodity money items was looking like a sui-generis “market competition”, whereas, in reality, each item was facing its own condition—at this level of confronting market as well as at the basic level of transactions—and limits of acting. Just here adding up a paradoxical aspect: contrary to model (II), the previous model (I) and its price and economic system do not contain any intrinsic contradiction—however, model (II) was clearing the way for an exponential progress, as compared to model (I).

II.2 Related historical references: the ancient merchants The question to be here posed is: “did the ancient ( . . .) world know private merchants?” Leiden (1995. Ch.3), from the very beginning draws attention that rulers and officials who engaged in commercial activities may or may not have been public enterprisers in the sense that their enterprises with their profits belonged to the “public,” that is, to the nation at large. Besides, as for an individual to be an entrepreneur in antiquity, such an Here recall the “ice cream example” from the Introduction above, as for understanding something of such a contradiction in acting. 76 See Guitton & Bramoulé (1987), once more, but also other scholars in the next paragraph. 75

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appropriate role would have been much more limited to officials and members of the elite. The point is that, given the relatively limited pool of entrepreneurial talent, major roles for palace and temple are predictable. Nevertheless, emphasizes the author, there is a significant body of evidence pointing to the existence of independent merchants. In Mesopotamia, in the cycle of stories about the Kings of Akkad, one77 called “King of Battle” was found, in which to merchants who were obviously independent, Sargon (2334-2279 BC), the founder of the Dynasty, offered to pay some expenses to open the trade routes to the north and northwest. In late third millennium Sumer (Ur III) merchants (damkar’s) do not appear on royal “ration lists” and their sales do not depict royal presentations. Certainly, as the “balanced account documents” demonstrate, merchants acted as agents for the palace, but it would seem that these traders were not members of the bureaucracy or simple employees of the crown. On the other hand, there is little if any direct and unambiguous evidence of independent commercial activity. However, Neumann (1999. p. 53) cites a loan document from Nippur in which a merchant declares that he will repay the amount lent “if he gets back from his commercial journey (kaskal).” It might be here agreed that this promise strongly suggests both independent finance and commercial activity. A good amount of evidence equally demonstrates that the Assyrians trading in Cappadocia in the early second millennium were basically independent business persons, not agents of temple or palace. Thus, for example, a great merchant complains in a letter that he was losing much profit because of delays in obtaining a loan to finance an enterprise (Leiden 1995 p. 168). At roughly the same time the Persian Gulf trade of Sumer with Tilmun (Bahrain) was in the hands of non-royal (of course, also independent) merchants who styled themselves alik Tilmun or “go-getters of Tilmun.” For the Old Babylonian period (ca. 2000-1600 BC) there is much evidence of non-royal commercial activity and; on the contrary, little evidence connecting merchant (tamka_ru) with palace. One example of independent commercial activity is of special interest. In two liver omen texts one Kurû—probably to be identified with Kurû the tamka_rum attested in contemporary texts—makes sacrifices of lambs in order to foresee whether his affairs will prosper. Both texts refer to prospective sales in the market78. One of these texts is asking whether Kurû is going to make a profit (ne_melu) on some kind of (gem?) stone, whereas the other asks the same about the In an Akkadian tablet from Amarna and in Hittite fragments. See: ina su_qi_ ši_ma_ti, (literally) = in the buying streets . . .

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sale of goods, “market/trade goods”, sachirtu . . . (Wilcke, cited by Powell 1999: 11). 79 Then, in Babylonia after the Old Babylonian period evidence of commercial activity is sparse and becomes more plentiful again in the later second millennium. Large non-royal commercial houses flourished from the seventh to the fourth century BC. The House of Egibi, for example, bought and sold houses, fields, and slaves, took part in domestic and “international” trade, and participated in a variety of banking activities. At Ebla in northern Syria in the mid-third millennium, according to Pettinato, the lu-kar “man of the commercial center” is an independent businessman and the kas or lu-kas “messenger” is a royal merchant.

Merchants build trust. B. Ebla

Unfortunately, there is not similarly clear evidence in such a way for the nearby Hittite zone of Anatolia. Paragraphs 5 and 6 of the Hittite Laws80 require that if someone kills a traveling Hittite merchant he must pay compensation and replace the goods of the merchant. If seen in the context of similar provisions in the Laws, there is to be understood that the payments are due to the merchant’s family or partners, not to the king81. A merchant who owns his own trade goods is to this extent independent. An edict of the Hittite king to the king of Ugarit (an important north Syrian port) says that citizens of Ugarit who fail to repay their debts to merchants from Ura (a similarly important port in Cilicia) should be handed over to them (as See also Leiden, Brill E.J(1999): Nederlands Historisch-Archaeologisch. Instituut te Istanbul, p. 5-23. 80 For a recent translation of the Hittite Laws, see Harry Angier Hoffman (1997). The Laws of the Hittites: A Critical Edition (Leiden 1995). 81 This interpretation finds support in a letter dating to the thirteenth century from a Hittite ruler to a Babylonian ruler concerning compensation for murdered merchants. 79

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slaves). There is no indication that the merchants of Ura were doing business in Ugarit. In a different order, texts from Ugarit (about 1400-1200 BC) demonstrate the existence of “individual ownership of cargo ships” and also show individuals, including merchants (mkrm), paying large sums of gold for trading concessions and the authority to collect harbour taxes82. That an individual might own a cargo vessel is hinted in the late third millennium by the inscription of Qedes of Gebelein and proven by the Edict of Horemheb dating from the second half of the fourteenth century. Papyrus Leiden 344 (The Admonitions of Ipuwer) in pursuing its theme of reversal of fortune attests to the private ownership of ships : “Behold, he who never built for himself a boat is (now) the possessor of ships, he who possessed the same looks at them, (but) they are not his” (Shupak). There are also Ramessid texts in which individuals pay for the use of cargo ships. Papyrus Anastasi IV demonstrates that even a sea-going vessel was not beyond the means of a rich man. A rich man is represented as using his ship to bring goods from Syria to Egypt. A treaty between the rulers of Ugarit and a neighbouring state permitted citizens to form partnerships (tapputu) for commercial expeditions to Egypt. One text refers to an individual about to undertake a voyage to Egypt with the financial backing of four persons. Some merchants with no explicit royal connections spoke of “my merchants” and the merchants “of my hand”83. Actually, Ugarit knew two categories of merchants: tamkaru sha shepi, who were dependents of the king, and tamkaru sha mandatti, who clearly possessed their own trade goods and for whom there is no direct evidence that they traded with palace goods rather than on their own84. As for Egypt, there is evidence of at least “non-institutional” commercial activity. There are marketplace scenes on Old Kingdom tombs, one of which shows traders selling cloth (Leiden 1995, pp. 162). Recall from above that an individual might own a cargo-boat is suggested by the inscription of Qedes of Gebelein dating from the late third millennium (First Intermediate Period/Leiden 1995, pp. 57). In a text dating to early in Dynasty Twelve, Hekanakht refers in routine terms to renting, buying and selling land, cloth, oil and whatever (Leiden 1995, pp. 173-74). Hekanakht, obviously acting as an individual, may or may not have operated on a large scale, but the demonstrated existence of a market In one instance the king of Ugarit declared a vessel to be exempt from duty when it arrived from Crete. 83 “Merchants of the hand” are attributed to Tyre in “Ezekiel 27.15,21”. 84 Leiden (1995) here cites authors like Heltzer and Vargyas 82

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leaves open the possibility that others did. In extolling the life of the scribe, a text dated to 1350-1200 BC85, tells that “the merchants (shewtyew) fare downstream and upstream and are as busy as copper, carrying wares (from) one town to another and supplying him who has not, although the tax-people carry (exact?) gold, the most precious of all minerals”86. There is no indication whatever that the busy shewtyew87 were royal merchants. Moreover, if the merchants were subject to the tax-collector it is hardly possible that they were royal employees. Of course, the text does not specify that the gold “carried” by the tax-collectors was exacted from the shewtyew. But what then, in a composition dedicated to the advantages of the scribal profession, would be the point of the contrast between merchants and tax-collectors, and from whom did the tax-people obtain the gold? Then, the observation that “the ship’s crews of every house (per) that they take up their freights”88. They depart for Syria. It is well known that, for good reason, the terms “family,” “house,” and “firm” overlapped in antiquity (Leiden 1995, Ch. 2.D). Obviously, then, there were non-royal trading “houses” operating in Egypt. Perhaps, the reference includes trading enterprises under the auspices of temples, but there is no reason to exclude independent firms. However, texts from Ugarit record the transfer of oil to “Abrm of Egypt.”—the account of Wenamun provides strong hints that Syrian trading houses were operating in Egypt in the later eleventh century. Another text89 locates a merchant in the “house” of the scribe of contracts Mery 90. Sike, chantress of (the god) Thoth, instructs her correspondent to go to the “merchant” (shewty) and have his oath annulled91. The point of Sike’s letter is obscure but the merchant has no named institutional connection. However, Leiden (1995) keeps equally aware of the other side of this thinking: that the above evidence does not conclusively demonstrate the existence of independent merchants, at least in Egypt. One of the “lines of ” objections is that the examples cited come from periods of weak central Papyrus Lansing (4.8-10)—see Leiden (1995). Names like Blackman and Peet, Caminos and Castle are here cited by Leiden (1995). 87 It is recently related shewety to shewet and translates it literally as “the one of the lack”. 88 Papyrus Lansing (4.10) 89 Pap. Bibl. Nat. 211.18 (Leiden 1995). 90 Leiden (1995) here cites the name of Janssen. 91 Caminos, cited by Leiden (1995). 85 86

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government, when reality did not fit the model of royal domination of resource allocation. This line of argument deserves analysis: the emergence of independent merchants in periods of weak central government shows that the necessary commercial mindset and entrepreneurial talent lurked just below the surface of Egyptian society. The prevalence of the commercial mindset is strongly hinted in the Egyptian wisdom literature of the Middle Kingdom and New Kingdom by repeated condemnations of and warnings against the desire to acquire wealth and expressions of individual initiative. In which context, also Bleiberg (1994) believes that the negative attitude expressed toward entrepreneurial values in the wisdom literature “does not demonstrate that the Egyptian economy did not know markets”. Why then did not the merchants come to the surface in periods of strong central government? asks the author for two answers that he also provides for such a question. One possibility is that royal enterprise, perhaps as a result of economies of scale and/or the “favour of the gods”, was much more efficient (i.e., had much lower unit costs) than independent enterprisers. The other answer is that strong central governments suppressed independent merchants with a combination of confiscatory taxation, regulation and naked force. Finally, as for the Mycenean Greece, Leiden (1992) provides two examples. One is a tablet from Pylos (year 35) which shows a trader, named a-ta-ra, receiving wine, wool and other goods from the palace in exchange for the imported mineral alum, used in building, leatherworking, and cloth dyeing. The a-ta-ra may well be an independent merchant. The other recalls the Dark Age (Archaic) Greece for the undertakings (“labours”) of the mythical hero Herakles92 may cast light on commercial practice in Greece prior to the Classical period. On behalf of king Eurystheos, Herakles undertook various “commissions.”93 Thus, it is possible to understand that in addition to commissions undertaken on behalf of Eurystheos and other For an extended analysis of the commercial aspects of Herakles’ career, see also Leiden (1992, Ch. 5) 93 The Greek technical term here rendered as “commission” is athlos (or aethlos) whose basic meaning is “activity carried out for a prize.” The Homeric Hymn to Herakles explains further that Herakles “wandered” (“circuited” probably comes closer to the mark) doing “the bidding of Eurystheos, and himself did many deeds of violence and endured many” (see Evelyn-White, cited by Leiden 1992). But some manuscripts read aethleuon krataios “mighty (difficult?) commissions” and exocha erga “outstanding works.” Similarly, Pausanias mentions “the numerous labors of Herakles and numerous good deeds he did of his own free will (ethelo_n) . . .” (see Levi, cited by Leiden 1992). 92

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principals, Herakles acted on his own behalf. Like the merchants of the Near East, Herakles might be both principal and agent. By far the most commercially revealing of those activities Herakles carried out on his own behalf took place during his commission to remove the dung from the cattle-yard of Augeios, ruler of Elis. A legal dispute arose because Herakles, despite his status as Eurytheos’ agent, made a side-deal with Augeios for a tenth of the cattle. When Augeios learned of Herakles’ athlos for Eurystheos, he refused to pay the contracted-for tenth. For his part, Eurystheos refused to credit Herakles with a fulfilled commission because his activity “had been performed for hire” (Leiden 1992.Ap. 2.5.5). The details of the dispute, as we have them from Apollodorus, are at once trivial and obscure. Light seems to be cast on the point of the matter by Babylonian long-distance trading contracts of the seventh-sixth centuries wherein the principal stipulates how much of his capital his agent might employ for traveling expenses and, more significantly, prohibits the agent from doing business on the side. The myth suggests that similar contracts were employed in Greece and that Herakles, as Eurystheos’ agent, had violated the no-side-business provision.

Herakles. Detail from Amphora (485 BC)

As concluding from above, the interesting question that yes or no merchants of the antiquity would be an independent profession—see non-royal or non-institutional—is really provocative. And here there are to be attached in detail further questions, like: would merchants be owners of merchandise traded and/or of the impressive means of transport that they conducted (or simply driven) on long distances etc. (?). However, another aspect worth to be here emphasized. The above literature sees, as exclusively, an upper stage 86

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of the merchant profession evolving, as much as in the below II.4 description will regard the correspondingly evolved trade of the antiquity. The point is that something is missing for both paragraphs—by the literature, as well: the early stage of the merchant profession development, the one of the passage between the little trade (within the community) and the extended trade (between different community areas and on), as correspondingly. Or, there is to believe that some things are here for certain. The extended trade could not exist without either its little trade precedent, or professional merchants (traders) of its time. As consequently, there were not the great empires or political powers and super-powers of those times creating such an activity out of nothing. But just then there comes the above set of question to be answered—about yes or no merchants independent in their activity, owners of merchandise carried or of means of transport that they were driving etc. Then, if yes one more question here remains: could the large-scale and long-distance trade be undertaken, at that time, by quite independent entrepreneurs?94 As for certain once more, the ancient trade has got enough influenced by all strengthening political powers and its design will be able to reveal much of their context description.

II.3 Commodity money II.3.1 Basics and concepts Let us here reiterate that bartering has several development problems in its primitive form, most notably the coincidence of wants problem. For example, if a wheat farmer needs what a fruit farmer produces, a direct swap is impossible as seasonal fruit would spoil before the grain harvest. A solution is to trade fruit for wheat indirectly through a third entity working as such and commodity: the fruit is exchanged for the interchanging commodity when the fruit ripens. If this commodity doesn’t perish and is reliably in demand throughout the year (e.g. copper, gold, or wine) then it can be exchanged for wheat after the harvest. The function of the interchanging commodity as a store-of-value can be standardized into a widespread commodity money, reducing the coincidence of wants problem. By overcoming the limitations of primitive barter, commodity money makes the market in all other commodities more liquid. See also the below II.4.

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Commodity money includes any commonly-available commodity that has intrinsic value. So, it is defined by: money whose value comes from a commodity out of which it is made. It is objects that have value in themselves as well as for use as money (O’Sullivan&Sheffrin 2003). The earliest historical examples include pigs, rare seashells, whale’s teeth, and (often) cattle. Even bread was used as an early form of money in medieval Iraq. Authors agree that since payment by commodity generally provides a useful good, commodity money is similar to barter, but is distinguishable from in having a single recognized unit of exchange. Radford (1945) described the establishment of commodity, meaning that commodities often come back to this function in situations where other forms of money are not available or not trusted95. A key feature of commodity money is that the value is directly perceived by the users of this money, who recognize the utility or beauty of the tokens as they would recognize the goods themselves. Although gold and silver were commonly used to mint coins, other metals could be used as well. For instance, Ancient Sparta minted coins from iron to discourage its citizens from engaging in foreign trade. Numismatists have examples of coins from the earliest large-scale societies, although these were initially unmarked lumps of precious metal96. The system of commodity money in many instances evolved into a system Various examples of commodities are here mentioned to have been used in pre-Revolutionary America including wampum, maize, iron nails, beaver pelts, and tobacco. In post-war Germany, cigarettes became used as a form of commodity money in some areas. The Fort Knox gold repository long maintained by the United States, functioned as a theoretical backing for federally issued “gold certificates” to substitute for gold. Between 1933 and 1970 (when the U.S. officially left the gold standard), one U.S. dollar was technically worth exactly 1/35 of a troy ounce (889 mg) of gold. However, actual trade in gold bullion as a precious metal within the United States was banned after 1933, with the explicit purpose of preventing the “hoarding” of private gold during an economic depression period in which maximal circulation of money was desired by influential economists. This was a fairly typical transition from commodity to representative to fiat money, with people trading in other goods being forced to trade in gold, then to receive paper money that purported to be as good as gold. 96 However, the metal coins problem was going on and reiterate even in much later times. As for instance, in the early seventeenth century Sweden lacked more precious metal and so produced “plate money”, which were large slabs of copper approximately 50 cm or more in length and width, appropriately stamped with indications of their value. 95

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of representative money 97— the last is a certificate or token which can be exchanged for the underlying commodity. In this “new” system, the material that constitutes the money itself had very little intrinsic value, but nonetheless such money achieves significant market value through scarcity or controlled supply (Weisbrot 2005). Commodity money and representative money are, for the moment, to be distinguished from each other in such an order. Then, let us here develop the idea that the face value of specie and base-metal coins is set by government fiat, and the last is only the value which must be legally accepted as payment for debt, in the jurisdiction of the government which declares the coin legal tender. The value of the precious metal in the coin may give it another value, but this varies over time, its value is subject to bilateral agreement, just as is the case with pure metals or commodities which had not been. Actually, the role of mint and of coin differs between commodity money and fiat money. In situations where there is commodity money, the coin retains its value if it is melted and physically altered, while in a fiat money it does not. Usually in a fiat money the value drops if the coin is converted to metal, but in a few cases the value of metals in fiat moneys have been allowed to rise to values larger than the face value of the coin. In India, for example fiat Rupees disappeared from the market after 2007 when their content of stainless steel became larger than the fiat or face value of the coins98 (Oconnor 2007). II.3.2 Some related history Many cultures around the world eventually developed the use of commodity money. Ancient China and Africa used cowrie shells.

1742 drawing of shells of the money cowry, Cypraea moneta An issue which will be debated in the next Part Three, which will entirely regard money and currencies. 98 In the U.S., the metal in pennies (mostly zinc since 1982) and the metal in nickels (75% copper, 25% nickel) has a value close to (and at some times exceeding) the fiat face value of the coin. 97

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Wherever trade is common, barter systems usually lead quite rapidly to several key goods being imbued with monetary properties. In a word, all goods might have once played this role (Guittton & Bramoulé 1987). This use of barter like method using commodity money may date back to at least 100,000 years ago. Trading in red ochre is attested in Swaziland, shell jewellery in the form of strung beads also dates back to this period, and had the basic attributes needed of commodity money99. In Mexico under Montezuma cocoa beans were money. Even later on, in the Japan’s feudal system trade was based on the koku—a unit of rice per year.

Japanese commodity money before the 8th century CE:

arrow-heads, rice grains and gold powder100 Although some commodity money (see barley), has been used historically in relations of trade and barter (as for instance, Mesopotamia circa 3000 BC.), it can be inconvenient to be used as medium of exchange or standard of deferred payment due to transport and storage concerns, and eventual rancidity. The city-states of Sumer developed a trade and market economy based originally on the commodity money of the Shekel which was a certain weight measure of barley, while the Babylonians and their city state neighbours later developed the earliest system of economics using a metric of various commodities, that was fixed in a legal code (Horne 1915). But, when commodity money came to be metals101, authorities (see Shells are believed to be 100,000-year-old jewellery. This is the earliest form of Japanese currency. 101 That was about around 5000 B.C. Notice that there is an enough time interval up to about 700 BC, when the Lydians became the first in the Western world to make coins. Metal was used because it was readily available, easy to work with and could be recycled. Since coins were given a certain value, it became easier to compare the cost of items people wanted. 99

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government) mint was often coining money by placing a mark on the metal that serves as a guarantee of the weight and purity of the metal. Coins were typically minted by governments in a carefully protected process, and then stamped with an emblem that guaranteed the weight and value of the metal. It was, however, extremely common for governments to assert the value of such money lay in its emblem and thus to subsequently debase the currency by lowering the content of valuable metal102. The first stamped money—having the mark of some authority in the form of a picture or words—can be seen in the Bibliothèque Nationale of Paris. It is an electrum stater of a turtle coin, coined at Aegina island. This remarkable coin (Cheal 1988) dates about 700 B.C.103. Electrum coins were also introduced about 650 B.C. in Lydia104.

A 640 BC one-third stater coin from Lydia

Coinage was widely adopted across Ionia and mainland Greece during the 6th century BC, eventually leading to the Athenian Empire‘s 5th century BC dominance of the region through their export of silver coinage, mined in southern Attica at Laurium and Thorikos. A major silver vein discovery at Laurium in 483 BC led to the huge expansion of the Athenian military fleet.

The next following Part Three will follow the historical path towards monetization, starting from coinage and all of related facts, as described above. 103 http://rg.ancients.info/lion/article.html Goldsborough, Reid. “World’s First Coin” 104 See: Pierre Marteau. http://www.pierre-marteau.com/editions/1701-25-mintreports/report-1717-09-25.html.  and “Sir Isaac Newton’s state of the gold and silver coin (25 September 1717).”. 102

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Greek Drachm of Aegina. (INA) and dolphin. Obverse: Land turtle / Reverse: The oldest turtle coin dates 700 BC

Competing coinage standards at the time were maintained by Mytilene and Phokaia using coins of Electrum. Aegina used silver. It was the discovery of the touchstone which led the way for metal-based commodity money and coinage. Any soft metal can be tested for purity on a touchstone, allowing one to quickly calculate the total content of a particular metal in a lump. Gold is a soft metal, which is also hard to come by, dense, and storable105. Gold or other metals were sometimes used in a price system as a store of perceived value that does not break down due to environmental deterioration, and can be easily stored (demurrage). As a result, monetary gold spread very quickly from Asia Minor, where it first gained wide usage, to the entire world. The Roman denarius currency, in its turn, was introduced as standardized money to facilitate a wider exchange of goods and services. This first stage of currency, where metals were used to represent stored value, and symbols to represent commodities, formed the basis of trade in the Fertile Crescent for over 1500 years.

A Persian 309-379 AD silver drachm from the Sasanian Dynasty Using such a system still required several steps and mathematical calculation. The touchstone allows one to estimate the amount of gold in an alloy, which is then multiplied by the weight to find the amount of gold alone in a lump. To make this process easier, the concept of standard coinage was introduced—coins were pre-weighed and pre-alloyed, so as long as the manufacturer was aware of the origin of the coin, no use of the touchstone was required.

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To organize production and to distribute goods and services among their populations, before market economies existed, people relied on tradition, top-down command, or community cooperation. Several centuries after the invention of cuneiform, the use of writing expanded beyond debt/payment certificates and inventory lists to codified amounts of commodity money being used in contract law, such as buying property and paying legal fines (Dow 2005). Babylonians and their neighbouring city states developed the earliest system of economics as we think of today, in terms of rules on debt, legal contracts and law codes relating to business practices and private property (Dow 2005)106. In such an order, the Code of Hammurabi107, the best preserved ancient law code, was created about 1760 BC (middle chronology) in ancient Babylon. It was enacted by the sixth Babylonian king, Hammurabi. Earlier collections of laws include the codex of Ur-Nammu, king of Ur (ca. 2050 BC), the Codex of Eshnunna (ca. 1930 BC) and the codex of Lipit-Ishtar of Isin (ca. 1870 BC/ Horne 1915). These law codes formalized the role of money in civil society108. The first known ruler who officially set standards of weight and money was Pheidon109.

See also: http://history-world.org/reforms_of_urukagina.htm. Codex Hammurabi 108 They set amounts of interest on debt . . . fines for ‘wrong doing’ . . . and compensation in money for various infractions of formalized law. As for a good example, the Shekel referred to an ancient unit of weight and currency. The first usage of the term came from Mesopotamia circa 3000 BC. and referred to a specific mass of barley which related other values in a metric such as silver, bronze, copper etc. A barley/shekel was originally both a unit of currency and a unit of weight, just as the British Pound was originally a unit denominating a one pound mass of silver. In cultures where metal working was unknown, shell or ivory jewelry were the most divisible, easily storable and transportable, scarce, and hard to counterfeit objects that could be made. It is highly unlikely that there were formal markets in 100,000 BCE (any more than there are in recently observed hunter-gatherer cultures). Nevertheless, proto-money would have been useful in reducing the costs of less frequent transactions that were crucial to hunter-gatherer cultures, especially bride purchase, splitting property upon death, tribute, and inter-tribal trade in hunting ground rights (“starvation insurance”) and implements (http://www.archive.org/ stream/earliestcoinsofg00garduoft/earliestcoinsofg00garduoft_djvu.txt). 109 http://www.snible.org/coins/hn/aegina.html 106 107

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II.3.3 A conclusion is drawing We are already getting into the middle of a peculiar debate. In which, they are wrong the theorists who claim that either barter—especially in its primitive, community-related form—might not have really existed, that it might not have built an economic system either, so that in reality there might be the gift economy as directly turning into commodity money, or that bartering might be conceptually (see totally) opposed to money-based economy. They are right, on the other hand, the scholars who admit either that commodity money or related coinage were not yet money, but still barter, or that the same commodity money phase has been the one paving the way for the next further money and money-based economy. Actually, commodity money was the upper phase of barter evolving into money, and so demonstrating further several truths. First, barter has existed, as in its both primitive—community-related—and advanced—commodity money—forms, as much as its advanced form could not be imagined in the absence of its previous primitive one. Second, barter is a complex issue and development the way that it either had the historical ability to create an economic system, or had evolved on several phases. Barter had a long and amazing story to be told: the longer its life, the clearer its meaning for a really unitary historical development in the above Modelski (2004)’s way of understanding. Third, this is not the same for money, as succeeding to barter110. On the contrary, money was born for good political, economic and historical reasons of that referred era, but yet making things at least more complicated on the same historical development side. And let us here extract some aspects of it, as directly resulting from the above story. First, commodity money cleared the way for coinage and minting money the way that one commodity money was able to give birth to several currencies issued in different states and regions ruled by different governments. So, instead of similar price systems of the same individual commodity on a larger area, there is to figure out different price systems—as attributed to individual currencies. There can be admitted that the money parity between currencies will come to solve such a problem of difference between the price systems, but that will be the market here acting and making it on longer time terms. Another aspect is directly linked to this previous one. The government’s seignoriage acting on issuing money by token and stamping pieces of metal here has proven as allowing the metal base of the And details will come up in the next Part Three, as well.

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piece lose some of its declared weight. Or, this is another way of at least making the money parity (exchange rate) more difficult to apply, so the inter-markets business reports will be once more suffering. In the different metal based cases of relating individual currencies, the problem becomes even more difficult, and the result might be the one of remaking the old narrow markets’ closure, as similarly to the primitive cell-market stage. As for a third example, the Ancient Sparta’s case, as above mentioned, is just this aspect, as materialized. As opposite to the money acting, in this stage, barter, in its commodity money form, stayed still far from giving up its economic and historical mission of unifying markets in the region—and world-wide areas. And here there comes the very outline of such acting, the one that nobody seems to have fully understood so far. As between “all goods have . . .”111—in the earliest times—and the opposite international gold standard—of the modern era of industrial revolution —, a selection process really comes into being. This is both amazingly long time—which seems to be not so specific to economic and social developments—and large-scale developed. A very turning point of this was the metals era, as distinct from its previous Neolithic and Paleolithic: metals were drawing the line of the final and decisive period of this passage process between barter and money. As for the other part of the commodity money selection idea, it finally threatens the barter system by an imminent extinction of the mediums of exchange, but first it plays for an opposite—meaning (very) positive—development: it goes hand in hand with a capacity and resource of extending and unifying the earlier cell-markets and regional markets among each other. Our above model was able to explain the commodity money economy and the international gold standard base—the two above complementary models here so describe the whole barter economy. There is equally to be concluded that the international gold standard has actually been the last stage of the barter economic system—an economic system starting some 10,000 years ago and ending in the very advanced market economy of the modern era. Money has really replaced barter only in this interesting stage of the international gold standard112, and not (never) earlier than that—the way that the earlier money issued had not played any substantial role in this context. This was the stage of modern money—here meaning all: international and national based system and acting together with credit and later-on with monetary policy. See again Guitton & Bramoulé (1987). This description will be once more for Part Four.

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II.4 Related history: the “great trade” of the antiquity The discovery of non-local objects at many archaeological sites strongly suggests that trade existed in prehistoric times. Anthropologists and other explorers have found trade institutions among diverse peoples throughout the world. As for already above given examples, the ceremonially elaborate kula trade ring of the Trobriand Islands,113 the gift-giving potlatch of W Canada’s Kwakiutl, and the desert caravan of North Africa and the Arabian Peninsula are among famous examples. The archive found at Ebla gives a glimpse of an early trading city, from the middle of the third millennium BC. When travel is slow and dangerous, the trader’s commodities must be as nearly as possible imperishable; and they must be valuable in relation to their size. Spices fit the bill; so do rich textiles. And, above all, precious ornaments of silver and gold, or useful items in copper, bronze or iron. As the most valuable of commodities (in addition to being compact and easily portable), metals are a great incentive to trade. The extensive deposits of copper on Cyprus bring the island much wealth from about 3000 BC114. Later, when the much scarcer commodity of tin is required to make bronze, even distant Cornwall becomes—by the first millennium BC—a major supplier of the needs of Bronze Age Europe. See below an outline of the coordinates of the large scale trade of those times. II.4.1 Points of view and scientific reservations Historians have long argued about the place of trade in classical antiquity: was it the life-blood of a complex, Mediterranean-wide economic system, or a thin veneer on the surface of an underdeveloped agrarian society? Trade underpinned the growth of Athenian and Roman powers, helping to supply armies and cities. It furnished the goods that ancient elites needed to maintain their dominance—and yet, those same elites generally regarded trade and traders as a threat to social order (Morley 2007). In the Western world a number of peoples, including the Egyptians, Sumerians, Cretans, Phoenicians, and Greeks, at one time or another dominated trade. Later on, the Crusades did much to widen European trade horizons and prefaced the passing of trade superiority from Constantinople to Venice and other cities of North Italy (Day 1907/1983). That are already referred above, in Part One. Cyprus, in Latin, gives copper its name—cyprium corrupted to cuprum.

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Trade provides mankind’s most significant meeting place, the market. In primitive societies only religious events—cult rituals or rites of passage such as marriage—brought people together in a comparable way. But in these cases the participants are already linked, by custom or kinship. The process of barter brings a crowd together in a more random fashion. New ideas, along with precious artifacts, have always traveled along trade routes. And the natural week, the shared rhythm of a community115, has frequently been the space between market days. Agricultural products and everyday household goods tend to make short journeys to and from a local market. Trade in a larger sense, between distant places, is a different matter. It involves entrepreneurs and middlemen, people willing to accept delay and risk in the hope of a large profit116. Despite these above, and as much as some accounting of export-import were also found—as for one more example mentioned by Morley (2007) regarding that “Rome has imported lions from Africa”—there is no evidence about either profitability, or frequency of transactions. Or, this might be the serious gap between that time and nowadays, plus an important embarrassing factor for the current research. II.4.2 Waterborne traffic: 3000-1000 BC By far the easiest method of transporting goods is by water, particularly in an era when towns and villages are linked by footpaths rather than roads. The first extensive trade routes are up and down the great rivers which become the backbones of early civilizations—the Nile, the Tigris and Euphrates, the Indus and the Yellow River. As boats become sturdier, coastal trade extends human contact and promotes wealth. The eastern Mediterranean is the first region to develop extensive maritime trade, first between Egypt and Minoan Crete and then—in the ships of the intrepid Phoenicians—westwards through the chain of Mediterranean islands and along the north African coast. Phoenicia was famous for its luxury goods. The cedar wood is not only exported as top-quality timber for architecture and shipbuilding; it is also carved by the Phoenicians, and the same skill is adapted to even more precious work in ivory. The rare and expensive dye, Tyrian purple, complements another famous local product, fine linen. The metal workers of the region are famous, particularly in gold. And Tyre and Sidon are known See Part One, model (I) results. See the above II.2.

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for their glass. These are only the products which the Phoenicians were exporting. As traders and middlemen they taken a cut on a much greater Cornucopia of precious goods—as the prophet Ezekiel grudgingly admits. Going back nearly 2000 years, during China’s Eastern Han Dynasty, a sea route117 led from the mouth of the Red River near modern Hanoi, through the Malacca Straits to Southeast Asia, Sri Lanka and India, and then on to the Persian Gulf and the Red Sea kingdom of Axum and eventual Roman ports. From ports on the Red Sea goods, including silks, were transported overland to the Nile and then to Alexandria from where they were shipped to Rome, Constantinople and other Mediterranean ports. Another branch of these sea routes led down the East African coast, called “Azania” by the Greeks and Romans in the 1st century AD, as described in the Periplus of the Erythraean Sea (Chami 2002) at least as far as the port known to the Romans as “Rhapta,” which was probably located in the delta of the Rufiji River in modern Tanzania(Kislev, Hartmann, Bar-Yosef 2006). As for the Egyptian maritime trade, shipbuilding was known to the Ancient Egyptians as early as 3000 BCE, and perhaps earlier (Aston.; Harrell; Shaw 2000). It is proved that Ancient Egyptians knew how to assemble planks of wood into a ship hull, with woven straps used to lash the planks together, and reeds or grass stuffed between the planks helped to seal the seam118s.

Model of a paddling funerary boat from the tomb of Meketre dating from the time of the Twelfth dynasty of Egypt, early in the reign of Amenemhat I, circa 1931-1975 BCE. Not part of the formal Silk Route. The Archaeological Institute of America reports that the earliest dated ship—75 feet long, dating to 3000 BCE—may have possibly belonged to Pharaoh Aha. An Egyptian colony stationed in southern Canaan dates to slightly before the First Dynasty—see Parsons (2008),  Aston (1994) and Shaw (2002 and see regions such as Arad, En Besor, Rafiah, and Tel Erani. Also in 1994 excavators discovered an incised ceramic shard with the serekh sign of Narmer, dating to circa 3000 BCE. Mineralogical studies reveal the shard to be a fragment of a wine jar exported from the Nile valley to Palestine.

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The so called Palermo stone mentions King Sneferu of the 4th Dynasty sending ship to import high-quality cedar from Lebanon. In one scene in the pyramid of Pharaoh Sahure of the Fifth Dynasty, Egyptians are returning with huge cedar trees. Sahure’s name is found stamped on a thin piece of gold on a Lebanon chair, and 5th dynasty cartouches were found in Lebanon stone vessels119. Plus, the idea of a west-east Canal120 is amazingly old and it involves names like Sesostris (likely either Pharaoh Senusret II or Senusret III of the Twelfth dynasty of Egypt), Necho II, Darius I of Persia and Ptolemy II Philadelphus. Evidence seems to indicate the existence of an ancient canal around the 13th century BC—during the time of Ramesses II—and equally later continuous construction efforts. On the other hand, discoveries about such facts evidence started from Napoleon Bonaparte and his cadre of engineers and cartographers in 1799 (Aston.; Harrell; Shaw 2000). II.4.3 Caravans: from 1000 BC : Petra By the fourth millennium BC shipping was well established, and the donkey and possibly the dromedary had been domesticated. Domestication of the Bactrian camel and use of the horse for transport then followed (Aston 1994). The camels can derive water, when none is available elsewhere, from the fat stored in their humps. It is probable that they were first domesticated in Arabia. By about 1000 BC caravans of camels were bringing precious goods up the west coast of Arabia, linking India with Egypt, Phoenicia and Mesopotamia. This trade route brought prosperity to Petra, a natural stronghold just north of the Gulf of Aqaba on the route from the Red Sea up to the Mediterranean coast. Evidence suggests that settlements had begun in and around Petra in the eighteenth dynasty of Egypt (1550-1292 BC). It is listed in Egyptian campaign accounts and the Amarna letters as Pel, Sela or Seir. Though the city was founded relatively late, a sanctuary existed there since very ancient times. Stations 19 through 26 of the stations list of Exodus are places associated with Petra121. This part of the country was Biblically

Other scenes in his temple depict Syrian bears. The Palermo stone also mentions expeditions to Sinai as well as to the diorite quarries northwest of Abu Simbel. 120 Later on called the Suez Canal. 121 Genesis xiv. 6, xxxvi. 20-30; Deut. ii. 12. 119

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assigned to the Horites, the predecessors of the Edomites122. In the heyday of the kingdom of Israel, around 1000 BC, this important site was occupied by the Edomites—bitter enemies of the Israelite kings, David and Solomon. Then, in the 4th century BC the Edomites were displaced by an Arab tribe, the Nabataeans. They soon came into conflict with new neighbours in Mesopotamia, the Seleucid Greeks, who have an interest in diverting trade from the Gulf of Aqaba.

Petra: the Urn Tomb

Christianity found its way to Petra in the 4th century CE, nearly 500 years after the establishment of Petra as a trade center. Athanasius mentions a bishop of Petra (Anhioch. 10) named Asterius. After the Islamic conquest of 629-632 Christianity in Petra, as of most of Arabia, gave way to Islam. During the First Crusade Petra was occupied by Baldwin I of the Kingdom of Jerusalem and formed the second fief of the barony of Al Karak (in the lordship of Oultrejordain) with the title Château de la Valée de Moyse or Sela. It remained in the hands of the Franks until 1189. It is still a titular see of the Catholic Church123. Petra declined rapidly under Roman rule, in Among other aspects, the habits of the original natives may have influenced the Nabataean custom of burying the dead and offering worship in half-excavated caves. 123 “Petra“. Catholic Encyclopedia. New York: Robert Appleton Company. 1913 122

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large part from the revision of sea-based trade routes. In 363 an earthquake destroyed many buildings, and crippled the vital water management system124(Glueck 2003). II.4.4 New routes to the west: from 300 BC: Antioch and Seleucia The presence of Greeks in Mesopotamia and the eastern Mediterranean encourages a new trade route. To ease the transport of goods to Greece and beyond, Seleucus found in 300 BC a city at the northeast tip of the Mediterranean. He called it Antioch, in honour of his own father, Antiochus. Its port, at the mouth of the river, was named after the Seleucus’ name—Seleucia. Here goods were put on board ship after arriving in caravans from Mesopotamia. The journey has begun in another new city, also called Seleucia, founded in 312 BC by Seleucus as the capital of his empire. It is perfectly placed for trade, at the point where a canal from the Euphrates links with the Tigris. Historically, Alexander the Great is said to have camped on the site of Antioch, and dedicated an altar to Zeus Bottiaeus, it lay in the northwest of the future city. This account is found only in the writings of Libanius, a 4th century AD orator from Antioch, and may be legend intended to enhance Antioch’s status. But the story is not unlikely in itself (Downey 1963). After Alexander’s death in 323 BC, his generals divided up the territory that he had conquered. In the Hellenistic era, Antioch became a “new city” and it was populated by a mix of local settlers that Athenians brought from the nearby city of Antigonia, Macedonians, and Jews (who were given full status from the beginning). The Roman emperors favoured the city from the first, seeing it as a more suitable capital for the eastern part of the empire than Alexandria, could be, because of the isolated position of Egypt. To a certain extent they tried to make it an eastern Rome. Julius Caesar himself visited it in 47 BC, and confirmed its freedom.

This “argenteus” was struck in Antioch mint, under Constantius Chlorus. The ruins of Petra were an object of curiosity later on, in the Middle Ages and were visited by Sultan Baibars of Egypt towards the end of the 13th century. The first European to describe them was Johann Ludwig Burckhardt in 1812.

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The ramparts of Antioch climbing Mons Silpius during the Crusades

(lower left on the map, above left) Antioch was a chief center of early Christianity. The city had a large population of Jewish origin in a quarter called the Kerateion, and so attracted the earliest missionaries125. When it was the emperor Julian‘s tour to visit the city in 362 on a detour to Persia, he had high hopes for Antioch, regarding it as a rival to the imperial capital of Constantinople. Antioch had a mixed pagan and Christian population, which Ammianus Marcellinus implies lived quite harmoniously together. Later on, in 637, during the reign of the Byzantine emperor Heraclius, Antioch was conquered by the Arabs in the caliphate of al-Rashidun during the Battle of Iron Bridge126. Since the Umayyad dynasty was unable to penetrate the Anatolian plateau, Antioch found itself on the frontline of the conflicts between two hostile empires during the next 350 years, so that the city went into a precipitous decline.

Evangelized, among others, by Peter himself, according to the tradition upon which the Antiochene patriarchate still rests its claim for primacy, and certainly later by Barnabas and Paul during Paul’s first missionary journey. Its converts were the first to be called Christians.[This is not to be confused with Antioch in Pisidia, to which the early missionaries later travelled. See also: Müller, Karl Otfried: Antiquitates Antiochenae (1839). 126 The city became known in Arabic as ‫( ةّيكاطنأ‬Antākiyyah). 125

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II.4.5 Doura-Europos, a frontier town: from the 3rd century BC The first major stopping point for the caravans on the route from Mesopotamia to Syria is the old Babylonian town of Doura, on the west bank of the Euphrates. Rebuilt by Seleucus in about 300 BC, it is given the new name of Europus. This settlement later becomes of great importance as a frontier post, when the Euphrates is the boundary between successive empires.

Temple of Bel at Dura-Europos

Dura-Europos was a Hellenistic, Parthian and Roman border city built on an escarpment ninety meters above the right bank of the Euphrates river. It is located near the village of Salhiyé, in today’s Syria. It was founded in 303 BC (in the Hellenistic era) by the Seleucids on the crossroad of an east-west trade route and the trade route along the Euphrates. The new city controlled the river crossing on the route between his newly founded cities of Antioch and Seleucia on the Tigris. Its rebuilding as a great city built after the Hippodamian model, with rectangular blocks defined by cross-streets ranged round a large central agora, was formally laid out in the 2nd century BC. The traditional view of Dura-Europos as a great caravan city is becoming “nuanced” by the discoveries of locally made manufactures and traces of close ties with Palmyra. During the later second century BC it came under Parthian control (Millar 1998) and in the first century BC, it served as a frontier fortress of the Arsacid Parthian Empire, with a multicultural population, as inscriptions in Greek, Latin, Aramaic, Hebrew, Syriac, Hatrian, Palmyrenean, Middle Persian and Safaitic Pahlavi testify (Millar 1993). It was captured by the Romans in 165 and abandoned after a Sassanian siege in 256-257. After it was abandoned, it was covered by sand and mud and disappeared from sight. 103

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II.4.6 Palmyra: from 300 BC The other great staging post on the route to Antioch is also an important site, and today a much more visible one. It is Palmyra127, famous as one of the great classical cities128. The caravans were striking west from Doura-Europus, on the Euphrates, through the desert to the Mediterranean coast.

Palmyra: a panorama Palmyra is an oasis of central Syria, nearby Damascus (215 km north-east) half way across this difficult terrain. Its wealth derives from its position on the east-west axis from Persia to the coast, in addition to being on the older route up from Mesopotamia (Burns 1999). In the 1st century BC, when Palmyra was on the verge of its greatest prosperity, a rich new supply of goods began to arrive from the east along the Silk Road129. In the mid of this century, this wealthy and elegant city came under Roman control. But, contrary to the Petra’s case, the following period was coming to be one equally of great prosperity for Palmyra, in which the Aramaean, Bedouin and other inhabitants of the city adopted customs and modes of dress from both the Parthian world to the east and the Graeco-Roman west. Meanwhile, the city belonged to the Roman province of Syria during the reign of Tiberius (14-37). It steadily grew in importance as a trade route linking Persia, India, China, and the Roman Empire. In 129, Hadrian visited the city and proclaimed it a free city and renamed it Palmyra In Arabic, this is: Tadmur‎ (‫)رمدت‬, Tudmur or Tadmor, which is claimed to be the name of Palmyra in modern Hebrew and/or to mean “the town that repels” in Amorite and “the indomitable town” in Aramaic (Palmyra (Syria)—Britannica Online Encyclopedia Retrieved 2008-11-16). 128 As ruined today. 129 See also: Syria uncovers ‘largest church’ BBC News Online, 14 November 2008. Retrieved 2008-11-16; Palmyra (Syria)—Britannica Online Encyclopedia Retrieved 2008-11-16; Syria Gate—About Syria—Palmyra Retrieved 2008-11-16. 127

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Hadriana. The city was captured by the Muslim Arabs under Khalid ibn Walid in 634. Palmyra was kept intact. After the year 800 and the civil wars which followed the fall of the Umayyad caliphs, people started abandoning the city. At the time of the Crusades, Palmyra was under the Burid emirs of Damascus, then under Tughtekin, Mohammed the son of Shirkuh, and finally under the emirs of Homs. In 1132 the Burids had the Temple of Ba’al turned into a fortress. In the 13th century the city was handed over to the Mamluk sultan Baybars. In 1401, it was sacked by Tamerlan, but it recovered quickly, so that in the 15th century it was described as boasting “vast gardens, flourishing trades and bizarre monuments” by Ibn Fadlallah al-Omari. II.4.7 China and the Silk Roads: from the 2nd century BC to the 1st century AD In pre-historical times, Epi-palaeolithic Natufians were carrying parthenocarpic figs from Africa to the southwestern corner of the Fertile Crescent ( circa 10,000 BC /Chicki coord. 2002). Later migrations out of the Fertile Crescent would carry early agricultural practices to neighbouring regions—westward to Europe and North Africa, northward to Crimea, and eastward to Mongolia (Zvelebil 1986; Bellwood 2005). The ancient peoples of the Sahara imported domesticated animals from Asia between 6000 and 4000 BCE. In Nabta Playa by the end of the 7th millennium BC, prehistoric Egyptians had imported goats and sheep from Southwest Asia130. Foreign artifacts dating to the 5th millennium BC in the Badarian culture in Egypt indicate contact with distant Syria. In predynastic Egypt, by the beginning of the fourth millennium BC, ancient Egyptians in Maadi were importing pottery as well as construction ideas from Canaan (Parsons 2008).Predynastic Egyptians of the Naqada I period also imported obsidian from Ethiopia, used to shape blades and other objects from flakes (Shaw 2002). The Naqadans traded with Nubia to the south, the oases of the western desert to the west, and the cultures of the eastern Mediterranean to the east (Branislav 1995).

See, the Maadi culture.

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Map of Nubia

A tentative trade route started establishing along a string of oases north of the Himalayas. They were very exposed to the broad expanse of steppes—from which marauding bands of nomadic tribesmen were liable to descend at any moment—but protection by the Han dynasty in China was making it reasonably safe for merchants to send caravans into this region. The Han Dynasty (206 BC–220 AD)131 was highly responsible for a whole process of construction132. The central Asian sections of the trade routes were expanded around 114 BCE by the Han dynasty (Hogan 2008), largely through the missions and explorations of Zhang Qian, but earlier trade routes across the continents already existed. So, in 106 BC, for the first time, a caravan leaves China and travels through to Persia without the goods changing hands on the way. The Silk Road was open at that time. In the 1st century BC the Romans gained control of Syria and Palestine—the natural terminus of the Silk Road, for goods can move west more easily from here by sea. Soon a special silk market came to be established in Rome. China, proudly self-sufficient, wanted nothing that Rome was able to offer. And the Han rulers were unwilling to release silk—either as thread or woven fabric—except in exchange for gold. It has been calculated that in the 1st century AD China had a hoard of some five million ounces of gold. In Rome the emperor Tiberius issues a decree against the wearing of silk—his stated reason was the drain on the empire’s reserves of gold. The Roman dominance of the entire Mediterranean, and of Europe as far north as Britain, was giving the merchants vast new scope to the west. At The ruins of a Han Dynasty Chinese watch-tower is made of rammed earth at Dunhuang, Gansu province. 132 The “Silk Road” is highly interesting as much as it actually seems to have not been projected by anybody. 131

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the same time a maritime link, of enormous commercial potential, was opening up between India and China. The map of the world offers no route so promising to a merchant vessel as the coastal journey from India to China. Down through the Straits of Malacca and then up through the South China Sea, there are at all times inhabited coasts not far off to either side. It is no accident that Calcutta is now at one end of the journey, Hong Kong at the other, and Singapore in the middle. Indian merchants were trading along this route by the 1st century AD, bringing with them the two religions, Hinduism and Buddhism, which profoundly influence this entire region. The Silk Road133 extending to 4,000 miles, from Southern Europe through the Arabian Peninsula, Somalia, Egypt, Iran, Pakistan, India, Bangladesh, Java-Indonesia, and Vietnam until it reaches China—see on the map that land routes are red, water routes are blue. This name was coming from the lucrative Chinese silk trade, a major reason for the connection of trade routes into an extensive trans-continental network (Eliseeff 2009).

Ancient silk road trade routes across Eurasia

The goods were usually unloaded in each oasis and traded or bartered before continuing the journey westwards—where rich customers around the Mediterranean were eager for the luxury products of the east. The routes enabled people to transport goods, especially luxuries such as slaves, silk, satin and other fine fabrics, musk, other perfumes, spices, medicines, jewels, glassware and even rhubarb, as well as serving as a conduit for the spread of knowledge, ideas, cultures but also diseases(Wood 2002) between different parts of the world: Ancient China, Ancient India (Indus valley, now Pakistan), Asia Minor and the Mediterranean. For the most part, goods were transported by a series of agents on varying routes and were traded in the bustling mercantile markets of the oasis towns(Elisseef 2001). Although the term the Silk Road implies a continuous journey, very few who traveled Actually, this is about the Silk Routes, collectively known as the “Silk Road”.

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the route traversed it from end to end. The Silk Road was linking east Asia and western Europe at a time when each has, in its own region, a more sophisticated commercial network than ever before. The caravan routes of the Middle East and the shipping lanes of the Mediterranean have provided the world’s oldest trading system, ferrying goods to and from between civilizations from India to Phoenicia. The role played by the Silk Road in exchanging goods, technologies, and ideas between regions of agrarian civilization is well understood. Less well understood is the trans-ecological role of the Silk Roads—the fact that they also exchanged goods and ideas between the pastoralist and agrarian worlds (David 2000). The second of these systems of exchange, though less well known, predated the more familiar “trans-civilizational” exchanges, and was equally integral to the functioning of the entire system, says the author. A clear awareness of this system of trans-ecological exchanges should force world historians to revise their understanding of the age, the significance, and the geography of the Silk Roads.134. This is the moment of equally getting aware of an underlined unity of Afro-Eurasian history. Besides, some authors claim that the Silk Road introduces what is today called global economics135. Moreover, it was equally an important path for cultural, commercial and technological exchange between traders, merchants, pilgrims, missionaries, soldiers, nomads and urban dwellers from Ancient China, Ancient India, Ancient Tibet, Persia and Mediterranean countries for almost 3,000 years136. Then, trade on the Silk Road was a significant factor in the development of the great civilizations of China, India, Egypt, Persia, Arabia, and Rome, and in several respects helped lay the foundations for the modern world. II.4.8 Rome and its trade within the Empire Big cities like Rome had to import large amounts of food from all over the empire. Luxury goods also came from all over Europe, Africa and the Near East. Silk came on camel caravans from China. Ships brought spices, See also: Questia Media America, Inc. www.questia.com http://www.historyworld.net/wrldhis/PlainTextHistories.asp?historyid=ab72#ix zz10A8Ku18v 136 ANCIENT SILK ROAD TRAVELERS [sic”]. www.silk-road.com. http://www. silk-road.com/artl/srtravelmain.shtml. Retrieved 2008-07-02.  134 135

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jewels and perfumes from India (Rostovtzeff 1966). Trade flourished throughout the Roman world, but as transport by land was slow and expensive, long distance travel was usually via the Mediterranean Sea. But there, sailing was dangerous and voyages were therefore confined mainly to the summer season and the sailors tried to keep near the coast. Evidence of the trading routes can be found in shipwrecks and in the distribution of goods and coinage. Merchant ships, packed with amphorae (clay pots) full of wine and olive oil, sailed from the well-farmed regions of Italy and Spain to Gaul and Britain, and grain and papyrus were brought in from Egypt to Rome and to the other big imperial cities. Exotic animals from the East and Africa were also transported in huge numbers to be made fight each other or human beings at the games in the amphitheatre. High quality marble, glass and mosaics were carried across the Empire for use in the construction and decoration of the homes of the wealthy, the town houses and country villas. Other luxury items: sculpture, silk clothes and hangings, gold and silver jewellery and household ornaments were also exchanged for tin (from Cornwall) and furs, hunting dogs, wool and slaves from other northern regions (Rostovtzeff 1966).

References: Andrei, Liviu C (2010): About how did the first ever big economic crisis look like. Unpublished manuscript. 2010 Guitton, H & Bramoulé, R (1987): La monnaie. Paris. Dalloz. 6th edition. 1987 Jinga, Victor(1981) : Moneda si Problemele Ei Contemporane. Editura Dacia. Cluj Napoca. 1981. Book written in Romanian. Leiden, Brill E.J(1995): Economic Structures of Antiquity (ESoA) (1995) Greenwood Press, Westport, Connecticut Neumann, Hans. (1999). “Ur-Dumuzida and Ur-DUN.” In Dercksen (ed.), Trade and Finance in Ancient Mesopotamia, 43-53. Powell, Marvin A. (1999): “Wir müssen alle Nische nutzen: Monies, Motives, and Methods in Babylonian Economics.” In Dercksen, J.G. (ed.)(1999): Trade and Finance in Ancient Mesopotamia. Bleiberg, Edward. (1994). “‘Economic Man’ and the ‘Truly Silent One’: Cultural Conditioning and the Economy of Ancient Egypt. In “Journal of the Society for the Study of Egyptian Antiquities”, pp. 24, 4-16. 109

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Leiden, Brill E.J(1992):Taking Ancient Mythology Economically (TAME) (1992) O’Sullivan, Arthur; Steven M. Sheffrin (2003): Economics: Principles in action. Upper Saddle River, New Jersey 07458: Pearson Prentice Hall. pp. 246. ISBN 0-13-063085-3. http://www.pearsonschool.com/index. cfm?locator=PSZ3R9&PMDbSiteId=2781&PMDbSolutionId=6724 &PMDbCategoryId=&PMDbProgramId=12881&level=4. Radford, R. A. (2009): “The Economic Organisation of a P.O.W. Camp”, Economica, vol. 12, 1945, referenced 2009-05-09. Weisbrot, Mark (2005). Trade—What Are the Gains and Who Gets Them. Center for Economic and Policy Research Economics Seminar Series. Oconnor, Ashling (June 16, 2007): “Coins run out as smugglers turn rupees into razors”. The Times (London). June 16, 2007. http://www. timesonline.co.uk/tol/news/world/asia/article1940319.ece. Retrieved April 30, 2010. Horne, Charles F. (1915): “The Code of Hammurabi : Introduction”. Yale University. http://www.yale.edu/lawweb/avalon/medieval/hammint. htm. Retrieved September 14, 2007. Cheal, David J (1988): The Gift Economy. New York: Routledge. pp. 1-19. ISBN  0415006414. http://books.google.com/books?id=o-wNAAAA QAAJ&pg=PP1&dq=Cheal,+David+J.+%27The+Gift+Economy%2 7&ei=PKg5StboFZDakATHy-DFAw,M1. Retrieved 2009-06-18. Dow, Sheila C. (2005), “Axioms and Babylonian thought: a reply”, Journal of Post Keynesian Economics 27 (3), p. 385-391. Modelski, George( 2004): World Cities: –3000 to 2000. Washington, DC: FAROS 2000, 2003. Paper presented to the “Globalization and World System Dynamics” panel, annual conference of the International Studies Association, Montreal, March 18, 2004 Morley, Neville (2007): Trade in the Classical Antiquity. Cambridge University Press. 2007 Day, Clive. (1983): A History of Commerce. Amazon.com paperback. First published 1907. Chami, Felix A.(2002): “The Egypto-Graeco-Romans and Panchea/ Azania: sailing in the Erythraean Sea.” In: “Society for Arabian Studies Monographs 2 Trade and Travel in the Red Sea Region”. Proceedings of Red Sea Project. British Museum. October 2002, pp. 93-104. Edited by Paul Lunde and Alexandra Porter. ISBN 1841716227. 110

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Kislev ME, Hartmann A, Bar-Yosef O (2006): Early domesticated fig in the Jordan Valley. Nature 312:1372-1374. Aston, Barbara G.; James A. Harrell; Ian Shaw (2000): “Stone”. In “Ancient Egyptian Materials and Technology”. Editors Paul T. Nicholson and Ian Shaw. Cambridge, 5-77, pp. 46-47. Aston, Barbara G. (1994). “Ancient Egyptian Stone Vessels,”/ Studien zur Archäologie und Geschichte Altägyptens 5, Heidelberg, pp. 23-26 Glueck, Grace (2003-10-17). “ART REVIEW; Rose-Red City Carved From the Rock”. The New York Times 2003-10-17. Downey, Glanville (1963): Ancient Antioch (Princeton, Princeton University Press. 1963 Millar, F. (1998): “Dura-Europos under Parthian rule,” in Das Partherreich und sein Zeugnisse/The Arsacid Empire: Sources and Documentation, J. Weisehöfer, ed. (Stuttgart) 1998 Millar, F. (1993): The Roman Near east, 31 BC-AD337 (Harvard University Press) 1993, pp 445-52, 467-72. Burns, Ross (1999). Monuments of Syria. London and New York: I.B. Tauris. pp. 162-175. Chicki, L; Nichols, RA; Barbujani, G; Beaumont, MA. (2002): Y genetic data support the Neolithic demic diffusion model. Proc. Nat. Acad. Sci. 99(17): 11008-11013 Zvelebil, M. (1986): Hunters in Transition: Mesolithic Societies and the Transition to Farming. M. Zvelebil (editor), Cambridge University Press: Cambridge, UK (1986) pp. 5-15, 167-188. Bellwood, P. (2005): First Farmers: The Origins of Agricultural Societies, Blackwell: Malden, MA Parsons, Marie(2008): “Egypt: Hierakonpolis, A Feature Tour Egypt Story”. www.touregypt.net. http://www.touregypt.net/featurestories/ hierakonpolis.htm. Retrieved 2008-07-09. Shaw, Ian (2002). The Oxford History of Ancient Egypt. Oxford, England: Oxford University Press. p. 61. ISBN 0-500-05074-0. Branislav Andelkovic (1995): The Relations between Early Bronze Age I Canaanites and Upper Egyptians, Belgrade, p. 58, map 2. Branislav Andelkovic, 2002. Southern Canaan as an Egyptian Protodynastic Colony. Cahiers Caribéens d`Egyptologie 3-4: 75-92. Hogan, C. Michael (2008): “The Megalithic Portal and Megalith Map: Silk Road, North China [Northern Silk Road, North Silk Road Ancient 111

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Trackway”]. www.megalithic.co.uk. http://www.megalithic.co.uk/ article.php?sid=18006. Retrieved 2008-07-05. Eliseeff, Vadime (2009): “Approaches Old and New to the Silk Roads”. In: “The Silk Roads: Highways of Culture and Commerce”. Paris (1998) UNESCO, Reprint: Berghahn Books (2009), pp. 1-2. ISBN 92-3-103652-1; ISBN 1-57181-221-0; ISBN 1-57181-222-9 (pbk) Wood, Francis (2002): The Silk Road: Two Thousand Years in the Heart of Asia. Berkeley, CA: University of California Press. pp.  9, 13-23. ISBN 978-0-520-24340-8. Elisseeff, Vadime (2001). The Silk Roads: Highways of Culture and Commerce. UNESCO Publishing / Berghahn Books. ISBN 978-92-3-103652-1. David, Christian (2000): Silk Roads or Steppe Roads? the Silk Roads in World History.Journal of World History. Volume: 11. Issue: 1. Publication Year: 2000. Page Number Rostovtzeff, M.I. (1966): Social and Economic History of the Roman Empire. Claredon Press. 1966. 847 pages.

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PART THREE MONEY AND MONETARY SYSTEM AS PRE-MODERN AND MODERN This paper is already entering a double story or, actually, two parallel stories and histories. The first line of developments belongs to the already “old” barter, as continuing its notable and noble mission of unifying its given primitive markets and later on reaching the national-international market structure of the modern world economy. The other line belongs to money, as already born and proving its life capacity next to the commodity money stage of barter. Despite the money’s “youth” at that time—while barter was already entering its up-stages of developments —, the progress interestingly stays on the “old” side of barter, and this leads to enlarging and unifying markets137, as explained. The money’s side of the history will develop here below, especially with its early aspects. Note that all of the below descriptions, here including the next chapters, devolve from the idea of the “barter-money reconciliation”.

III.1 A transitory history: the Middle Ages The Middle Ages are understood as the period devolving from the destruction of the Roman Empire under the Eastern invasions—a period strengthened by the rise of the Ottoman Empire with its conquest of Constantinople and the rise of other eastern empires. For some historians, this was the “Dark Age”138. The Middle Ages are nearly unanimously associated to feudalism. And this history will be continued in the next Part Four with the gold standard and bi-metalism. 138 Unfortunately, there were more “Dark Ages” in the historians’ different views for different periods and areas. 137

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Feudalism is a political and military relationship system during the Middle Ages between the feudal aristocracy (a lord), and his vassals139. Reynolds (1994) here adds the fiefs (lands owned), as the third component. A lord granted land (a fief ) to his vassals. In exchange for the fief, the vassal would provide military service to the lord. The obligations and relations between lord, vassal and fief form the basis of feudalism (Reynolds 1994). The system that feudalism describes was not conceived as a formal political system by the people living in the Medieval Period and there is no broadly yet accepted modern definition of feudalism. Since at least the 1960s, many medieval historians have included a broader social aspect, adding the peasantry bonds of manorialism, sometimes referred to as a “feudal society“. First, the historical examples given by Susan Reynolds seriously call into question the traditional use of the term feudalism. Sources reveal that the early Carolingians had vassals, as did other leading men in the kingdom. It is also true that, in Carolingian Francia, that the man who held the status of servi could also hold the sorts of offices that we normally think of as belonging to vassals. This relationship did become more and more standardized over the next two centuries, but there were differences in function and practice in different locations. For example, in the German kingdoms that replaced the kingdom of Eastern Francia, as well as in some Slavic kingdoms, the feudal relationship was arguably more closely tied to the rise of serfdom, a system that tied peasants to the land.

Cleric, knight and peasant in the Middle Age 139

xxx“Reader’s Companion to Military History”. http://web.archive.org/ web/20041112062036/http://college.hmco.com/history/readerscomp/mil/html/ mh_017900_feudalism.htm

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Second, moreover, the evolution of the Holy Roman Empire greatly affected the history of the feudal relationship in central Europe. Long-accepted feudalism models could imply that there was a clear hierarchy from Emperor to lesser rulers, be they kings, dukes, princes, or margraves. These models are patently untrue: the Holy Roman Emperor was elected by a group of seven magnates, three of whom were princes of the church, who in theory could not swear allegiance to any secular lord. Third, the French kingdoms also seem to provide clear proof that the models are accurate, until it is considered that, when Rollo of Normandy knelt to pay homage to Charles the Simple in return for the Duchy of Normandy accounts tell that he knocked the king down as he rose, demonstrating his view that the bond was only as strong as the lord—in this case, not strong at all. This reveals that it was possible for ‘vassals’ to openly disparage feudal relationships. The autonomy with which the Normans ruled their duchy supports the view that, despite any legal “feudal” relationship, the Normans did as they pleased. In the case of their own leadership, however, the Normans utilized the feudal relationship to bind their followers to them. It was the influence of the Norman invaders which strengthened and to some extent institutionalized the feudal relationship in England after the Norman Conquest. In the late 19th Century, Karl Marx described feudalism as the economic situation coming before the inevitable rise of capitalism. For Marx, what defined feudalism was that the power of the ruling class (the aristocracy) rested on their control of arable land, leading to a class society based upon the exploitation of the peasants who farm these lands, typically under serfdom. “The hand-mill gives you society with the feudal lord; the steam-mill society with the industrial capitalist.”. Marx thus considered feudalism within a purely economic model140. In the next 20th century, the historian François-Louis Ganshof was arguing that feudal relationships existed only within the medieval nobility itself. The Ganshof ’s classic definition of feudalism is the most widely known today and also the easiest to understand (Ganshof 1952). Then, the French historian Marc Bloch (1961) approached feudalism not so much from a legal and military point of view but from a sociological one. Bloch conceived feudalism as a type of society that was not limited solely to the nobility. Like Ganshof, he recognized that there was a hierarchical relationship between 140

xxx“Let’s try capitalism instead of feudalism”. http://www.wnd.com/index. php?fa=PAGE.printable&pageId=149637.  115

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lords and vassals, but Bloch saw as well a similar relationship obtaining between lords and peasants. It is this radical notion that peasants were part of feudal relationship that sets Bloch apart from his peers. While the vassal performed military service in exchange for the fief, the peasant performed physical labour in return for protection. Both are forms of feudal relationship. According to Bloch, other elements of society can be seen in feudal terms; all the aspects of life were centered on “lordship”, and so we can speak usefully of a feudal church structure, a feudal courtly (and anti-courtly) literature, and a feudal economy. Still others since the 1970s have re-examined the evidence and concluded that feudalism is an unworkable term and should be removed entirely from scholarly and educational discussion, or at least used only with severe qualification and warning. In Western societies institutions and attitudes similar to those of medieval Europe are perceived to prevail. Ultimately, the many ways the term feudalism has been used has deprived it of specific meaning, leading many historians and political theorists to reject it as a useful concept for understanding society (Brown 1974). And that whereas, outside a European context, the concept of feudalism is normally used only by analogy (called semi-feudal), most often in discussions of Japan under the shoguns, and sometimes medieval and Gondarine Ethiopia. However, some have taken the feudalism analogy further, seeing it in places as diverse as ancient Egypt, the Parthian empire, the Indian subcontinent, and the antebellum American South141. As concluding, these enough crucial centuries of the Middle Ages might be here approached with a similar prejudice that the literature keeps as regarding barter and its specific economy so far. Though, this time we can admit—together with the whole literature—that this period keeps much less significance for our subject than all periods before or of the aftermath. The fact that the Middle Ages keeps little significance for the history of money is certainly due to the above scheme of a feudalism of no economic freedom and brutal step back of market. Despite that, it is very known that the above description remains just a scheme, and beyond this outline a list of events did positively develop. Trade did develop and cities kept far from the king-vassal-peasant relationships and at least developed some guilders142. The firms’ accounting was developing under the Luca Bacioli’s principle (here in place today), “Reader’s Companion to Military History”—see above. See: Basing (1990); Cooper (1985); Epstein (1991; 1998).

141 142

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and a whole landscape was preparing the forthcoming modern era143. In another development, feudalism was strong in the Eastern Europe under domination of the Middle Ages empires, whereas to their west side Inquisition came up in Spain and Italy. But when especially the eastern side of Europe was “defended” against the empires by feudalized (sacrificed development) peoples, at the western extreme England was already stepping into a modern society, Europeans started colonizing America, Netherlands does account for the oldest “free society” of Europe and of the whole world and in France, in 1716 the modern Law144 type financial-banking system was built and also developed (Guitton & Bramoulé 1987). As for the money development in the Middle Ages, this was rather contradictory ad limited by what the above “feudal scheme” describes—but there is not to be here omitted that now the old antiquity had passed over, together with its States and currencies becoming just numismatics. In reality, in the Middle Ages States, Governments and their corresponding frontiers were remade, in which context issuing money was taken over by other authorities, which were not only States, but also (feudal) domains (Guitton & Bramoulé 1987)—an aspect so demonstrating how strong this vassals’ autonomy was, at least sometimes and for some cases, in the above (Reynolds 1994) type of definition. As Europe was changing its political landscape, the new States were issuing their currencies one after another: Genoa (1252), Florence (1253), Venice (1253), France and England (1260), Hungary (1308; 1334), Flanders (1337), Bohemia (1325), Lübeck (1340), Poland (1528) and Sweden (1568)—actually, this was also the old Roman gold standard flourishing in a new era145. An economic, fiscal and of course political crisis occurred in the Western Europe of the fourteenth century, event then causing some monetary policy type interventions.146. A real “gold rush” activity meats a peak about 1520, followed by slowly lowering such a business objective—that was in some European regions like Tyrol, Bohemia, Silesia and Saxony, plus in Africa (see Ghana and Mali), New Guinea and Be it in the Marxian view, as mentioned above. J.Law was a Scottish man immigrated in France. He was a successful banker and succeeded to become the French minister of finance at that time. 145 See details in the ext Part Four. 146 See: reducing the non-monetary regime of monetary metals, control of metal amounts issues at the boundaries, mechanisms and procedures of credit and clearing—see treasury “enlarged” —, quasi-money and account money, devaluation on the metal weight rule etc. 143 144

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Sierra Leone(Guitton & Bramoulé 1987). And all these because the Middle Ages—despite their handicap of development and dynamics, sometimes even as compared to some more spectacular facts of the previous antiquity—did follow the same two-levels (two “floors”) of the already definite process: (1) the monetary development at the surface of the society and (2) the underground or hidden evolving of barter, as basing money and as its stages of pluri—and/or unique metal base of value. The gold standard and money were meeting a historically uninterrupted functioning ever-since the Roman Empire, but conceptually a very similar description at the end of the Middle Ages.

III.2 The early money: money and political authority. An analysis This paragraph is supposed to be history as well, but since fewer references about, we will take the things in a possible logical order147. And this order starts of course with identifying the legal entity of the money issuer, which is the political authority of the State (let us say Government)148. In other words, as much spectacular that the history of money is, it is not a history for itself, but for somebody else’s interest. In such an order, our finding below will first identify the real motivation of the Government’s involvement in the money story. III.2.1 Money and the State budget This motivation does regard, instead of money in itself, something which both belongs to Government, and is older than (pre-existent of ) money—this is the State budget and this is for managing the State’s expenses—see budget spending (BS)—and revenue—see budget revenue (BR). Irrespective of the commodity money selection on market, Government has historically been the first to have noticed the need for an easier procedure of accounting revenue-expense in a single unit of value of reference. Government already practices taxation (T). Now, a common denominator for taxation and the State’s spending comes to be possible by a political decision in such a sense. 147 148

As similarly to the above two models It might be kingdom, versus antique republic, city-State or Imperial authority, or even a Middle Ages State formation.

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So that, currency will be designed, produced, issued and enforced by law on the territory, whereas the State’s employees will receive their wages and salaries directly in the official currency units. Then, as by the given law enacted taxation will be expected priory in the same currency units. Or, this is what can be called the primitive monetary system: money limits to be issued and collected back and the system is aimed to design a double flow of value between the State issuer and the rest of society149. The closer the already in place monetary system to its primitive description, the stronger the link between the State budget and monetary system—this correlation subsists up to the modern State and economy of nowadays, but the primitive money (monetary system) is the very start of this history finding the two issues matching each other in the detail of components. III.2.2 The budget deficit in the pre-modern economy The budget spending (BS) identifies with the money supply (M) and remains the “pure” exogenous of the model—so that, it will be the Government’s needs to spend determining its value level. The State, at that time, needs to repay services from its employees, who can be members of the Government, militaries, managers, officers and their subordinates of the authority head-quarters or spread within territory etc. Moreover, buildings and the other State constructions and establishments, here including roads, need to be maintained and repaired etc. Then, budget revenues (BR) identifies taxation (T), even before the money terms, but there is to be found another interesting point, since identifying budget with monetary terms by components. Budget determines (and dictates to) money by BS and its general terms, but we now quickly come to the point of a converse150 determination between the two systems. The monetary system contains a double requirement, meaning to avoid its two possible extremes, at least in the short run: the (1) total and (2) zero money back to the issuer—as for (1), the money issued proves as less valuable (previously over-valued); as for (2), on the contrary, it is more highly valuable (previously under-valued) and its high value acts like a physical impulse for a long run within the home market and even farther on, off Money does not get “created” within the market system, but limits to its issue by the authority, does not meat credit and related institutions, other money issued by different authorities either etc. See the next III.2. 150 Let us say, dialectic in the Hegel’s and Marx’ common sense. 149

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the issuer’s control. As a result, a healthy monetary system is supposed to result into both a money-back (to the issuer) part—which will here be by taxation (T)—and a left part—on market, as for both money in its market circulation (MC) and private reserves (MR) —, as identifying (what else than) the budget deficit (BD). In such conditions, the (money) terms of the monetary system: M = T + (MC + MR) just re-writes the State budget functioning report: BS = BR (=T) + BD in identified terms—on each of the above equations’ sides —, so at least: BD = MR + MC As the result—the result of the above hypothesis-restriction of primitive monetary system and its identification with the State budget terms for either the whole management activity or for components, as in details—the budget deficit (BD) is interestingly found as a compulsory issue—i.e. politically. The budget deficit does limit neither to a today political obsession of inflation causes, nor to some management dysfunctions—is it founded on a basic sense of the State’s generosity face to the society governed. This finding does reflect what the State (by its Government) ever was: a legal entity missing any proper interests as related to its citizens—on the contrary, when there would be a budget exceeding (BE), instead of budget deficit (BD), the State entity becomes the one similar to any other economic entity—see companies and all other types of organizations, plus individuals, acting for themselves in the area and not for serving the others’ interests. III.2.3 State and Government To be so here noticed that the same State becomes an economic entity even when remaining the organism of political power that it is

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by definition151—but its definition does not adjust when extending the Government’s qualities to economic dimension. Besides, when dictatorships or corrupted States, the State’s definition as a no interests entity does not get affected in any way—it limits to the State organization and does not extend to “whose” interests does the State serve. Moreover, there is one more aspect defining the State as a different (particular) economic entity: its revenues by taxation are simply taken from taxpayers by law enforced, and not earned in exchange of services provided—as in the cases of the other economic entities. Or, State so sees itself forced to cover just partly its specific spending by taxation and makes some people in the area wealthier—see the above “whose interests?” served by the State—and the newly coming monetary system secures this political maneuver by one of its requirements. Plus, since the appropriate term is securing a State’s proper system by money this is not limiting to some individuals’ welfare, but extending to trade activity and market. In a word, issuing money might become a welfare providing political decision for the antic State, plus the one strengthening the State-society economic relation, of which State strengthens its political position. Given all these above, BD—as contrary to BS—becomes the “pure endogenous” of our case study. The next problem to be here solved is the one of some more restricted limits for the BD—in other words its ratios to total BS and/or BR. Or, things are here casual, in our view, not depending on general rules, but on the limits affordable for the State, as regarding first the budget spending (BS), as specifically—or, history can provide cases of bankruptcy for political authorities. Actually, the antic and pre-modern States here benefited from not enough definite macro-systems and reference home markets—see flows defining the corresponding term of the today gross domestic product (GDP)—and this comes for relaxing the Government’s position in such a concern, at least on the short terms and for the time being.

151

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III.2.4 Seigniorage Another question to be answered in such a context comes on the interesting aspect that the BD existence (required)—in the antic or Middle Ages economies of metal based money—stays indifferent to the real intrinsic value of money—money can stay close to commodity money, in which case their intrinsic value is not or less affected. We can here conclude that in such conditions BD feeds directly the welfare in the area152. The same welfare comes to be affected once and in a direct correlation with money spoiling its intrinsic value—the difference between its commodity value and its specie value: becomes what is called seigniorage(Horne 1915). Or seigniorage is a term as old as money, since translating, on the other hand, the seignior’s (money issuer’s) advantage for her asymmetric position against the society from the money issued criterion—actually, the seignior authority offers to herself and uses the right of reducing the natural value of her “substance” issued and claiming a higher natural value in exchange. The seigniorage matter is even more than these above, and there is to be found its characteristics, but also its limitation. Then, recall that the authority sees herself committed to a BD for feeding the welfare in the area—and here, first, there comes a kind of resort for compensation in economic terms and this in the absence of market. Second, the advantage of seigniorage for the seignior stays on the short term: it takes up to the money-back to the issuer moment—and the money concept terms are appropriate to the free option of the money owner to give her money up, here including back to the authority, as for some other exchanges. In such a context, seigniorage really turns to credit153 related terms and the origin of public debt—as the relation between Government and the rest of society. On longer terms, the previous seignior’s asymmetric advantage turns into strengthening economic and political link between the governor and the governed parts of the society in the area; and so into increasing the authority’s political responsibility. Then there becomes an increasingly obvious process by which the State’s currency—besides feeding Recall that in the today modern economy with no intrinsic money value, BD becomes an up-pressure on inflation, and this equals reducing the money market value—which is not occurring when the money market value is exogenous by nature, as in the metal money-based conditions and representative money of the pre-modern economy. 153 See the below III.3.1. 152

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some welfare in the area—reinforces the State’s authority and social awareness of belonging to a State formation, as a distinct state and culture. Third, there remains an equally important distinction from more (close to the commodity money case), versus less (high seigniorage) intrinsic value of money from a different point of view than the Government’s condition and relation with the rest of society. Closer to high intrinsic value and to commodity money means also closer to barter and to its terms of open economy and enlarging market process154 towards the virtual, future and modern national-international market structure—once more, in early stages money does not provide such an economic progress and this is a kind of its “childhood handicap”, whereas barter yet stays similar to the money’s young and healthy “parent”. The higher the seigniorage as difference between the real-intrinsic and the claimed values of specie, the less the money’s complying with this general process by helping the domestic market’s closeness, as the opposite. The less welfare directly provided by BD in high seigniorage conditions here associate with closed and “defensive” home market. On the contrary, of course, the authority here benefits from the alterative of keeping the intrinsic value of specie for both a prosperous and open society that it represents face to the rest of the world, as for the two political alternatives available. However, it is similarly true that the BD level stays an independent variable in context, together with its welfare benefit transferred from the authority to the society, and this as one more economic policy tool for that time. Ultimately, there is a decisive limit for seigniorage that the policymaker feels constrained to take into account—and this is even the market itself, as yes or no accepting the currency issued as the real-true and appropriate money of its related area. Do not here omit the truth that—as compared to the social attachment to the State authority, as a culture supposed to be built by its policy—market might be a much longer tradition in the area, plus this Government is supposed to be much less experienced than the modern economy corresponding one to work and influence such a given context. Actually, a solid home market might be able to act on the irreversible money-back danger– in other words, Government is never as strong as refusing its own money issued, all the more under an enacted law of “no refusal for money received” from anyone. The available solution will be less seigniorage, equaling back closer to commodity money and to natural intrinsic value of the metal-specie—here see, for the pre-modern world, a 154

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monetary policy of strengthening money not by restrictions imposed155, but on the contrary, by favouring the market openness.

III.3 The modern money Since the political authority reference of money had been clarified by the early money stage (see above), the passage from early to modern money mainly consisted in a two dimension development: (1) internationalization and (2) symbiosis between money and credit. III.3.1 The British variant: money and credit issues As for prehistoric times, the Celts on the European Continent and in parts of Britain produced large numbers of coins before the Roman conquest. The Anglo-Saxon invasions put an end to minting in Britain almost completely for nearly two hundred years (Davies 1994). Credit156 is even older than money (Davies 1994), so the two concepts are originally different from one-another, even whether today this truth became less obvious. The interesting historical precedent of the credit concept in the modern economy consists in the ancient Egyptian157 grain certificates158, when grains were professionally stored in special storage houses for the use of individual owners, who (by traveling etc.) were so entitled to access the same quantity stored on a real “network” of warehouses in different places and areas. This aspect was /is able to demonstrate that credit—so, banking—might work without money base and, before all; this concept was and is on its own. So it will be referred below in this paragraph on different money related issues of the modern post-Middle Ages economy159. See the modern money conditions, once more. See loan, when it becomes a systematic and professional activity in helping and supporting the economic activities. 157 In the Ptolomies era. 158 See: orders of withdrawal—very close to that of modern checks. In fact, during Alexander the Great’s period, the grainaries were linked together, making checks in the 3rd century BC more convenient than British checks in the 1980s. The Egyptians had in fact invented the first giro system. See also: NOVA Online’s the Secrets of Making Money, “The History of Money.”  159 Marx also wrote that: The money-economy and credit-economy thus correspond only to different stages in the development of capitalist production, but they are by no means independent forms of exchange vis-à-vis natural economy. With 155 156

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III.3.1.1 Trade bills of exchange Against a bill of exchange, which constituted the buyer’s promise to make payment at some specified future date; goods were supplied by the seller to this buyer. Provided that the buyer was reputable or that the bill was endorsed by a credible guarantor, the seller could then present the bill to a merchant banker and redeem it in money at a discounted value before it actually became due. These bills could also be used as a form of payment by the seller to make additional purchases from his own suppliers. Thus, the bills—an early form of credit—became both a medium of exchange and a medium for storage of value. Like the loans made by the ancient Egyptian grain banks, this trade credit became a significant source for the creation of new money. In England, bills of exchange became an important form of credit and money during last quarter of the 18th century and the first quarter of the 19th century before banknotes, checks and cash credit lines were widely available(Davies 1994 p.172, 339). Bills of exchange became prevalent with the expansion of European trade toward the end of the Middle Ages160. The acceptance of symbolic forms of money opened up vast new realms for human creativity. A symbol could be used to represent something of value that was available in physical storage somewhere else in space, such as grain in the warehouse. It could also be used to represent something of value that would be available later in time, such as a promissory note or bill of exchange—a document ordering someone to pay a certain sum of money to another on a specific date or when certain conditions have been fulfilled.

the same justification one might contra pose as equivalents the very different forms of natural economy to those two economies. In the second place, since it is not the economy, i.e., the process of production itself that is emphasized as the distinguishing mark of the two categories, money-economy and credit-economy, but rather the mode of exchange—corresponding to that economy—between the various agents of production, or producers, the same should apply to the first category. Hence exchange economy instead of natural economy. A completely isolated natural economy, such as the Inca state of Peru, would not come under any of these categories (see: Capital Vol. 2, chapter 4). 160 When especially a flourishing Italian wholesale trade in cloth, woolen clothing, wine, tin and other commodities was heavily dependent on credit for its rapid expansion. 125

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III.3.1.2 Tallies In the 12th Century, the English Monarchy introduced an early version of the bill of exchange in the form of a notched piece of wood known as a tally stick. Tallies originally came into use at a time when paper was rare and costly, but their use persisted until the early 19th Century, even after paper (forms of ) money had become prevalent. The notches were used to denote various amounts of taxes payable to the crown. Initially tallies were simply used as a form of receipt to the tax payer at the time of rendering his dues. As the revenue department became more efficient, they began issuing tallies to denote a promise of the tax assessee161 to make future tax payments at specified times during the year. Each tally consisted of a matching pair—one stick was given to the assessee at the time of assessment representing the amount of taxes to be paid later and the other held by the Treasury representing the amount of taxes be collected at a future date. The institution of Treasury discovered that these tallies could also be used to create money. When the crown had exhausted its current resources, it could use the tally receipts representing future tax payments due to the crown as a form of payment to its own creditors, who in turn could either collect the tax revenue directly from those assessed or use the same tally to pay their own taxes to the Government. The tallies could also be sold to other parties in exchange for gold or silver coin at a discount reflecting the length of time remaining until the taxes was due for payment. Thus, tallies became an accepted medium of exchange for some types of transactions and an accepted medium for store of value. Like the giro-banks before it, the Treasury soon realized that it could also issue tallies that were not backed by any specific assessment of taxes. By doing so, the Treasury created new money that was backed by public trust and confidence in the monarchy rather than by specific revenue receipts (Davies 1994 p.146-151) III.3.1.3 Goldsmith bankers The highly successful ancient grain bank also served as a model for the emergence of the goldsmith bankers in the 17th Century England. These were the early days of the “mercantile revolution” before the rise of the British Empire when merchant ships began plying the coastal seas laden As opposite to assessor.

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with silks and spices from the Orient and shrewd traders amassed huge hoards of gold in the bargain. Since no banks existed in England at the time, these entrepreneurs entrusted their wealth with the leading goldsmith of London, who already possessed stores of gold and private vaults within which to store it safely, and paid a fee for that service. In exchange for each deposit of precious metal, the goldsmiths issued paper receipts certifying the quantity and purity of the metal they held on deposit. Once more like the ancient grain receipts, tallies and bills of exchange, the goldsmith receipts soon began to circulate as a safe and convenient form of money backed by gold and silver in the goldsmiths’ vaults. Knowing that goldsmiths were laden with gold, it was only natural that other traders in need of capital might approach them for loans, which the goldsmiths made to trustworthy parties out of their gold hoards in exchange for interest. Like the grain bankers, goldsmith began issuing loans by creating additional paper gold receipts that were generally accepted in trade and were indistinguishable from the receipts issued to parties that deposited gold. Both represented a promise to redeem the receipt in exchange for a certain amount of metal. Since no one other than the goldsmith knew how much gold he held in store and how much was the value of his receipts held by the public, he was able to issue receipts for greater value than the gold he held. Gold deposits were relatively stable, often remaining with the goldsmith for years on end, so there was little risk of default so long as public trust in the goldsmith’s integrity and financial soundness was maintained. Thus, the goldsmiths of London became the forerunners of British banking and prominent creators of new money. They created money based on public trust (op.cit.) III.3.1.4 Demand deposits The primary business of the grain and goldsmith bankers was safe storage of savings. The primary business of the early merchant banks was promotion of trade. The new class of commercial banks made accepting deposits and issuing loans their principal activity. They lend the money that they received on deposit. They created additional money in the form of new bank notes (see the below sub-paragraph). They also created additional money in the form of demand deposits simply by making numerical entries in the ledgers of their account holders. The money that they created was partially backed by gold, silver or other assets and partially backed only by public trust in the institutions that created it (op.cit). 127

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III.3.1.5 Banknotes, as representative money The history of money and banking are inseparably interlinked. The issuance of paper money was initiated by commercial banks. Inspired by the success of the London goldsmiths (see above), some of which became the forerunners of great English banks. Banks began issuing paper notes quite properly termed ‘banknotes’ which circulated in the same way that Government issued currency circulates today. In England this practice continued up to 1694. Scottish banks continued issuing notes until 1850162. Only notes issued by the largest, most creditworthy banks were widely accepted. The script of smaller, lesser known institutions circulated locally. Farther from home it was only accepted at a discounted rate, if it was accepted at all. The proliferation of types of money went hand in hand with a multiplication in the number of financial institutions. These banknotes were a form of representative money which (1) could be converted into gold or silver by application at the bank and (2) refers to money that consists of a token or certificate made of paper. The use of the various types of money including representative money, tracks the course of money from the past to the present. Token money may be called “representative money” in the sense that, say, a piece of paper might ‘represent’ or be a claim on a commodity also (Mundell 2002). It may also be called “representative money” in the sense that, say, a piece of paper might “represent” or be a claim on the commodity.” Gold certificates or Silver certificates are a type of representative money (Steiner 1941) which were used in the United States as currency until 1933. The term ‘representative money’ has been used in the past “to signify that a certain amount of bullion was stored in a Treasury while the equivalent paper in circulation” represented the bullion. Also recall from the above Part Two that representative money differs from commodity money which is actually made of some physical commodity (Mundell 2002). The use of bank notes issued by private commercial banks as legal tender has gradually been replaced by the issuance of bank notes authorized and controlled by national Governments. The Bank of England was granted

162

Correspondingly, in USA, this practice continued through the 19th Century, where at one time there were more than 5000 different types of bank notes issued by various commercial banks in America.

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sole rights to issue banknotes in England after 1694163. Until recently, these government-authorized currencies were forms of representative money, since they were partially backed by gold or silver and were theoretically convertible into gold or silver. Since banks issued notes far in excess of the gold and silver they kept on deposit, sudden loss of public confidence in a bank could precipitate mass redemption of banknotes and result in ‘‘bankruptcy” III.3.1.6 Gold-backed banknotes This term was due to the so-called gold standard. The gold standard was a system for exchange of value between national currencies, never an agreement to redeem all paper notes for gold (Davies 1994, pp. 146-151). The classic gold standard prevailed during the period 1880 and 1913 when a core of leading trading nations agreed to adhere to a fixed gold price and continuous convertibility for their currencies. Gold was used to settle accounts between these nations. With the outbreak of World War I, Britain was forced to abandon the gold standard even for their international transactions. Other nations quickly followed suit. After a brief attempt to revive the gold standard during the 1920s, it was finally abandoned by Britain and other leading nations during the Great Depression 164. The term gold standard is often erroneously thought to refer to gold-backed banknotes, as a currency where notes were fully backed by and redeemable in an equivalent amount of gold. The British pound was the strongest, most stable currency of the 19th century and often considered the closest equivalent to pure gold, yet at the height of the gold standard there was only sufficient gold in the British treasury to redeem a small fraction of the currency then in circulation165.

In the USA, the Federal Reserve Bank was granted similar rights after its establishment in 1913—see the below III.3.2. 164 See the full history of the gold standard in the next Part Four. 165 See also the US, where in 1880, the Government gold stock was equivalent in value to only 16% of currency and demand deposits in commercial banks and by 1970, it was about 0.5%. 163

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III.3.1.7 Fiat money Fiat money166 refers to money that is not backed by reserves of another commodity. The money itself is given value by government fiat167 or decree, enforcing legal tender laws, previously known as “forced tender”, whereby debtors are legally relieved of the debt if they pay it in the government’s money. By law, the refusal of a legal tender (offering) extinguishes the debt in the same way acceptance does168. At times in history169 the refusal of legal tender money in favour of some other form of payment was punished with the death penalty. Governments through history have often switched to forms of fiat money in times of need such as war, sometimes by suspending the service they provided of exchanging their money for gold, and other times by simply printing the money that they needed. When governments produce money more rapidly than economic growth, the money supply overtakes economic value, but also the government control on minting is installed. Therefore, the excess money eventually dilutes the market value of all money issued—this is called inflation170 (see also the open market operations).

See also the previous Part Two where refers to commodity money. Latin for “let it be done”. 168 The inclusion of “In God We Trust” on all currency was required by law in 1955. See: The Columbia Encyclopedia, Sixth Edition. 2008. Encyclopedia.com. for “fiat money.” http://www.encyclopedia.com/topic/fiat_money.aspx Retrieved July-17-09 169 e.g. Rome under Diocletian, and post-revolutionary France during the collapse of the assignats. 170 In 1971 the United States finally switched to fiat money indefinitely. At this point in time many of the economically developed countries’ currencies were fixed to the US dollar (see Bretton Woods Conference), and so this single step meant that much of the western world’s currencies became fiat money based. Following the first Gulf War the president of Iraq at that time, Saddam Hussein, repealed the existing Iraqi fiat currency and replaced it with a new currency. Despite having no backing by a commodity and with no central authority mandating its use or defending its value, the old currency continued to circulate within the politically isolated Kurdish regions of Iraq. It became known as the “Swiss dinar”. This currency remained relatively strong and stable for over a decade. It was formally replaced following the second Gulf War. 166

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III.3.2 The American variant: the story of the US$ The British colonies in North America previously were chronically short of coins and forced to use various substitutes including wampum, like the native inhabitants, and tobacco. The enthusiastic adoption of paper money and its suppression by the British was a factor in provoking the American Revolution, which was financed by hyperinflation. Ever since independence banking has been the subject of political controversy (Davies 1994). Since no modern money or national currency in the absence of money internationalization, this process also developed on several aspects—among which the transparent truth that money, as national currencies, disposed of various reference areas and degrees of strength. In this context, in the following parts of this paper there will be much more about the US$. This paragraph will limit to the early history of a (more than) special national currency. III.3.2.1 Early history The history of the dollar in North America pre-dates US independence, starting with the issuance of Early American currency called the colonial script, in which the issuance of currency was equal to the goods and services in the economy. Even before the Declaration of Independence, the Continental Congress had authorized the issuance of dollar denominated coins and currency, since the term ‘dollar’ was in common usage referring to Spanish colonial “eight-real” coin or Spanish dollar. However, the word “dollar” is derived from Low Saxon “daler”, an abbreviation of “Joachims-daler171 so called because it was minted from 1519 onwards using silver extracted from a mine which had opened in 1516 near Joachimstal, a town in the Ore Mountains of northwestern Bohemia. Besides, the same word “dollar” was used by Shakespeare and derives from “thaler” the name of an old European coin (Davies 1994)172. The dollar was approved by Congress in a largely symbolic Resolution Coin from Joachimsthal (St. Joachim’s Valley, now Jáchymov, Bohemia, then part of the Holy Roman Empire, now part of the Czech Republic.) 172 Plus, even the origin of the “$” money sign is not certain. Many historians trace the $ money sign to either the Mexican or Spanish “P’s” for pesos, or piaster, or “pieces of eight”. The study of old manuscripts shows that the “S,” gradually came to be written over the “P,” looking very much like the “$” mark. 171

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on August 8, 1786173. Then, the Coinage Act of 1792 established the dollar as the basic unit of account for the United States. Because gold and silver in the open marketplace vary independently, the production of coins of full intrinsic worth under any ratio will nearly always result in the melting of either all silver coins or all gold coins174. In 1853, the weights of US silver coins (except, interestingly, the dollar itself, which was rarely used) were reduced. This had the effect of placing the nation effectively (although not officially) on the gold standard175. The gold standard survived, with several modifications, until 1971176. On the other had, foreign coins, including the Spanish dollar, were also widely used as legal tender until 1857 (Rothbard 2009). With the enactment of the National Banking Act(1863) during the American Civil War and its later versions that taxed states’ bonds and currency out of After passage of the Constitution was secured, the Government turned its attention to monetary issues again in the early 1790s under the leadership of Alexander Hamilton, the secretary of the treasury at the time. Further on, Congress acted on Hamilton’s recommendations. 174 In the early 1800s, gold rose in relation to silver, resulting in the removal from commerce of nearly all gold coins, and their subsequent melting. Therefore, in 1834, the 15:1 ratio of silver to gold was changed to a 16:1 ratio by reducing the weight of the nation’s gold coinage. This created a new U.S. dollar that was backed by 1.50 g (23.22 grains) of gold. However, the previous dollar had been represented by 1.60 g (24.75 grains) of gold. The result of this revaluation, which was the first-ever devaluation of the U.S. dollar, was that the value in gold of the dollar was reduced by 6%. Moreover, for a time, both gold and silver coins were useful in commerce. 175 The retained weight in the dollar coin was a nod to bimetallism, although it had the effect of further driving the silver dollar coin from commerce. 176 The discovery of large silver deposits in the Western United States in the late 19th century created a political controversy. Due to the large influx of silver, the value of silver in the nation’s coinage dropped precipitously. On one side were agrarian interests such as the United States Greenback Party that wanted to retain the bimetallic standard in order to inflate the dollar, which would allow farmers to more easily repay their debts. On the other side were Eastern banking and commercial interests, who advocated sound money and a switch to the gold standard. This issue split the Democratic Party in 1896. It led to the famous “cross of gold” speech given by William Jennings Bryan, and may have inspired many of the themes in The Wizard of Oz. Despite the controversy, the status of silver was slowly diminished through a series of legislative changes from 1873 to 1900, when a gold standard was formally adopted. 173

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existence, the dollar became the sole currency of the United States and remains so today177. III.3.2.2 The gold standard for the USA Bimetallism178 persisted until March 14, 1900, with the passage of the “Gold Standard Act“179 setting the value of the dollar at $20.67 per ounce (66.46 ¢/g) of gold. This made the dollar convertible to 1.5 g (23.22 grains)—the same convertibility into gold that was possible on the bimetallic standard. The gold standard was suspended twice during World War I180 and restored when the New York Stock Exchange re-opened in December 1914 (Crabbe 1989). After the war, European countries slowly returned to their gold standards, though in somewhat altered form (Crabbe 1989 and Bernanke, Ben 2004).

In 1878, the Bland-Allison Act was enacted to provide for freer coinage of silver. This act required the Government to purchase between $2 million and $4 million worth of silver bullion each month at market prices and to coin it into silver dollars. This was, in effect, a subsidy for politically influential silver producers. 178 A term which will be referred together with the gold standard concept in the next following Part Four. 179 Which provided that: “. . . the dollar consisting of twenty-five and eight-tenths grains (1.67 g) of gold nine-tenths fine, as established by section thirty-five hundred and eleven of the Revised Statutes of the United States, shall be the standard unit of value, and all forms of money issued or coined by the United States shall be maintained at a parity of value with this standard . . .” Thus the United States moved to a gold standard, made gold the sole legal-tender coinage of the United States. 177

At the onset of the war, US corporations had large debts payable to European entities, who began liquidating their debts in gold. With debts looming to Europe, the dollar to British pound exchange rate reached as high as $6.75, far above the (gold) parity of $4.8665. This caused large gold outflows until July 31, 1914 when the New York Stock Exchange closed and the gold standard was temporarily suspended. In order to defend the exchange value of the dollar, the US Treasury Department authorized state and nationally-charted banks to issue emergency currency under the Aldrich-Vreeland Act, and the newly-created Federal Reserve organized a fund to assure debts to foreign creditors. These efforts were largely successful, and the Aldrich-Vreeland notes were retired starting in November 1914.

180

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A gold-standard 1928 one-dollar bill181

During the Great Depression, every major currency abandoned the gold standard. Among the earliest, the Bank of England abandoned the gold standard in 1931 as speculators demanded gold in exchange for currency, threatening the solvency of the British monetary system. This pattern repeated throughout Europe and North America. In the United States, the Federal Reserve was forced to raise interest rates in order to protect the gold standard for the US dollar, worsening already severe domestic economic pressures. After bank runs became more pronounced in early 1933, people began to hoard gold coins as distrust for banks led to distrust for paper money, worsening deflation and gold reserves. III.3.2.3 The “Gold Reserve Act” In early 1933, in order to fight severe deflation Congress and President Roosevelt implemented a series of Acts of Congress and Executive Orders which suspended the gold standard except for foreign exchange, revoked gold as universal legal tender for debts, and banned private ownership of significant amounts of gold coin182. These actions were upheld by the US Supreme Court in the “Gold Clause Cases” in 1935183. The higher 181

It is identified as a “United States Note” rather than a Federal Reserve note and by the words “Will Pay to the Bearer on Demand,” which do not appear on today’s currency. This clause became obsolete in 1933 but remained on new notes for 30 years thereafter.

These acts included: Executive Order 6073, the Emergency Banking Act, Executive Order 6102, Executive Order 6111, the Agricultural Adjustment Act, 1933 Banking Act, House Joint Resolution 192, and later the Gold Reserve Act. 183 For foreign exchange purposes, the set $20.67 per ounce value of the dollar was lifted, allowing the dollar to float freely in foreign exchange markets with no set value in gold. This was terminated after one year. Roosevelt attempted first to 182

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price increased the conversion of gold into dollars, allowing the U.S. to effectively corner the world gold market (Meltzer 2004). The suspension of the gold standard was considered temporary by many in markets and in the government at the time, but restoring the standard was considered a low priority to dealing with other issues (Crabbe 1989 & Meltzer 2004). Under the post-World War II Bretton Woods system184, all other currencies were valued in terms of U.S. dollars and were thus indirectly linked to the gold standard185. In March 1968, the effort to control the private market price of gold was abandoned186. III.3.2.4 More about the late cancellation of the gold standard In 1971, the US under President Richard Nixon unilaterally cancelled the direct convertibility of dollar to gold. This act was known as the “Nixon Shock” and put the US in an illegal position as for the earlier Bretton Woods Agreement(1944) provisions. In 1972, the United States correspondingly restabilize falling prices with the Agricultural Adjustment Act, however, this did not prove popular, so instead the next politically popular option was to devalue the dollar on foreign exchange markets. Under the Gold Reserve Act the value of the dollar was fixed at $35 per ounce, making the dollar more attractive for foreign buyers (and making foreign currencies more expensive to those holding US dollars). See: “Gold Clause Cases”. http://www.answers.com/topic/ gold-clause-cases. Retrieved 2008-07-03. 184 This event will be detailed in Part Five. The need for the U.S. government to maintain both a $35 per troy ounce (112.53 ¢/g) market price of gold and also the conversion to foreign currencies caused economic and trade pressures. By the early 1960s, compensation for these pressures started to become too complicated to manage. 186 A two-tier system began. In this system all central-bank transactions in gold were insulated from the free market price. Central banks would trade gold among themselves at $35 per troy ounce (112.53 ¢/g) but would not trade with the private market. The private market could trade at the equilibrium market price and there would be no official intervention. The price immediately jumped to $43 per troy ounce (138.25 ¢/g). The price of gold touched briefly back at $35 (112.53 ¢/g) near the end of 1969 before beginning a steady price increase. This gold price increase turned steep through 1972 and hit a high that year of over $70 (2.25 $/g). By that time floating exchange rates had also begun to emerge, which indicated the de facto dissolution of the Bretton Woods system. The two-tier system was abandoned in November 1973. By then the price of gold had reached $100 per troy ounce (3.22 $/g). 185

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reset the value to 38 dollars per troy ounce (122.17 ¢/g) of gold. Because other currencies were valued in terms of the U.S. dollar, this failed to resolve the disequilibrium between the U.S. dollar and other currencies. In 1975 the United States began to float the dollar with respect to both gold and other currencies. With this the United States was, for the first time, on a fully fiat currency. Then, in the absence of a gold-market-valued U.S. dollar, investors were choosing to continue putting their faith in actual gold. Consequently, the price of gold rose from $35 per troy ounce (1.125 $/g) in 1969 to almost $900 (29 $/g) in 1980 (see the graph).

Explanation: This graph shows the final closing value of the U.S. dollar for each calendar year. Value is measured in milligrams of gold. By this measure the U.S. dollar lost a great amount of value during the 1970s. Source: Wikipedia. The Free Encyclopedia . . .

III.3.2.5 The silver standard in the US As for a broadly less representative aspect of the history of the United States with some recent connotations, silver certificates were a type of representative money printed from 1878 to 1964 in the United States as part of its circulation of paper currency187. 187

They were produced in response to silver agitation by citizens who were angered by the Fourth Coinage Act, and were used alongside the gold-based dollar notes. The silver certificates were initially redeemable in the same face value of silver dollar coins, and later in raw silver bullion. Since the early 1920s, silver certificates were issued in $1, $5, and $10 notes. In the 1928 series, only $1 silver certificates were produced. Fives and tens of this time were mainly Federal Reserve notes, which

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“Five Silver Dollars” of Series 1923

First small-sized $1 bill which was issued in 1928 as a silver certificate

The last Government regulation regarding the silver standard was in 1963, when President John F. Kennedy issued Executive Order 11110, authorizing the Department of Treasury to issue silver certificates for any silver held by the U.S. Government in excess of that not already backing issued certificates. These redeemable silver certificates were issued for a short period in notes of $5, but they were eventually discontinued.

$5 United States Note of Series 1963

were backed by and redeemable in gold. In 1933, the Agricultural Adjustment Act was passed, which included a clause allowing for the pumping of silver into the market to replace the gold. A new 1933 series of $10 silver certificate was printed and released, but not many were released into circulation. In 1934, a law was passed in Congress that changed the obligation on Silver Certificates so as to denote the current location of the silver—see U.S. Treasury—FAQs: Legal Tender Status of currency 137

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$100 United States Note of Series 1966.

III.4 Concluding remarks Once more, the above model (I) of the previous Part Two demonstrates that money can be born and reaches its way to enter the market system since the commodity money stage of barter. Despite that, barter is still vivid and stays far from giving up. It keeps its development resources of enlarging markets for the perspective of a unique value basing the modern price system. Barter yet leads the market and development, whereas the “young” money keeps founded by. In such a context, authors admit that stability came into the system with national Banks guaranteeing to change money into gold at a promised rate—it did, however, not come easily188. When barter keeps strong, money faces self-assertion problems: it might multiply market price system by multiplying its base in an injurious way for exchanges ad business; it might “chose” to represent a “loser” metal base, the one missing perspectives of enlarging and strengthening on market; its seignoriage might be able to restrict market, instead of enlarging and strengthening; different individual currencies meet difficulties for the exchange rate between, and so on. Money, in its early history, is not yet able to fight barter for good from market, as the today manual of economics expresses, but despite all these there is something definitively changing the market description—and this comes to be forever and on several significant aspects. In the first place, ones money entering the economic life it occupies the “surface” of this—whereas the “still vivid” barter withdraws and so

188

The Bank of England risked a national financial catastrophe in the 1730s when customers demanded their money be changed into gold in a moment of crisis. Eventually London’s merchants saved the bank and the nation with financial guarantees.

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certainly meets its decline189—a kind of a dinosaur aging, but it remains a “dinosaur” here including by its giant dimensions. In the second place, it is money—taking over the barter’s position for—changing a coin from being a unit of weight to being a unit of value (Horne 1915). Thirdly, money appears as just being issued and carried all over the place by people, plus each of its units is the same with any other unit of the same sign. But this is just an appearance and stays for the early times only—in reality, since the money creation (as opposite to money issuance) has come once in time money has reached its maturity and is already on its own. Is this vivid substance just the value behind? But how can be value behind money when certainly no intrinsic value any longer ? And fourthly, once money reaches the surface of economy (see, economic transactions) and society (see, the everyday life), the money supply will be induced by (the endogenous of ) the money multiplier 190– see on the other hand the rule of increasing–decreasing the metal base, as proper to barter, to commodity money and so to the basic industrial production and specific of consumption of this item. Or, irrespective of scientifically and historically admitting money as being born from barter (in its late modern forms), here there also comes the moment in which there are two distinct identities to talk about—and that turns into the irreconcilable contradiction between commodity-representative and fiat money descriptions. Unfortunately, as always in the economic thinking context both are just theories.

References: Reynolds, Susan(1994): Fiefs and Vassals: The Medieval Evidence Reinterpreted. Oxford: Oxford University Press, 1994 ISBN 0-19-820648-8 Ganshof, François Louis (1952). Feudalism. London; New York: Longmans, Green. Bloch, Marc (1961): Feudal Society. Tr. L.A. Manyon. Two volumes. Chicago: University of Chicago Press, 1961 ISBN 0-226-05979-0

We believe that confusions in the matter and denying barter and/or the value standard concept and its role on market arise from here around, in the authors’ view. 190 See, dependent on the commercial-banks’ reserves/deposit and the non-bank-public’s currency/deposit ratios. 189

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Brown, Elizabeth A. R. (1974). “The Tyranny of a Construct: Feudalism and Historians of Medieval Europe”.The American Historical Review (American Historical Association) 79 (4): 1063. doi:10.2307/1869563. http://www.journals.uchicago.edu/doi/abs/10.2307/1869563. Retrieved 2008-09-07. Basing, Patricia (1990): Trades and Crafts in Medieval Manuscripts. London: British Library, 1990. Cooper, R.C.H.(1985): The Archives of the City of London Livery Companies and Related Organizations. London: Guildhall Library, 1985. Davidson, Clifford (1996): Technology, Guilds, and Early English Drama. Early Drama, Art, and Music Monograph Series, 23. Kalamazoo, MI: Medieval Institute Publications, Western Michigan University, 1996 Epstein, S. R(1998): “Craft Guilds, Apprenticeships, and Technological Change in Pre-Industrial Europe” In “Journal of Economic History” 58 (1998): 684-713. Epstein, Steven(1991): Wage and Labor Guilds in Medieval Europe. Chapel Hill, NC: University of North Carolina Press, 1991. Guitton, Hanry & R. Bramoulé (1987): La Monaie. Paris. Dalloz. 6th edition. 1987 Horne, Charles F Ph.D. (1915). “The Code of Hammurabi : Introduction”. Yale University. http://www.yale.edu/lawweb/avalon/medieval/ hammint.htm. Retrieved September 14, 2007. Davies, Glyn (1994): ‘‘A History of Money’’, University of Wales, 1994, p.172, 339. Mundell, Robert A. (2002). “The Birth of Coinage”. Columbia University Department of Economics. http://www.columbia.edu/cu/economics/ discpapr/DP0102-08.pdf. Steiner, William Howard (1941): Money and banking, p.30, H. Holt and company, 1941. Rothbard, Murray N. (2009): “The Mystery of Banking” (pdf ), p.10, referenced 2009-08-24. Crabbe, Leland (1989): “The International Gold Standard and U.S. monetary policy from World War I to the New Deal”. Federal Reserve Bulletin. http://findarticles.com/p/articles/mi_m4126/is_n6_v75/ai_7698825. Bernanke, Ben ( 2004): “Remarks by Governor Ben S. Bernanke: Money, Gold and the Great Depression”. At the H. Parker Willis Lecture in Economic Policy, Washington and Lee University, Lexington, Virginia. http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/ default.htm. 140

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Meltzer, Allan H. (2004): A History of the Federal Reserve: 1913-1951. pp. 442-446. Investopedia.com. “The Gold Standard Revisited”. http://www. investopedia.com/articles/05/030705.asp. Retrieved 2008-07-03.

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PART FOUR A CRUCIAL POINT IN THE MONEY HISTORY: GOLD STANDARD AND BIMETALLISM Recall from above that commodity money is found as inconvenient to both store and transport and to the government to control or regulate the flow of commerce within its dominion with the same ease that a standardized currency does. As such, commodity money gave way to representative money, and gold and other species were retained as its backing. It is in such a context that gold, once, became a common form of money due to its rarity, durability, divisibility, fungibility, and ease of identification (Meltzer 2006). Gold standard is the most famous monetary system that ever existed191. It is a system in which international currencies are tied to a specific amount of gold. At the turn of the 20th century, many major trading nations used the gold standard to adjust their monetary supply. However, it was later abandoned in favour of Keynesian theories.192. Silver, in its turn, was typically the main circulating medium, with gold as the metal of monetary reserve. And the two monetary metals often “worked” in conjunction with each other. See: Officer, Lawrence H. (2010): Gold Standard. Posted Mon, 2010-02-01 19:08 by backend, University of Illinois at Chicago (on line). This is an internet article, yet unpublished elsewhere, but both the qualitative information (ideas) and data numbers provide it with enough scientific value. Plus, this is one of the most recent references (2010) available. 192 Abdel-Monem, Tarik(2010): What is The Gold Standard?The University of Iowa Center for International Finance and Development(on line). The author also insists that today, some commentators still advocate a return to the gold standard, but an examination of history would not support them. 191

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In the context of our above theory193, gold standard was just “expected” by the economic development for an era between the early barter and the “true”(see fiat, in fact) money—gold came, historically, to fulfill a job already created, and in our view, this is it the “motor” of favourable qualities of this system, of its complexity and crucial role for a similarly crucial economic period, as it was the one between the nineteenth and twentieth centuries. This was the time in which barter in its high stage194 coexisted and worked together with money entering a decisive period in its turn. Moreover, the silver’s presence and evolving nearby gold195 at a certain time expresses something about the same artificial selection among commodity moneys when actually this selection was entering its final stage, as well—however, the gold-silver reports also become a complex issue for these years (as also detailed below). Representative money and the gold standard beyond protect citizens from hyperinflation and other abuses of monetary policy, as were seen in some countries during the Great Depression. And in real terms, it is difficult to manipulate a gold standard to tailor to an economy’s demand for money, providing practical constraints against the measures that central banks might otherwise use to respond to economic crises (Demirgüç-Kunt & Detragiache 2005). The monetary system corresponding to gold standard was so simply to be built, ruled by authorities and understood by citizens and so on. However, the same gold standard and appropriate issues do not miss their problems, controversies, critics and scientific doubts (as detailed below). And let us here start by that there is to debate about gold standard, whereas money—unlike the previous pre-modern economy periods referred in the previous chapters—was already in place, as either “de iure” or “de facto”. Or, the question to be here asked is how exactly this money-gold standard relation was (would be) supposed to work? As for the time being, there is just a partial answer as available: gold standard and bimetallism bias commodity and representative money, as against fiat money.

See this time the two models of Parts One and Two. As contrary to the above Jevons’ view for the “opposition” between barter and money economic systems. 195 Details in paragraph IV.3 below. 193 194

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IV.1 Gold standard: basics and general description As above defined already, the foundation of gold standard is that a currency’s value is supported by some weight in gold. Inherently, it makes sense to value currency by some tangible and precious resource—otherwise, currency is just paper bills. Therefore, by tying paper money to an amount of gold, it gives the holder of the paper money the right to exchange her paper bills for actual gold. Ideally, this requires that paper money be readily exchangeable for gold. If a bank does not have gold, then the paper money has no value. But theoretically, actual gold would flow between nations to ensure that all currencies would be supported by gold196.

Then, variously specified how the gold backing would be implemented, including the amount of specie per currency unit. The currency itself is just paper and so has no intrinsic value, but is accepted by traders because it can be redeemed any time for the equivalent specie197.

Gold certificate198 Abdel-Monem, Tarik (op.cit.). This international part of the gold standard functioning will be approached below, as called “price-specie” effect. 197 A U.S. silver certificate, for example, could be redeemed for an actual piece of silver. 198 Gold certificates were used as paper currency in the United States from 1882 to 1933. These certificates were freely convertible into gold coins. 196

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Basic concepts of this system will be approached in the next following sub-paragraph (IV.1.1), then followed by the description of this system’s picture (IV.1.2). IV.1.1 Domestic gold standard In principle, a country can choose among four kinds of (domestic) gold standards : pure coin versus mixed standards, gold-bullion standard, and a gold—exchange standard. And this belongs to “domestic” gold standard, as a zone of concepts—those that do not depend on interaction with other countries, as to be distinguished from the international gold standard. IV.1.1.1 “Pure coin”, versus “mixed” standards Under a pure coin standard, gold is the only money whereas under a mixed standard, there are also paper currency (notes)—issued by the government, central bank, or commercial banks—and demand-deposit liabilities of banks—here to be noticed the sharp mark between money (the notes) and the old barter (as for its principle of the metal weight). Government or central-bank notes (and central-bank deposit liabilities) are directly convertible into gold coin at the fixed established price (rate) on demand. Commercial-bank notes and demand deposits might be converted not directly into gold but rather into gold-convertible government or central-bank currency. This indirect convertibility of commercial-bank liabilities would apply certainly if the government or central-bank currency were legal tender but also generally even if it they were not. As legal tender, gold coin is always exchangeable for paper currency or deposits at the mint price, and usually the monetary authority would provide gold bars for its coin. Again, two-way transactions in unlimited amounts fix the currency price of gold at the mint price. The credibility of the monetary-authority commitment to a fixed price of gold is the essence of a successful, ongoing gold-standard regime. Concomitantly, the two systems share several properties. (1) There is a well-defined and fixed gold content of the domestic monetary unit. For example, the dollar is defined as a specified weight of pure gold. (2) Gold coin circulates as money with unlimited legal-tender power—meaning that it is a compulsorily acceptable means of payment of any amount in any transaction or obligation. (3) Privately owned bullion (gold in mass, foreign coin considered as mass, or gold in the form of bars) is convertible into 145

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gold coin in unlimited amounts at the government mint or at the central bank, and at the “mint price” (of gold, the inverse of the gold content of the monetary unit). (4) Private parties have no restriction on their holding or use of gold199; in particular, they may melt coin into bullion. The effect is as if coin were sold to the monetary authority (central bank or Treasury acting as a central bank) for bullion. It would make sense for the authority to sell gold bars directly for coin, even though not legally required, thus saving the cost of coining. Conditions (3) and (4) commit the monetary authority in effect to transact in coin and bullion in each direction such that the mint price, or gold content of the monetary unit, governs in the market lace200. There is some controversy about the pure coin standard, as being used between the 1879 and 1914 by many modern trading nations (Officer (2010) versus not having existed at all during the gold-standard periods(Triffin 1964). The truth is that over time, gold coin declined from about one-fifth of the world money supply in 1800 (2/3 for gold and silver coin together, as silver was then the predominant monetary standard) to 17 percent in 1885 (1/3 for gold and silver, for an eleven-major-country aggregate), 10 percent in 1913 (15 percent for gold and silver, for the major-country aggregate), and essentially zero in 1928 for the major-country aggregate (Triffin 1964, pp. 15, 56). IV.1.1.2 Gold specie standard A gold specie standard might be the oldest concept in matter—it existed in some of the great empires of earlier times, such as in the case of the Byzantine Empire which used a gold coin known as the Byzant. In modern times the British West Indies was one of the first regions to adopt a gold specie standard201. Later on, the gold standard in the British West Indies, which followed from Queen Anne’s proclamation of 1704, was a ‘de facto’ gold standard based on the Spanish gold “doubloon” coin. In the year 1717 the Royal Mint202 established a new mint ratio as between silver and gold that had the effect of driving silver out of circulation and putting 201 202 199 200

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Except possibly that privately created coined money may be prohibited. Officer (2010). See also IV.3 below. Under the management of Sir Isaac Newton.

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Britain on a gold standard203. But it wasn’t until the year 1821, following the introduction of the gold sovereign coin by the new Royal Mint at Tower Hill in the year 1816, that the United Kingdom was formally put on a gold specie standard. The United Kingdom was the first of the great industrial powers to switch from the silver standard to a gold specie standard. Soon to follow was Canada in 1853, Newfoundland in 1865, and the USA and Germany ‘de jure’ in 1873. The USA used the American Gold Eagle as their unit, and Germany introduced the new gold mark, while Canada adopted a dual system based on both the American Gold Eagle and the British Gold Sovereign. Australia and New Zealand adopted the British gold standard, as did the British West Indies, while Newfoundland was the only British Empire territory to introduce its own gold coin as a standard. Royal Mint branches were established in Sydney, New South Wales, Melbourne, Victoria, and Perth, Western Australia for the purposes of minting gold sovereigns from Australia’s rich gold deposits204. IV.1.1.3 Gold exchange standard Towards the end of the nineteenth century some of the remaining silver standard205 countries began to peg their silver coin units to the gold standards of the United Kingdom or the USA. In 1898, British India pegged the silver rupee to the pound sterling at a fixed rate of 1s 4d, while in 1906, the Straits Settlements adopted a gold exchange standard against the pound sterling with the silver Straits dollar being fixed at 2s 4d. Meanwhile at the turn of the century, the Philippines pegged the silver Peso/dollar to the US dollar at 50 cents. A similar pegging at 50 cents occurred at around the same time with the silver Peso of Mexico and the silver Yen of Japan. When Siam adopted a gold exchange standard in 1908, this left only China and Hong Kong on the silver standard206. IV.1.1.4 Gold bullion standard That was the successor of the gold specie-standard of the 19th century in a context of an obvious degradation of the gold standard functioning 205 206 203 204

See also the next following paragraphs IV.2 and IV.3. Wikipedia, the Free Encyclopedia See the next IV.2. Wikipedia, the Free Encyclopedia 147

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in the next 20th century. The gold specie standard ended in the United Kingdom and the rest of the British Empire at the outbreak of World War I. Treasury notes replaced the circulation of the gold sovereigns and gold half sovereigns. However, legally the gold specie standard was not repealed207. Under a gold-bullion standard, gold coin neither circulates as money nor is it used as commercial-bank reserves, and the government does not coin gold. The monetary authority208 stands ready to transact with private parties, buying or selling gold bars (usable only for import or export, not as domestic currency) for its notes, and generally a minimum size of transaction is specified. Finally, the monetary authority of a country on a gold-exchange standard buys and sells not gold in any form but rather gold-convertible foreign exchange, that is, the currency of a country that itself is on the gold coin or bullion standard 209 —in other words, the gold standard (or its remaining in such a context) has got limited to larger transactions210. This gold bullion standard lasted until 1931. In 1931, the United Kingdom was forced to suspend the gold bullion standard due to large outflows of gold across the Atlantic Ocean. Australia and New Zealand had already been forced off the gold standard by the same pressures connected with the Great Depression, and Canada quickly followed suit with the United Kingdom211. IV.1.2 International gold standard An international gold standard—which naturally requires that more than one country be on gold—requires in addition freedom both of international gold flows—private parties are permitted to import or export gold without restriction—and of foreign-exchange transactions—an absence of exchange control. Then the fixed mint prices of any two countries on the gold standard imply a fixed exchange rate (“mint parity”) between the countries’ currencies212. See details in the next IV.2 below. See treasury or central bank. 209 This was the reason that some authors call it the “false” gold standard (Guitton & Bramoule 1987, pp. 586). 210 For example, in 1925 and 1931 the Bank of England was on the bullion standard and would sell gold bars only in the minimum amount of 400 fine (pure) ounces, approximately £1699 or $8269 211 Wikipedia, the Free Encyclopedia 212 For example, the dollar—sterling mint parity was $4.8665635 per pound sterling (the British pound). 207 208

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The fixed exchange rates were coming to be one of the basic characteristics—if not one of the basic principles 213– of the gold, silver of any standard, as metal-based money. As for the international context of the gold standard, there will be below about gold points and the international monetary system of the gold standard214. IV.1.2.1 Gold points and gold export/import Officer (1996) underlines that a fixed exchange rate (the mint parity) for two countries on the gold standard is an oversimplification that is often made but is misleading—costs of importing or exporting gold215 are there to be considered besides. To obtain the gold-import point, the product of 1/100th of the importing costs and mint parity is subtracted from mint parity216. If the exchange rate is higher than the gold-export point, private-sector—or “gold-point arbitrageurs”—export gold, thereby obtaining foreign currency. Conversely, for the exchange rate less than the gold-import point, gold is imported and foreign currency relinquished. Usually the gold is, directly or indirectly, purchased from the monetary authority of the one country and sold to the monetary authority in the other. The domestic-currency cost of the transaction per unit of foreign currency obtained is the gold-export point. That per unit of foreign currency sold is the gold-import point. Also, foreign currency is sold, or purchased, at the exchange rate. Therefore arbitrageurs receive a profit proportional to the exchange-rate/gold-point divergence217 and therefore See the below IV.4. See also IV.2.1.2 below for histrorical details. 215 And they include freight, insurance, handling (packing and cartage), interest on money committed to the transaction, risk premium (compensation for risk), normal profit, any deviation of purchase or sale price from the mint price, possibly mint charges, and possibly abrasion (wearing out or removal of gold content of coin—should the coin be sold abroad by weight or as bullion). 216 Expressing the exporting costs as the percent of the amount invested (or, equivalently, as percent of parity), the product of 1/100th of these costs and mint parity (the number of units of domestic currency per unit of foreign currency) is added to mint parity to obtain the gold-export point—the exchange rate at which gold is exported. 217 However, the arbitrageurs’ supply of foreign currency eliminates profit by returning the exchange rate to below the gold-export point. 213 214

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perfect “gold-point arbitrage” would ensure that the exchange rate has upper limit of the gold-export point. Similarly, the arbitrageurs’ demand for foreign currency returns the exchange rate to above the gold-import point, and perfect arbitrage ensures that the exchange rate has that point as a lower limit. It is important to note what induces the private sector to engage in gold-point arbitrage: (1) the profit motive; and (2) the credibility of the commitment to: (a) the fixed gold price and (b) freedom of foreign exchange and gold transactions, on the part of the monetary authorities of both countries. The difference between the gold points is called the (gold-point) spread. The gold points and their spread may be expressed as percentages of parity. See table below for main gold computations for the classical gold standard era. Table IV.1.2.1 Gold points estimates for the classical gold standard GOLD POINTS (a)

1881-1890

EXPORT (b) 0.6585

SPREAD (%) 0.7141

CALCULATION 1.3726

IMPORT (c ) PA

U.S./Britain (d)

1891-1900

0.6550

0.6274

1.2824

PA

U.S./Britain (d)

1901-1910

0.4993

0.5999

1.0992

PA

U.S./Britain (d)

1911-1914

0.5025

0.5915

1.0940

PA

France/U.S.

1877-1913

0.6888

0.629

1.3178

MED

Germany/U.S.

1894-1913

0.4907

0.7123

1.2030

MED

France/Britain

1877-1913

0.4063

0.3964

0.8027

MED

Germany/Britain

1877-1913

0.3671

0.4405

0.8076

MED

Germany/France

1877-1913

0.4321

0.5556

0.9877

MED

Austria/Britain Netherlands/ Britain Scandinavia(e) / Britain

1912

0.6453

0.6037

1.2490

SE

1912

0.5534

0.3552

0.9086

SE

1912

0.3294

0.6067

0.9361

SE

COUNTRY

PERIOD

U.S./Britain (d)

a For numerator country. b Gold-import point for denominator country. c Gold-export point for denominator country. 150

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d Gold-export point plus gold-import point. e Denmark, Sweden, and Norway. Calculation: PA = period average. MED = median exchange rate form estimate of various authorities for various dates, converted to percent deviation from parity. SE = single exchange-rate—form estimate, converted to percent deviation from parity. Data sources: U.S./Britain—Officer (1996, p. 174). France/U.S., Germany/U.S., France/Britain, Germany/Britain, Germany/France—Morgenstern (1959, pp. 178-81); Austria/Britain, Netherlands/Britain, Scandinavia/Britain—Easton (1912, pp. 358-63) IV.1.2.2 International monetary system (IMS) This is about a theory 218– the one regarding the international monetary system (IMS), as a concept in itself, be it basing on gold or otherwise—and as for the way of satisfying the IMS’ requirements by the gold standard see below IV.3. Then, let us have a different approach for this concept. Triffin (1973) defines the IMS concept219 as in need of: (1) liquidity resource produced for; (2) a unique basic stable reference market value; (3) remaking the external balance of payments (EBP) equilibrium of each member State; (4) the member States’ engagement for the IMS in terms of law (i.e. international agreement). As for (1), the resources of metal were not a problem for the system at that time220. As for (2), the Karl Marx’ And this is here preparing a theoretical encounter in the final Part of this paper, as for describing some historical periods. 219 To be emphasized that the author aimed the comparative analysis between two monetary systems, which were the gold standard and Bretton Woods Agreement (1944) ones. The scientific influence of the Triffin’s view goes beyond this comparative analysis. There will be related in the next Part Five that when the Bretton Woods IMS was coming to its end, a real remaking the IMS thinking movement came up in the seventies and eighties, as driven by the Triffin’s theory of the IMS (see also Andrei 1999). 220 See also the next following IV.2 paragraph below. Actually, this was coming to be different for the post-gold IMS (see Part Five). 218

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truth about the unique reference value for each price system is here reiterated (Marx 1962). Plus, it might be equally the nominal anchor in terms of McKinnon (1993)’s historical analysis221— except for that Triffin here relates to all that might be considered as value, in itself (i.e. here including gold or other commodity, but equally financial reserves), whereas the McKinnon’s nominal anchor restricts to a national currency, as freely used in the international market area. As for (3), Triffin explains in his comparative analysis between the gold standard and the Bretton Woods IMS that the previous disposes of an automatic remaking EBP equilibrium internal resource222. As for (4), finally, the gold standard did not meet any international (inter-States) agreement223 as for engagement of States in its respect—and the system’s automatic functioning has a word to say in the same context. All the above construction items of IMS then meet some logical consequences as equally significant. As specifically, (2) further plays for (5): fixed exchange rates, as compulsory for any IMS. The fixed exchange rate was working in favour of all exporters-importers, as eliminating any currency risk—creating their indifference about payment and receiving payment money for international transactions, as a real “heaven” for international business at that time. And this was due to the equality between exchange rate, on the one hand, and minting parity (more or less adjusted by gold points checking calculations), on the other. The gold standard was so proving as a monetary system favouring the international trade and economic flows for the industrial revolution era (late 19th century). The (2) corroborated with (3) result into two more aspects. First, let us remark the policy principle which (6) associates the fixed exchange rate(s) with the EBP equilibrium, as workable—the theory proves just unable to understand the EBP equilibrium, as working with mobile (see, floating) exchange rate. Second, this policy maneuver is claimed in the context of the This will equally be more referred in Part Five below. Whereas the Bretton Woods IMS has been founded together with the International Monetary Fund (IMF) financial institution to act in such a sense (see details in the next Part Five, whereas the explanation about the gold standard functioning comes even earlier below in IV.3). 223 Except for the Latin Monetary Union (1873),an organization of some European States at the time in which’s status the gold standard is expressly mentioned (see also IV.2.2.1 below). However, it is far from defining or identifying this organization with the (classical) gold standard of that time (See also in Part Five a box referred to monetary unions). 221 222

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IMS in function, actually on the IMS’ side—with the meaning of: (7) no national (member State’s) monetary (exchange rate) policy in the IMS context. On the contrary (and even, as a result), the IMS (theory) supporters will ever see the individual State’s monetary policy active in the non-IMS and international monetary crisis and disorder conditions, as exclusively. All economic theories and theories in general contain (also) controversial aspects, as by definition—and the theory of IMS makes no exception in this concern. And let us here refer to some aspects of IMS theory. The most highly important aspect is the fixed exchange rate, as compulsory for any IMS—it is true that, in reality, all the authorities of existing IMSs224 proved highly resistant against any adjustment of this principle. Or, critics here come where and when each individual currency contains its own price system, as naturally changing (transforming) on longer terms and containing exchange rate, as one more price level, by definition—in other words, no fixed exchange rate lasts on long terms, as correspondingly basing on changeable (domestic and international) prices. There might be equally true that the gold commodity might bear price changing, together with all the other commodities in the market area, so its gold monetary system might be able to “absorb” price changing throughout keeping the fixed exchange rate—against any other national currency, as equally gold-based. But, as much as there might be definitely no problem for the gold standard, this will become really controversial for either the current monetary thinking, or for other IMSs, as based on the above principles, except for the gold standard. Or, this is generalizing the IMS rules by principles which belong to gold standard, as exclusively. This becomes a controversial aspect, as theoretically, but the reality of the other IMS constructions gets even more important in context. As a consequence, IMS stays proper to commodity and representative money225 and offers no chance to fiat money226. And that Here including the IMF institution surviving in the context in which the old Bretton Woods IMS had already gone out of work (see the next Part Five). Further on, the European Monetary System (EMS) was keeping the same fixed exchange rates even when stating itself completely out of the gold reference. 225 See the above Part Three. 226 Or, this paper—which deals with money and barter, the last admitted as achieving the national-international market structure of the contemporary economy—might be OK with this idea, but scholars supporters of the fiat money and of money working by itself (out of metal base) in the contemporary economy might argue hard against it. 224

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(together with all of the above sub-paragraph) is whereas the same theory sees no alternative to IMS for ensuring international money order227.

IV.2 The gold standard: description and functioning (explaining principles) IV.2.1 Why gold ? There is plenty of literature to remember gold standard as just history, supporting or rejecting gold standard on some principles228. But, first of all recall that all manauls of economics here express like: „special qualities” of this metal made it first a commodity money and after a true money base—the last was for both the effective money and the issuing money (see representative money) base.

Or, as much as these „special qualities” form the very truth of our issue—and they will be detailed below —, let us also here resume our approach of the early chapters of this paper from the conclusion that the latter and more developed barter was basing on both commodity money items and on their artificial selection229 in the market exchanges process on longer terms. Conclusions were worked out in the above chapters about the start and advance of this selection, as similar to a „market competition” See once more the below IV.4 paragraph for a full and concrete explanation about the gold standard functioning, as internationally. 228 See details in the below paragraphs. 229 See Jinga (1981, pp. 33) and Oprescu (1981, pp. 14), but both Romanian authors limits their views to the final selection of gold against silver, and this as driven by money, and not otherwise. 227

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among some goods, as for the medium of exchange position. This is here and now for the „other end” of this story: selection is finally done, meaning that this is finally just (the) one. But even more interesting than this is the fact that it took a so long while the way that some economists might reject this idea on the correct assumption that economic processes are likely to stay much shorter than that. So, deepening, as below, the special qualities of gold in spite of explaining the gold standard would be interesting in any way—whereas in our view this is studying the true qualities of an item ever expected as carrying and storing market value230 in the best way, as possible. What is for sure in such a context is that—just continuig the above idea of the manual of economics—these qualities are both phisical-chemical and economic. IV.2.1.1 Natural properties and availability 231 Gold lies in the middle of the periodic table232. It is a heavy metal in a group known as the transition metals (see the table extract below). SYMBOL

Au

ATOMIC NUMBER

79

ATOMIC MASS

196.9665

FAMILY

Group 11 (IB) Transition metal

The “Au” chemical symbol comes from the Latin word for gold, aurum that means “shining dawn.” Gold is also known as a precious metal233. As for physical properties, gold is both ductile and malleable. Ductile means it can be drawn into thin wires, whereas malleable means capable of being hammered into thin sheets. A piece of gold weighting only 20 grams (slightly less than an ounce) can be hammered into a sheet that will cover more than 6 square 230

Recall from above the “Turgot’ axiom”: value exchange, as ensured by valuable goods only” (Jinga 1981).

See www.metakem.de This table shows how elements are related to one another. 233 As are platinum and silver. 231 232

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meters (68 square feet). The sheet will be only 0.00025 centimeters (one ten-thousandth of an inch) thick. Gold foil of this thickness is often used to make the lettering on window signs. Besides, gold is quite soft. It can usually be scratched by a penny. Its melting point is 1,064.76°C (1,948.57°F) and its boiling point is about 2,700°C (4,900°F). Its density is 19.3 grams per cubic centimeter234. As for chemical properties, gold is not very reactive—this is what can be equally called an advanced chemical inertia for this element. It does not combine with oxygen or dissolve in most acids. It does not react with halogens, such as chlorine or bromine, very easily. However, gold ores can be treated with potassium cyanide (KCN) or some other kind of cyanide. Gold combines with the cyanide to form a new compound, gold cyanate, which is then treated with an active metal, such as zinc. The active metal replaces gold in the compound, leaving pure gold. Gold occurs in nature in both its native state235 and in compounds. Given its chemical inertia, gold is not combined with any other element, in the natural environment236. People mined gold by picking it out of streams and rivers. In fact, gold was once very common in some parts of the world. People valued it not because it was rare, but because it was so beautiful. The abundance of gold in the Earth’s crust is estimated to be about 0.005 parts per million—that makes it one of the ten rarest elements in the Earth’s crust237. About a quarter of the world’s gold comes from South Africa. Other leading producers of the metal are the United States, Australia, Canada, China, and Russia. In the United States, about two-thirds of its gold is mined in Nevada, whereas California, Montana, Alaska, and South Dakota also produce gold.

Two other important properties are its reflectivity and lack of electrical resistance. Both heat and light reflect off gold very well. But an electric current passes through gold very easily. 235 The native state of an element is its free state. 236 More exactly, the most common compounds of gold are the tellurides. A telluride is a compound of the element tellurium and one or more other elements—for example, the mineral calavarite is mostly gold telluride (AuTe2 ). At one time, gold was found in chunks or nuggets large enough to see. 237 Gold is thought to be much more common in the oceans. Some people believe that as much as 70 million tons of gold are dissolved in seawater. They also think there may be another 10 billion tons on the bottom of the oceans. So far, however, no one has found a way to mine this gold. 234

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IV.2.1.2 Some related history Gold objects dating to 2600 B.C. have been found, as discovered in the royal tombs of the ancient civilization of Ur. These objects showed that humans had already learned how to work with gold this early in history. Amounts of gold extracted, for example, had been formed into wires. One of the special skills developed by the Egyptians was the adding of gold to glass objects. They found a way to use gold to make glass a beautiful ruby-red color. This glass became known as “gold ruby glass”. Gold is also mentioned in a number of places in the Bible. A passage in Exodus, for example, refers to the clothing worn by Aaron: “And they did beat the gold into thin plates, and cut it into wires, to work it in the blue, and in the purple, and in the scarlet, and in the fine linen, with cunning work.” Writings from every stage of human history tell of the discovery and use of gold. Roman historian Pliny the Elder ( A.D. 23-79), for example, describes gold-mining locations. The Romans found it lying in stream beds in the Tagus River in Spain, the Po River in Italy, the Hebrus River in Thracia (now Greece), the Pactolus River in Asia Minor (now Turkey), and the Ganges River in India. Europe during the Dark Ages minted only silver coins—and only pennies made of debased (low purity) silver at that. With the rise of commerce in the Mediterranean, a need for larger denominations and a more reliable medium of exchange emerged leading to the minting of first pure silver coins and then gold coins. The gold coins were first minted in Florence—the well-known Florin—and in Venice—the Ducat—in the mid-thirteenth century. Many other countries also introduced their own gold coins, but the Florin and Ducat became the dollar of their time, and were used in global commerce at least until the sixteenth century. Meantime most local or retail trade was conducted in the locally produced silver coinage238. Gold has long been known in the “New World”, too. During a visit to Haiti, Christopher Columbus (1451-1506) found gold nuggets lying on the bottom of rivers and harbours. A Portuguese explorer in 1586, Lopez Vaz, wrote that the region called Veragua (now Panama) was the “richest Land of Gold [in] all the rest of the Indies.” The Gold Rush(1849) is equally supposed to be a famous story about gold in the United States, as early as the sixteenth century records contained 238

Redish, Angela (2010): Bimetallism. Internet article, Posted Mon, 2010-02-01

18:21 by Anonymous. University of British Columbia 157

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stories about a great El Dorado239 on the western coast of the United States. Tales of this magical city were repeated for centuries. In the late 1840s explorers began to travel from the Eastern seaboard to California in search of El Dorado. The flow of visitors was slow at first. Gold was first discovered in 1848 at a place called Sutter’s Mill240. Word of the discovery spread quickly. Within a year, thousands of men and women made the long, expensive, and tiring trip. Most people traveled across the United States in covered wagons or on horseback. Many of them had to cross mountains, plains, and deserts. Because of the difficult conditions, many people and animals got sick or died. Some people traveled around Cape Horn at the bottom of South America or across the Isthmus of Panama. No matter which route was used, the journey usually took months. As people arrived in California, hundreds of mining camps sprang up. Some of them had colorful names. Poker Flat, Hang-town, Red Dog, Hell’s Delight, and Whiskey Bar were just a few! Mining for gold was hard work. Gold miners usually wound up being wildly successful or terrible failures. The Gold Rush of 1849 completely changed the state of California. It also helped expand the United States. At one time, gold was found in chunks or nuggets large enough to see. IV.2.1.3 Related economic processing As for extraction, there are at least two main ways to remove gold from its ores. One is to mix an ore with mercury metal. Mercury combines with gold in the ore to form an amalgam. An amalgam is a mixture of system weighs four ounces more than a pound of gold (troy system). Also recall two or more metals, one of which is mercury. The gold amalgam is then removed from the ore. It is heated to drive off the mercury. Pure gold remains. Gold is a heavy metal and element. As for practice, it is weighed by using the troy system—in which one pound contains only 12 ounces241. So, a pound of feathers—avoirdupois that the weight of other precious metals, like silver and platinum—are also measured using the troy system. Spanish; gilded means “covered in gold”. Sutter’s Mill was located near the present town of Coloma, California. See “the gilded one”, as in Spanish; gilded means “covered in gold”. 240 Sutter’s Mill was located near the present town of Coloma, California. 241 As differently from the common English avoirdupois system, in which there are 16 ounces to the pound. 239

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Gold metal is seldom used in a pure physical form, as it is too soft. It would bend or break if used pure. Instead, it is used in combination with other metals called alloys. An alloy is a mixture of two or more metals. The mixture has properties different from those of the individual metals. And so, gold is also weighed in carats—carat is defined as one fifth of a gram, or 200 milligrams ad this is for the amount of gold in alloys. In such context, pure gold metal again (mixed with no other metal) is said to be 24-carat gold. An alloy that contains 20 parts of gold and 4 parts of silver is 20-carat gold. The “20-carat” designation means the alloy contains 20 parts of gold and 4 parts of something else (silver, in this case). Gold stored in a national bank can be 24-carat gold. It is never used for any practical purpose. But gold used for any real application is almost always less than 24 carats. It must include other metals that make it stronger and tougher. As for uses, jewelry is the largest use of gold. In 1996242, about 3,290 tons of gold were made worldwide. Of that amount, nearly 85 percent was made into jewelry. The second largest use of gold (about 213 tons, or about 7 percent) was in industrial devices and consumer products. Some examples include electrical contacts and switches, laboratory equipment, printed circuits, dental alloys, instruments on space vehicles, and nozzles used in the production of synthetic fibers. But the chemical properties of the metal also account for more other important uses of gold—gold coins, for example, do not corrode (rust) or tarnish very easily; neither does jewelry nor artwork made of gold. Large amounts of gold are still used in the manufacture of coins, medals, jewelry, and art. Gold also has a number of uses in industry, medicine, and other applications. As for instance, gold is neutral for the good health in plants or animals, so, it can be injected into a plant or animal without causing harmful effects and some medical and commercial uses are based on this property. On the other hand, when its neutrality, it is not the same for some of its components—for example, one radioactive isotope of gold is commonly used to treat cancer. Besides these above details, Rockoff (1983) concludes that “it is fair to describe the fluctuations in the supply of gold under the classical standard as small and well-timed.” So, let us mention that in 1986 a study, experts estimated that about 121,000 tons of gold had been mined throughout history. Of that amount, about 18,000 tons were used for industrial, research, health, and other “dissipative” uses—dissipative means that the gold substance was gone

242

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once it was used243. It was made into devices that were eventually thrown away; the gold content could not or was not recovered from these devices. Of the remaining 103,000 tons of gold, about a third (35,000 tons) had been made into gold bars held by national banks. The gold bars are used as security for national money systems244. Finally, the remaining 68,000 tons of gold are owned by private individuals. This gold exists in the form of jewelry, coins, or bullion. Gold bullion are bars or other large pieces of pure gold245. IV.2.1.4 Preliminary conclusions As already repeated from above, this might be the “end of the road”. And this is the sense of a whole evolution—as the one of the barter process of market—and finality of its here introspection. Then, the question is: what does make gold qualify as final and unique medium of exchange, among all market goods? And the apparent answer, coming from all over, here including the literature, immediately sounds like: its special qualities. Or, might this be the really satisfactory answer? Rather, not. See the below Diagram for understanding the simple fact that none of the finally resulted qualities of the metal does make it “the best” among all goods and/or substances of its type. As for examples: it is neither the lonely metal, nor the most beautiful, nor the heaviest, nor the best for health, nor for the highest industrial use. The primary secret of gold and of its qualities is that they form a real “package” (set)—that they have to be taken just together (collectively), and not individually.

Actually, ust the opposite is the aspect that is more than interesting for the metal—it makes gold “special” in the context of market selection for commodity money and tool of storing value (medium of exchange): the special consumption which does not mean physical of chemical destruction. The overwhelming majority of gold amounts extracted go into non-dissipative consumption, the way that the today gold stock is certainly the one extracted from the very ancient times. 244 In the United States, for example, the nation’s supply of gold is stored at Fort Knox, Kentucky. 245 www.metakem.de 243

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Diagram IV.2.1.4 Gold qualifying for commodity money and monetary system PRIMARY (INTERMEDIARY)

BASIC PROPERTIES (level one)

FINAL (SIGNIFICANT) QUALITY RESULT S (level three)

CONSEQUENCE (level two)

metals were competing for commodity money, as a late stage of barter economy















distinction



high & increasing market value

(3)







processing qualities for coins, bars etc.

(4)

weight







significant mass in reduced volume

(5)

chemical inertia







neutrality for human health

(6)



large stocks preserved

(7)

metal

beautifulness

rarity

physical softness, divisibility, malleability, ductility



almost no natural corrosion & full preservation in nature

appearance, propensity and attraction for

(1)

(2)

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Liviu C. Andrei



low dissipative consumption



less significant industrial uses





best for storage, as for treasury and State reserves indirectly strengthening uses for medium of exchange & monetary system

(8)

(9)

This nine components package (see the last column) was not supposed to be accepted as a value representative or fetish for a so high number of generations when missing, for examples, just beautifulness, rarity, divisibility or qualities for human health. Second, the chemical inertia of the metal here comes up as the key feature—but never separated from the same package of qualities. This chemical inertia results into that the stocks of the metal become more relevant than current productions, as for the metal’s dynamic of supply. As complementary, the current production becomes decreasingly relevant for the available amount of metal (Maioreanu 1976 pp. 29; Guitton & Bramoulé, pp. 81). So, let us try to figure out246, in context, that gold that we currently have, store and ware is mainly the one produced (extracted) since the earliest times of humanity. Further on, such a circumstance is able to counteract something of the metal natural rarity—gold stays rare, but the human society disposes of increasing quantities of it every day and year, as for a very simple rule. Ultimately, this aspect tends to be similar to something that ever was and now remains significant for the market of all times: see the most general economic law of growth and development. In very concrete terms, here there hides a similarity of trends between the behaviours of the gold stock and production of all goods, as aggregate, see gross domestic product (GDP)—this is certainly not supposed to be a perfect mathematical similarity between the two dynamics, as possible to demonstrate, but the unshaken general law of economic growth and GDP every year growth might not find any other obvious physical and economic item to compare—or even correlate—with. Or, this natural and economic aspect—together with all natural coincidence and hazard that it contains—comes in favour of gold, as the one which could be able to follow, control (and monitor) the whole social production achievement Together with the experts of the above mentioned study of 1986.

246

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on both short and longer time terms. As commodity money, gold might be helped by a natural and not so variable velocity for interchanging (exchanges of ) the other goods. Later on, in an increasingly modern economic and financial world, the same velocity of the gold currency was coming to be helped by the money stage, as reached together with its money multiplier. Or, let us here notice that metal competitors of gold, in such a context of facts, acted much differently than gold—all, including silver, were proving some qualities but failed on preserving market value by less rarity, meaning increasing supplies which made them depreciate; as platinum, to the other end of the same scale, was proving itself too rare for “keeping a trend similarity” with the GDP growth. Gold, as distinctly, was so able to come to the first qualifying position in the same barter context and, once it made it, it came to face the monetary system requirements, which were no longer barter environment. Gold so became both commodity money, by its origin, and, one after another, coin, currency (effective money) and money base for monetary system, as newly; and so, a material relevance and a system together; and so, a monetary system as stable prices as the barter environment; and so, supporting both velocity and money multiplier, when banking was interfering; and so, finally, it both supported the monetary system in place and, reciprocally, it came to be sustained by, when finally no more competitors for the medium of exchange position. The very secret of the gold (standard) monetary system—i.e., the system’s price stability—might consist in that gold was both money and barter, as working together for the first and last time in history. Also concretely, gold was basing on the above identified similarity of trend with the GDP dynamic, but it further strengthens its position by permitting a very modern monetary and financial system developing: banks, with their money multiplier, modern money with their whole basic set of functions (here including some fiat money properties as reached), finance, here including related stock exchange, and money and financial markets acting. Once more, the barter and monetary systems appear not so opposite, as previously thought in the above mentioned Stanley Jevons’ way, since gold, as representative for a whole modern history, is certainly both. Gold might be here compared to a true and complex character in a written story: a cavalier called for a so genuine task to be fulfilled as founding monetary system ever was. Previously, it might have been just a rare and sometimes forbidden matter for social use—but, once in time the same noble character was called by society for a very special task. Then he has done his work the way that only a noble like him would. It was a noble character for a noble job and all 163

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these for a corresponding destiny. This is a story to be continued. Then, the next paragraph will be for deepening the quantitative aspects basing the gold monetary system. IV.2.1.5 A simple mathematical approach of the gold standard IV.2.1.5.1 Basic concepts See Table IV.2.1.5.1/1 below for listing the mathematic items that will be used in the developments of this paragraph. Table IV.2.1.5.1/1 Notations and related explaining on gold stocks and GDP247

Ord.

CONCEPT

NOTATION

MATHEMATICALLY DETAILED (if the case)

Gold stock* i

gold stock

ii iii

the same, in year (0) the same, in year (i) the same, as yearly variation (%)

iv

GdStk GdStko GdStk(i)

GdStko(1+∆GdStk)

∆GdStk

∆GdStk(%)

Data for GDP are provided by the World Bank’s statistics. The sources of data for the gold worksheet are the mineral statistics publications of the U.S. Bureau of Mines (USBM) and the U.S. Geological Survey (USGS)—Minerals Yearbook (MYB) and its predecessor, Mineral Resources of the United States (MR), and Mineral Commodity Summaries (MCS) and its predecessor, Commodity Data Summaries (CDS). The source for recent consumption data is Gold Fields Mineral Services Ltd. (GFMS) Gold annual reports. Metal price data were from Metal Prices in the United States through 1998 (MP98). The years of publication and corresponding years of data coverage are listed in the references section below. Blank cells in the worksheet indicate that data were not available. See Appendix for detailed worksheets.

247

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Gross domestic product* v vi vii

gross domestic product GDP the same, in year (0) GDPo the same, in year (i) GDPi GDPo(1+∆GDP) the same, as yearly variaviii tion (%) ∆GDP ∆GDP(%) * Here there will be some statistic completions below. There will be considered for the gold stock the central banks’ reserves physical quantity in metric tones and the total value, based on the unitary price of gold, as international, for each period (year).

Graph IV.2.1.5.1/1

Besides, here recall the expert study on the world-wide gold extraction and production undertaken in 1986248 with a summary of results as in Table IV.2.1.5.1/2.

248

See again: www.metakem.de 165

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Table IV.2.1.5.1/2 Gold production & consumption ever-since Year Chapter PRODUCTIONS Primary production Secondary production primary + secondary productions total production ever since USES(consumption)* industrial, research, health (dissipative uses) national banks’ reserves (bars) private non-dissipative use/consumption

metric tones

1986 % of total

116.0 47.3 163.3 121,000.0

( . . .) ( . . .) 0.13 100.00

18000.0 35000.0 68000.0 103000.0

14.88 28.93 56.20 85.13

*Distribution of the total production is approximated on the percentages worked out by the expert study of 1986.

For which data, all the current year production, consumption and influence on the percentage distribution become increasingly negligible in this whole historical landscape249. The national (central) banks’ reserves (bars) are to be focused on for 35.000 metric tones, as representing the above mentioned gold stock, whereas this would become 36763.9 metric tones in 2003 for a total production rising to 127,098.1 metric tones250. As for the GDP issues there will be also distinctly considered GDP at constant prices and current prices respectively. See the price effect on GDP for the related interval as the index ratio of the two in the below Graph IV.2.1.5.1/2. It develops in a 0.95-1.15 interval, as noticed.

And this is the same for every year, so 1986 is not a special case at all, in context. 250 According to our calculations. 249

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Graph IV.2.1.5.1/2

IV.2.1.5.2 The quantitative theory of money for gold standard There might be here agreed for the gold standard design that money supply (M) relates to both the gold reserves (gold stock) and money multiplier, as differently based and so in a mixture context. The behaviour of this mixture will be studied below, as simulated on the 1982-2003 interval, a two decade sequence of no (not any more) international gold standard. See Table IV.2.1.5.2/1 for related concepts of this theory.

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Table IV.2.1.5.2/1 Notations and related explaining on the quantitative theory of money

Ord. i ii iii iv

CONCEPT

NOTATION M V P M

v vi

money supply velocity price level money multiplier money multiplier & velocity coefficient the same, in year (0)

vii viii

the same, in year (i) the same, as yearly variation (%)

MMVCFFi ∆MMVCFF

MMVCFF MMVCFFo

MATHEMATICALLY DETAILED (if the case) GdStk x Gold Price x M

MV M V ( i ) = =MCFFo(1+∆MCFF) ∆MV(%)

Then, the basic quantitative theory of money expresses like: M x V = P x GDP whereas, for the gold standard both the gold stock (see, central bank reserves) and its price level (of gold) are directly involved in and: GdStk x PGd x (M x V) = PGd x GDP This can be re-written as: (1) M x V = GDP / GdStk Then, rename the same by money multiplier & velocity coefficient (see the above Table) and reconsider all concepts for each year of the series: MMVCFFi = GDP(i)/ GdStk(i) In which, (i) is each of the years of the here assumed gold standard life (1981-2003). In such a dynamic order, values of the basic year in line will reconsider, versus corresponding indexes: 168

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MMVCFFo (1+∆MCFF) = GDPo(1+∆GDP)/ GdStko(1+∆GdStk) And since MMVCFFo = GDPo/GdStko, there results: 1+∆MMVCFF = (1+∆GDP)/ (1+∆GdStk) the same as: (2) ∆MMVCFF = (1+∆GDP)/ (1+∆GdStk)—1 Just as the simple linear model for the endogenous of ∆MMVCFF(=y), versus the exogenous of (1+∆GDP)/ (1+∆GdStk) (=x): y(x) = x—1 for which circumstance, the unitary (=1) coefficient of “x” indicates that for the gold standard in place the money multiplier and velocity coefficient is (stays) maximally correlated to GDP over GdStk indexes’ ratio. Moreover, the endogenous obviously tends to zero. See also the time-Graph IV.1.2.1.5.2/2 for the simulated gold standard ∆MMVCFF appropriate to the 1982-2003 interval251. Another approach might re-write the above (2) equation as one basing on GDP and gold stocks annual variations, as directly. In such terms, the money multiplier & velocity coefficient variation becomes: (3) ∆MMVCFF = (∆GDP-∆GdStk)/(1+∆GdStk) with the same results for the endogenous coefficient as in the above graph. And finally a third approach might further replace the gold stock annual variation by its averages on the interval, so k1= 0.002, as corresponding to annual metric tones variation and k2=0.035, as corresponding to the gold value annual variation, as respectively.

251

See Appendix of the current Part Four for detailed data and do note that the real gold standard era was starting about one century before this period here under analysis. 169

Liviu C. Andrei

Graph IV.1.2.1.5.2/2

Such an artifice is aimed to distinguish the money multiplier & velocity coefficient variation, as a direct function of GDP variation, and takes into account the already reduced and continuously reducing gold stocks variation. ∆MMVCFF so comes back to a linear type function for two variants, as follows: (4/1) ∆MMVCFF = 0.998 ∆GDP—0.002 (4/2) ∆MMVCFF = 0.966 ∆GDP—0.034 Gold standard, as submitted to a low and decreasing gold stock variation, keeps both its money multiplier & velocity coefficient variation as strongly correlated to the GDP variation—see the ∆GDP coefficients as close to the unit (1)—and a rather negligible amount of other influential factors—see the so low (close to zero) free terms. However, there is also to be noticed—as comparing 4/1 and 4/2 equations—that both the same correlation lowers and the other influential factors slightly rise as from the mass of gold to the gold’s value interfering in, but not decisively. See also the time-Graph IV.2.1.5.2/3 for this variant of ∆MMVCFF. Or, for all the above three approaches the world-wide ∆MMVCFF: (1) might be able to support the GDP evolving (economic growth) along these two decades; (2) as gold standard related—issuing money, as 170

Money and Market in the Economy of All Times

representative on the existing central banks’ gold reserves’ mass ; (3) for a constant (fixed) market (general or aggregate) price level—as once more specific to the gold standard environment (on such a quite long term); (4) by a maximal variation of about 4%—between a minimum of 0.63% and a maximum of 4.80% —, as yearly (year to year). Moreover, ∆MMVCFF appears as stable as this as for relating the constant price GDP to the gold stock mass, whereas the price effect on gold and/or on GDP was able to enlarge the same interval of ∆MMVCFF to about 12%-19%.

Graph IV.2.1.5.2/3

IV.2.1.5.3 Some more remarks The 1981-2003 time interval was the one in which the gold standard was no more in place—the international money was no more gold based—for long enough. That is why the above found dynamic correlation between GDP and gold stock appears interesting. Our simple calculus and graphs show that, despite the historical reality of its overthrown, gold standard might still be able to support the world economy, as it did five decades after the end of the gold standard, and for a gold standard in its classical form252– here meaning money issuing as related to the mass (and not the value) of gold. 252

See the following paragraphs for detailing concepts. 171

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Of course, this above approach limits to a simple quantitative and very general analysis which escapes number of details and qualitative components of the world economy. On the one hand, an international immobility of gold, multitude of gold reserves, together with an important variation of amounts of gold among diverse State monetary authorities and no relations or flows amongst—in a word, no real gold market, as international. On the other one, a world-wide economic growth (GDP variation on short terms), as aggregate on a so diverse economic landscape in the area—so both components of such a correlation might be suspected to belong to the same dominant areas of the world economy, and not to the whole economic space world-wide etc. Or, such a reality might be able at least to indicate the source of the pro-gold standard ideology253 in any vulnerable financial environment. And not only—as for instance, Andrei (1999) finds the gold reserves254 of today (central) banks as a phenomenon demonstrating both a potential alternative of reviving gold standard in order to avoid financial crises and blockages and that the same gold standard was so much “special” that it would yet be not totally dead. On the contrary, see the Swiss Franc example of a currency keeping a full gold convertibility until 2000. Do not also omit that gold, as the commodity money leaving such an assignment as the last in the time order, did it not through depreciating its market value—see resulting from its oversupply—but on the contrary: the gold price rises since no gold standard, as for another “rule”. Both gold coins and gold bars are widely traded in liquid markets, and therefore still serve as a private store of wealth. Some privately issued currencies, such as digital gold currency, are backed by gold reserves. In 1999, to protect the value of gold as a reserve, European Central Bankers signed the Washington Agreement on Gold, which stated that they neither would allow gold leasing for speculative purposes, nor would they enter the market as 253 254

See also the following paragraphs. Gold reserves are held in significant quantity by many nations as a means of defending their currency, and hedging against the U.S. dollar, which forms the bulk of liquid currency reserves. Weakness of the U.S. dollar tends to be offset by strengthening of gold prices. Gold remains a principal financial asset of almost all central banks alongside foreign currencies and government bonds. It is also held by central banks as a way of hedging against loans to their own governments as an “internal reserve” (Wikipedia, the Free Encyclopedia. Gold Standard).

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sellers except for sales that had already been agreed upon255. But together with admitting that gold standard would be able to stay in place, at least in general quantitative terms and even when it was already out for long, recall how things really were when the system was in place. And let us have two examples that extend the gold related issues from money and economic area to the culture-related one. The first one might be related to the thinking about the value concept (Bran 1991). A long polemics on this concept was opposing two strong currents of thinking of the late 19th century—these were Marxism and Marginalism256. Value was basing on labour for Marxism and utility and rarity for Marginalism. Value seems to be a no longer debated issue in literature and manuals of economics and finance. This was different enough for the previous times. Actually, let us notice that the gold matter seems to reconcile with both theories of value, as different from each other that they appear—see either its high and higher costs, as also increasingly basing on labour, or utility, and especially rarity. Plus, such scholar related facts superpose, in our view, on a long time social mentality and feeling of carrying value in his/her pockets, as anchored to gold coins and other pieces of the yellow metal. The other example belongs to the liberal thinking, in which gold standard was associated to non-interventionism in favour of free market competition and economic development and against both monopoly-oligopoly and economic policies—that part will be detailed in the next paragraph below. IV.2.2 System, versus metal base As concluded above, the gold metal—by its special qualities—supported the specific monetary system and reciprocally. The below paragraph will point out details of this “dialectique” in a Hegelian-Marxian view. IV.2.2.1 “Rules of the game”257, as basic principles of the gold standard The literature calls “rules of the game” what actually was the (specifically monetary) law and State’s involvement principles in the gold monetary system. The idea is that all monetary systems are State law based, these 255

Wikipedia, the Free Encyclopedia. Gold Standard.

256

See also the Introduction chapter. See also the box below for a different order and classification.

257

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laws, in their turn, might be similarly or differently reported, and whereas national monetary systems here resulted was very similar in principle. The gold standard rules of the game All countries: (1) fixed mint parities and gold convertibility for all national currencies; (2) free export-import of gold for all citizens and no any other restriction on the EBP accounts; (3) all bank notes and money signs are supported by State’s reserves and all money supply expansion bases on the extension of gold reserves; (4) all international gold type crises are solved on the short time through rising interest rates (see the Bagehot rule); (5) any suspensions of gold convertibility of currency (see above 1 rule) is supposed to be temporary and State will proceed to solve it as quickly as possible, here including through home deflation (McKinnon 1993).

The first basic principle in a logical order would be (1) considering (respecting) the gold metal market, actually the market price of gold, as naturally resulting from. An express provision, versus just the implicit acting of all parts in such a sense, is supposed to be less significant. The fact was really significant and this was pointing to the large freedom of gold exchange and circulation among operators. Organizing exchanges in modern forms was not only favoured by the gold system, but this was equally in its favour and made it a really modern system. Moreover, respecting the gold market segment was meaningful for the economic and financial system’s attitude against all markets and domestic market as a whole. The financial market—that the gold standard sustained and let strengthen—was taking over its role of assessing all paper values related to gold etc. (2) The free negotiation, exchange and circulation of gold were understood up to the freedom to pass over the State’s boundaries—no one was supposed to stop such a movement (as referred to amounts of metal, gold valuable certificates, treasury bills, coins and even paper money) anywhere, here including at customs. It is based on (1) and (2) that comes up (3) the State’s engagement on repaying (redeeming) gold amounts by money amounts, meaning national currency, and conversely: collecting money from holders (market operators) and repaying it in amounts of gold metal from reserves. Or, this is the moment in which a new significant actor in the gold standard story enters 174

Money and Market in the Economy of All Times

the scene: the institution of minting, actually the minting house. As seen from today, minting was a so simple work for applying the State’s monetary law (if there was one) and system. The institution of minting was just receiving amounts of gold and/or amounts of money to repay them in the other form—ensuring gold convertibility of the national currency at the fixed exchange rate, as declared by State. As subsidiary, minting was also supposed to deduct a minting fee from the amount of gold/money received from operators—this was low enough (just a few percents of each amount, as also provided by the same monetary law or rule); the idea was that such exchanges were charged on operators, but the fee was limited to costs covering and not making minting a profitable activity for the State. The simplicity of minting, as associated to the so reduced size of the minting State institution, designs a very symbol of what gold standard really was at its time an in a very culture of liberalism that reigned the economic thinking of those times. As already underlined above, minting was so simple and simply acting, but aiming so much in context: price and exchange rates stability and general economic equilibrium beyond in the international and open economy environment. As closely related to these gold standard qualities (advantages), the classics and liberals were delighted by pointing to minting as much as it meant non-interventionism and free market competition258. Plus, as much as respecting the gold market was extending to the free international movement of the metal the modest symbol of minting (and of the State’s engagement by) was paving the way for another important State’s attitude, in context—this was the same (4)State’s indifference against its part of property—meaning the (so high) valuable property that the minting house gold reserves were representing. In other words, State was supposed to keep the other side of a general social attitude of fetish and propensity for accumulating gold, as value, welfare and capital support. The State’s preoccupation for gold reserves was supposed to limit to a general interest of making and keeping gold standard functioning. So to be noticed a gold standard design in which several aspects assert. First, let us consider the aspects regarding the above four principles (rules of the game). In our view, there was not only the similarity of the “rules of the game” concerning gold standard, equal its functioning principles, but 258

However, it is equally true that the later generations of the liberal thinking started rejecting gold standard, since its liquidity constraint, as also real and breaking the financial and economic developments. 175

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also the fact that these rules-principles were simple enough, as for being enacted and applied by authorities and understood by citizens and all parts in the game. It was so as resulted from our full story above. In other words, gold standard was enough historically expected for being a real financial, economic and social harmony, at least in a period like this. Plus, in the same context none of the four principles can be removed; no more principles to be here added up either—but for risking the system destruction. Or, things arrived which caused the system suffering: gold convertibility interruption in extreme conditions, but not only. Limiting the minting operations in the gold bullion standard era made the system turning into what authors call the “false” gold standard, especially for the interwar period (Guitton & Bramoulé 1981). Then, the State’s attitude turning into its interest in gold reserves, in their increase, the State monopoly on gold production, restricting international circulation of gold metal and so on caused, step by step, sufferance and problems to gold standard and to its advantages and qualities. Unfortunately, this kind of problems not only started from warrior episodes of the 19th and 20th centuries and put pressures on the States’ attitude and interests, but also ended in a post financial and economic crisis period of replacing the old liberalism by interventionism and of deliberately giving up the natural stability and harmony of gold standard and of its mentality. The next aspect that belongs to principles259 points to an asymmetry in which State gets an overweighed role to play, as in contrast with liberalism characterizing the system engendered by260. Or, one of the results of this situation was that gold standard also was a State dependent liberalism and coming to be destructed or bankrupted by States and their interests changing in the area. Thirdly, the international area and context were as important for gold standard as the States’ attitude and minting institution were—despite this, the international context yet stay not enough obvious for the zone of principles, as will be the case of functioning in the below lines.

The gold standard design will extend below, out of just principles, to the intimate functioning of the system. 260 See the “minimal State” doctrine and so on. 259

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IV.2.2.2 Rules of the game applied: the system functioning In the above order, principles or “rules of the game” for gold standard are the first to be considered. Despite this, they do not fill the picture, but this picture needs something of comparable weight, in such an order. Functioning is the direct consequence of principles-rules, as the two are both feet of the system. Besides, as for this paragraph on, functioning will come out in quite a logical order for principles-rules. It is equally to be considered all about functioning by the important components of gold standard. IV.2.2.2. 1 Minting and the minting house Minting is much older than the modern gold standard. Basically, minting is an industrial facility which manufactures coins for currency. The history of mints correlates closely with the history of coins—the difference is that the history of the mint is usually closely tied to the political situation of an era261. In the beginning, hammered coinage or cast coinage were the chief means of coin minting, with resulting production runs numbering as little as the hundreds or thousands. In modern mints, coin dies are manufactured in large numbers and planchets are made into milled coins by the billions. With the mass production of currency, the production cost is weighed when minting coins262. Around 1550 the German silversmith Marx Schwab invented coining with the screw press. Henry II of France (reign 1547-1559) imported the new machines: rolling mill, punch and screw press. 8 to 12 men took over from each other every quarter of an hour to maneuver the arms driving the screw which struck the medals. Henry II came up against hostility on the part of the coin makers, so the process was only to be used for coins of small value, medals and tokens. In 1645 it came into general use for minting coins(Cochran-Patrick 1876). Between 1817 and 1830 the German engineer Dietrich “Diedrich” Uhlhorn invented the Presse Monétaire263 which bears his name. Uhlhorn invented a new type of minting press (steam driven knuckle-lever press) that made him internationally famous—over 500 of the units had been See below for details. For example, it costs the US Mint much less than 25 cents to make a quarter, and the difference in production cost and face value (called seigniorage) helps fund the minting body. 263 See level coin press known as Uhlhorn Press. 261 262

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sold by 1940. The advanced construction of the Uhlhorn press proved to be highly satisfactory, and the use of the screw press for general coinage was gradually eliminated. Figure IV.2.2.2. 1 Coinage: several basic production technologies (M.A.N., Madrid) A furnace for producing molten metal for coin production.

A trussell for use with a pile in producing hammered coins as shown by the moneyer at work. A mill for the production of ‘milled’ coins with both coin dies illustrated.

A mill for inscribing or milling the edges of coin flans or planchets

French made coining press from 1831

Some of the earliest Greek mints were within city-states on Greek islands—a mint existed at the ancient city of Cydonia on Crete at least as early as the fifth century BC (Brogan 2008). A number of city-states in 178

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ancient Rome operated their own mints. Roman mints were spread widely across the Empire, and were sometimes used for propaganda purposes —the population often learned of a new Roman Emperor when coins appeared with the new Emperor’s portrait. Some of the emperors who ruled only for a short time made sure that a coin bore their image264. In the Middle Ages, the need for currency is reported to be relatively low in Europe during Merovingian times. The Münzmeister produced coins in small workshops, working alone or with the aid of a few assistants, and handled the precious metals required. During Carolingian times, minting of specie became the task of royally appointed officials. During the High Middle Ages they were replaced by the minting house cooperative265. Its members came from the ranks of rich burghers: usually merchants, precious-metal traders, money-changers, goldsmiths, who in turn appointed one out of their ranks as Münzmeister. For their labour, the members of the cooperative were due a share of the minting profits. They also enjoyed certain rights and privileges, including a monopoly on the purchase of gold and silver, exemption from customs duties and taxes, and independent jurisdiction in minting matters. The house cooperatives saw their heyday in the 13th and 14th centuries. In the late Middle Ages, the minting house cooperatives vanished when minting was taken over by sovereigns or cities. The Münzmeister was now an entrepreneur who determined weight, precious-metal content, seignorage and their own share, by way of free negotiations with the principals. Next to mines and shipyards, mints had become the largest enterprises of the age. In modern times, local entrepreneurs and their mints gained in importance. The era saw the rise of Münzmeister dynasties, with leases that were extended over several generations. Frequently the coins bear symbols engraved by the Münzmeister, often as tiny rosettae, tools, monographs or initials. In the 17th and 18th centuries the number of Jewish leaseholders in minting increased, not least because access of Jews to other occupations became more restricted on religious grounds. During the Habsburg era in Austria and Germany, the government soon began to establish a minting system. Austria created the office of a supreme heritable Münzmeister that provided for a sinecure without a share in profits. In Bohemia, too, the supreme office of Münzmeister was held by dukes and noblemen who at the same time supervised all the kingdom’s mining facilities. Besides the Quietus, for example, ruled only part of the Roman Empire from 260 to 261 AD, and yet he issued two coins bearing his image. 265 Münzerhausgenossenschaft. 264

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Münzmeister, there were other minting officials, such as the master smith, the dye-cutter, and the minter. The Münzwardein266 was tasked with making sure that minting was done properly from the right alloy. He also had to take samples that were presented to the Probationstag (sampling commission) in line with official regulations. The sampling commission was constituted from the royal court or local gentry or their representatives. Master of the Mint was an important office in the governments of Scotland and England, and later Great Britain, between the 16th and 19th centuries. The Master was the highest officer in the Royal Mint. Until 1699, appointment was usually for life. Its holder occasionally sat in the cabinet. The office was abolished as an independent position in 1870, thereafter being held as a subsidiary office of the Chancellor of the Exchequer (Challis 1992). As for the American continent, Casa de Moneda de México has been established in 1535 as the oldest mint. The New Orleans Mint was used by the Confederate States of America beginning in 1861. The Philadelphia Mint, which began operations in 1792 and first produced circulating coinage in 1793, are interwoven with the initiation of the Federal era of the United States. The story of minting for gold standard meets two lines of paradoxes. The first paradox might be just recalled from above: the liberal essence of gold standard, versus the strong State’s engagement in such a sense. Then, there comes the second paradox: despite its essential role for the system, State does not do much in practice for, except for its highest responsibility. Actually, the amount of operations that State does for gold standard reduces to minting. In such an order, the institution of minting—minting house— was founded. This is much less than the present central bank—actually, minting can be (at least methodologically) taken by manuals as the really “opposite” to central banking, as responsible for a lot of operations267(Patat 1991). Minting house is a typical State institution (or non-profit organization) and typically liberal one. Its current activity in the gold standard system means exchanging paper money into gold and vice-versa through respecting the official parity, as declared by State. Additionally, minting house was subtracting a commission—a modest percentage related to the amounts submitted to the exchange operation—just In Latin, wardinus. This will be clarified as a full context in the lines below. Let us just mention here that minting house might still exist today and some States subordinate it to the central bank (see even the UK case).

266 267

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for covering costs. So, the exchanges involving minting house were—in the same liberal way of thinking and acting—charged to the subjects of these operations—see persons or organizations, as legal entities. State was charging costs of minting on business people, but refusing any profit from. As in context, minting house was implicitly responsible for storing the gold reserves and amounts of money issued by State. Let us also notice that such an activity refers just to paper money versus gold, whereas the above gold species, bimetallism etc. stayed out of this and the minting activity was correspondingly even reducing. As the result of all activities that it was fulfilling, minting house keeps its small dimensions268 all over the world. And despite its small dimensions, minting house keeps an obvious significance. As results of this: (1) putting the official parity into practice, as actually applying the State’s law; (2) so, ensuring the equally official exchange rate which opposes the national currency to the other currencies working in the same gold standard system; (3) controlling and stabilizing the money price on the home currency market—that started existing in the same liberal context, but so minting house was meeting this market by a serious retort; (4) turning the money demand into money supply, and vice-versa—for the same home currency market —, and that might both include some accounting of the two, but exclude the State’s control on them. The last means, in the today view, no monetary policy (Patat 1991). Overall, minting (house) was for gold standard, as for no monetary policy, whereas the today money out of gold standard remains for the controlling money supply, central banking and monetary policy set of issues. Back to gold standard and its afferent minting house, there is to be noticed the interesting aspect that this institution stays significant by both what it was doing and what it was not doing. And that was the environment in which the minting institution was both a reduced set of activity and an significant set of objectives. These above lines define minting house as the very key issue of the gold standard landscape—all the below described issues come to be determined by.

268

As institution, technique, personnel employed and so on. 181

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IV.2.2.2. 2 Metal parity and currency exchange rate Minting house was exchanging gold into paper money through applying (respecting) the State declared money parity. As also mentioned above, that was really controlling the home currency market—any important money price fluctuation on this market meat the immediate consequence of money or gold flows redirected out of market, more exactly to the minting house, for more convenient exchanges. That was the same for controlling the exchange rate of the same currency—that on the foreign exchange market. Plus, the other States working in the gold standard system were doing the same job for their own national currencies. The overall result was keeping all gold standard system currencies in significantly restricted areas of fluctuation (Table IV.2.2.2. 2). Table IV.2.2.2. 2 Parities and exchange rates of some main currencies during gold standard and later periods

ORDER

1

2

3

RELATED CURRENCIES & PERIODS

182

EFFECTIVE (MARKET) EXCHANGE RATE FLUCTUATIONS

FF/US$ GOLD STANDARD 1879-1913

5.183

5.147-5.218

BRETTON WOODS AGREEMENT (1950-1970)

4.937

4.887-4.986

GOLD STANDARD 1879-1913

4.198

4.168-4.218

BRETTON WOODS AGREEMENT (1950-1970)

4.200

4.157-4.242

360.0

356.4-363.3

DM/US$

100 Y/US$ BRETTON WOODS AGREEMENT (1950-1970)

4

PARITY & OFFICIAL EXCHANGE RATE

DM/FF

Money and Market in the Economy of All Times EUROPEAN MONETARY SYSTEM (1979-1999)

2.310

2.258-2.362

Data sources: Giovaninni (1986) & Mc.Kinnon (1993, pp. 5)

By the official parity, on the national side, the fixed exchange rates were almost automatically achieved (ensured) and this was making gold standard work on both national and international sides; and both were equally important for the system—actually, the two sides of the system were efficiently working for each other. As subsequently, the currency and even the financial markets were developing in parallel and doing the same job. Besides, there results one more aspect in favour of strengthening the international trade, so reinforcing gold standard in the international area: there was no money fluctuations, no foreign exchange risk on the international payments and market transactions, so a business’ indifference about the international payment currencies. And that was a kind of key advantage for gold standard against all post-gold standard periods. Another aspect is once more related to the international money and makes the fixed exchange rates as appropriate to gold standard as enough difficult to any other international monetary system (IMS) not gold-based but aiming the same—a not gold-based IMS aiming the fixed exchange rate is supposed to base on the central bank interventions269 repeated on the foreign exchange markets. That is why the literature here automatically understands and underlines the direct and specific relation between money metal parity and fixed exchange rate (McKinnon 1993). It is through the fixed exchange rate that gold standard also exposes the report between exchange rate and external balance of payments (EBP): this is for a substantially stable exchange rate and the EBP equilibrium, as explained below, and as subsequently admitting that, in alternative, exchange rate fluctuations would be expected for EBP distortions. Last, but not least, exchange rate was a different issue than the price category—see below for concluding a different context for prices (and the corresponding price level) in the gold standard environment. Or, this above description indicates a simpler and more direct acting of gold standard on the exchange rate—that so remains a purely currency matter.

Actually, just selling-purchasing home money, against foreign exchange on the home foreign exchange market.

269

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IV.2.2.2. 3 External balance of payment (EBP) equilibrium In the gold standard system270, a country experiencing a balance-of-payments deficit loses gold and its money supply decreases, both automatically and by policy in accordance with the “rules of the game.” Money income contracts and price level falls, thereby increasing exports and decreasing imports. Similarly, a surplus country gains gold, the money supply increases, money income expands, the price level rises, exports decrease and imports increase. In each case, balance-of-payments equilibrium is restored via the current account. This is called the “price specie-flow mechanism” 271. For example, in a bilateral trade relationship between Australia and Brazil, if Brazil had a trade deficit with Australia, then Brazil could pay Australia gold. Now that Australia had more gold, it could issue more paper money since it now had a greater supply of gold to support new bills. With an increase of paper bills in the Australian economy, inflation, i.e. a rise in prices due to an overabundance of money, would occur. The rise in prices would subsequently lead to a drop in exports, because Brazil would not want to buy the more expensive Australian goods. Subsequently, Australia would then return to a zero balance of payments because its trade surplus would disappear. Likewise, when gold leaves Brazil, the price of its goods should decline and become more attractive for Australia. As a result, Brazil would experience an increase in exports until its balance of payments reached zero. Therefore, the gold standard would ideally create a natural balancing effect to stabilize the money supply of participating nations 272. The first scholar trying an explanation about the EBP in gold standard context was David Hume (Jinga 1981), an early supporter of gold standard and a contemporary of Adam Smith, the first ever author of a treaty of economics. An outline of this kind of thinking is exposed in Diagram IV.2.2.2. 3. There is certainly criticism about: authors remain skeptical as regarding international gold transfers and home and international inter-acting about home prices and costs depends on a so various economic openness etc. However, even supporters of such thinking see a significantly longer term for a supposable cyclical regulation of the EBP sold—as compared to, at least, the much more rapid exchange rate effect. And only in this monetary system, in other words, the post-gold money was not leaving the domestic marketplace, but for other causes. 271 See also a below sub-paragraph. 272 See Tarik Abdel-Monem (op.cit.) 270

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Anyway, the EBP remaking or not equilibrium remains the key issue not only between supporters and adversaries of the gold standard, but even of accepting or not gold standard as the first ever IMS—all IMS are supposed to contain proper systems of remaking national EBP’s equilibrium. EBP deficit minus of gold reserves money supply reduced home prices & costs reduced export prices & costs reduced export competitiveness increased export favoured and increased EBP favoured: (a) deficit reduced; (b) equilibrium remade; (c) exceeding Diagram IV.2.2.2. 3

Irrespective of accepting or not this logic of EBP remaking equilibrium in context, gold standard so succeeds to work for a complex interaction among issues—prices, exchange rate, EBP, money supply—of an afferent economic system, that qualifies for a modern description—and this is for the first time in historical terms.

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IV.2.2.2. 4 Price stability Gold standard seems to be famous not only for its fixed exchange rates, but also for its price stability—and emphasis increases when this system comes to be compared with post-gold based monetary systems, once more. One of our above conclusions was devolving from this paper, as studying both barter and monetary systems, and seeing gold standard as both money and barter—the real historical link between the two systems, which were no longer as opposite as the literature273 had previously considered about. In other words, as reviewing the above two models of barter, their basic report might be the first responsible for a gold standard just inheriting something of the first (primitive) model of barter had proven, in its turn. As independently for this chapter so far, price stability might reclaim two basics. The one is neutral money274 that lets the gold metal express its own price system, as against the other marketable goods. The other devolves from the previous sub-paragraph that indicates the home price behaviour, as resulting from the EBP equilibrium, versus disequilibrium.

273 274

Devolving from the Stanley Jevons’ view. See no authority controlling money supply, meaning no monetary policy, as above underlined.

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The “California” episode (1848), as the “gold inflation” The largest gold “supply shock” in the 19th century was the 1848 discovery of gold in California. The California gold rush meant that more ounces would be mined at any given purchasing power of gold. The outpouring of gold from California reduced the purchasing power of gold around the world, or in other words, generated an inflation of the price level. But how large was that inflation? The magnitude was surprisingly small, at least as viewed in today terms. Even over the most inflationary interval, the general price index (the GDP deflator) for the United States rose from 5.71 in 1849 (year 2000 = 100) to 6.42 in 1857, an increase of 12.4 percent spread over eight years. The compound annual price inflation rate over those eight years was slightly less than 1.5 percent. Twenty-two years later, when the gold standard was finally restored following its suspension during the Civil War, the purchasing power of gold had actually risen slightly (the price level was slightly lower). In economists’ slang, these were movements along the (relatively flat) long-run supply curve, not shifts of the curve (White 1999).

Significant is not only that the price category does not include exchange rate, in gold standard conditions275, but equally that there is to talk about fixed exchange rate and (just) stable prices. IV.2.2.3 Gold standard, as specific picture Let us also summarize some aspects of both principles and facts. The modern gold standard has some historical precedents of metal-based currencies—and this aspect will be detailed in the next following paragraph. The difference between is that this system belongs to modern times and the industrial revolution of the late 19th century. In such a context, the new elements, facts and aspects brought in by the modern gold standard were doing a very rupture between modern and pre-modern monetary systems. Then, this new context makes gold standard adapt to the new modern national-international (post-Ricardian) economic structure: no national 275

See also the post-gold standard times in which exchange rate is really included in the price category. 187

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(home) gold standard in the absence of its international context. Second, gold standard is barter by its origin and monetary system by its intrinsic evolving throughout extension from a purely barter definition. Third, its barter belonging plays a good role in price stability achieving, whereas its extension to monetary system also clears the way for adopting the other modern parallel markets: the money, foreign exchange and financial markets. Fourth, see the above picture of fixed exchange rate, EBP equilibrium and price stability as complying with the much later image of Jan Timbergen276 about general (macroeconomic) equilibrium achieved (Hardwick coord. 1992), except for the labour market—and that whereas this market disequilibria, see unemployment, was even not too much reproached to gold standard by its scholar opponents. Fifth, let us reconsider some aspects. Gold standard has provoked the effective rupture between pre-modern and modern moneys, as already mentioned here above—actually between pre-modern and modern economies through money and the monetary environment of the economy. The other internal rupture caused by gold standard to money is the one of concept and thinking, this time: this is the one between representative money—as here biased by gold standard—and fiat money—as correspondingly fallen in a serious scientific sufferance this way. Ironically, gold (standard, but metal, first of all) was the one called for achieving the historical transition between barter and money—and it did it during a couple of decades in a superb way of doing. That was the handsome and full of qualities cavalier once called by society to do an enough hard work: he went down from his “ivory tour” just into the crowd, where then he did his job succeeding not to spoil any of his well known qualities. At the end, when his job was done and his presence no longer welcome because people have themselves evolved and changed thinking and attitude meanwhile, he went back where he had come from: to his old “ivory tour”, as the noble character that he has always proven to be. Gold standard has been a (hi)story of generosity, of hard-work for a huge social benefit, of leaving scene with high dignity and of not harming anyone. Allegations as the ancient one of “evil”, as money 276

There are two main macroeconomic functions, meaning general economic: I. equilibrium and II. growth. Equilibrium, in the Keynesian and post-Keynesian terms, means: (1) price stability (no inflation); (2) labour market equilibrium (no unemployment); (3) EBP equilibrium (no external deficit and stable exchange rate (Hardwick coord. 1992).

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would be, and as the much later scientific doubts about gold standard would be expected behind his back, and that because, unlike the distinction of a noble character, we, people (the others), are just the crowd. IV.2.2.4 Final remarks on the “rules of the game” To be equally noticed that the effective monetary standard of a country might be distinguishable from its legal standard. For example, a country legally on bimetallism277 usually is effectively on either a gold or silver monometallic standard, depending on whether its “mint-price ratio”—the ratio of its mint price of gold to mint price of silver (see also IV.3 below)— is greater or less than the world price ratio. In contrast, a country might be legally on a gold standard but its banks (and government) have “suspended specie (gold) payments” (refusing to convert their notes into gold), so that the country is in fact on a “paper standard.” The criterion adopted here is that a country is deemed on the gold standard if (1) gold is the predominant effective metallic money, or is the monetary bullion, (2) specie payments are in force, and (3) there is a limitation on the coinage and/or the legal-tender status of silver (the only practical and historical competitor to gold), thus providing institutional or legal support for the effective gold standard emanating from (1) and (2)278. Actually, another aspect of the gold standard is here already open: the difference between a so called “principle” description of the appropriate system and the real(ity) picture (see IV.4 below).

IV.3 Bimetallism IV.3.1 A definition A bimetallic monetary standard can be defined as one in which coins of two different metals are legal tender (Redish 2000). Such standards were commonplace in Western economies throughout most of the last millennium, although their details differed. Under a typical bimetallic standard coins of gold and silver were produced by the Mint under orders of the sovereign, and they were given exchange values that reflected their 277 278

See the next below IV.3 paragraph. Officer (2010). 189

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intrinsic value279. The mint typically bought gold and silver freely that is, from anyone willing to sell at the mint price, which usually was slightly lower that the value of the coins produced, to pay for the costs of coining and, sometimes, profits or seignorage as well. As in the case of the gold standard—already well-understood from above and in practice—bimetallism provided a nominal anchor for the monetary system. The price of gold and silver were determined by their relative supply and demand (both monetary and non-monetary) and this determined the stock of money and the general price level. IV.3.2 Related history Bimetallism should in a way have been described in this paper before gold standard, due to its previous historical existence—we preferred the opposite due to a today understanding of bimetallism better as related to gold standard, than by itself or otherwise. As mentioned above, Europe during the Dark Ages minted only silver coins—and only pennies made of debased (low purity) silver at that (Redish 2000), but gold came to break this with the Ducat and Florin of the Mediterranean area of developing trade. Then, in the 16th century bimetallism encountered the important moment and person of Sir Thomas Gresham (1519-1579)280, with the famous Gresham’s Law—“bad money drives out good”—which played for a strong obstacle to the system (Macleod 1858). Despite this, at the beginning of the 19th century most Western economies still used bimetallic standards, but by the end of the century the(common) gold standard. The major transition actually occurred between 1850281 and 1880 by which time the US and almost all of Western Europe had adopted gold. A key factor in this timing was the California gold rush For example, in the late eighteenth century the US established a coinage system comprising a silver Dollar, containing 371.25 Troy grains of silver, and a gold Eagle containing 247.5 Troy grains of gold. The relative market values of gold to silver at that time were 15:1, and the legal tender value of the silver dollar was $1 and of the Eagle was $10, reflecting their relative values (ten silver Dollars would contain 3712.5 grains of silver, which is 15 times the 247.5 grain weight of the gold Eagle/Redish 2010). 280 The Queen Elizabeth I of England’s specialty advisor at that time. The text of the famous “Gresham’s Law” was actually included in a letter written to the Queen on the occasion of her accession in 1558. See the next subparagraph for details. 281 When only Britain and Portugal were on the gold standard. 279

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in the mid-19th century—this increased the world gold supply and caused a fall in the relative price of gold. Gold became the de facto money as it became unprofitable to sell silver to the Mint282. In earlier times the monetary authorities would have responded by altering the weight of the gold coins, however, in the environment of the mid-nineteenth century, the response was to provide low-value coins by producing token coins on government account (Redish 2010). As in the US subsidiary token coins were introduced in 1853 and in 1873 Congress passed the new Coinage Act that precluded the minting of the silver dollar. The silver dollar had not in fact been minted for decades but the Act was subsequently derided as the “Crime of ‘73” on the grounds that it had inadvertently led to the adoption of the gold standard. As in Europe, Belgium, Italy and Switzerland, whose gold and silver coinages were identical to that of France, each adopted different subsidiary coinages, but in 1865 joined with France to form the Latin Monetary Union (LMU) to create a uniform subsidiary coinage. In 1870 the newly unified Germany adopted the gold standard and financed the acquisition of gold (i.e. sale of the existing silver coins) through the indemnity it imposed on France at the conclusion of the Franco-Prussian War. In order to avoid providing a sink for German silver the French refused to buy silver, leading all the LMU countries to abandon bimetallism. Although the gold standard was entrenched by 1880, during the last two decades of the nineteenth century, there were attempts in both the US and Europe to return to bimetallism(Redish 2010). The arguments were both theoretical and partisan. A significant motivation was the rise in the price of gold after 1870 (in part due to the increased monetary demands for gold) which generated a secular deflation. Furthermore new silver discoveries reduced the price of silver, so that if the previous bimetallic standards had remained in place there would have been inflation. In the US, Westerners with nominal debts, who felt penalized by the deflation, supported William Jennings Bryan who campaigned for the Presidency in 1896 on the slogan that Americans should not be “crucified on a cross of gold.” However, Bryan lost the election and gold discoveries in the late 1890s generated a gradual inflation, and in 1900 the US adopted the Gold Standard Act cementing the adoption of the gold standard. In Europe the debate focused on the welfare properties of bimetallism, with advocates arguing that international bimetallism—in which all countries adopted 282

In the Gresham’s law terms, the silver ‘s withdrawal of from circulation came both in the US and Europe. 191

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the same relative prices for gold and silver—would alleviate the problems associated with Gresham’s Law, and that bimetallism would promote greater price stability than the gold standard provided. The LMU member countries were at the forefront of the promotion of bimetallism, but Britain and Germany were never really on board, and the requisite degree of international co-operation was not forthcoming. By 1900 bimetallism was dead(Redish 2010). IV.3.3 The Gresham’s Law under focus Studying bimetallism is never supposed to omit the Gresham’s Law as both theoretical debate and a historical event. In his above mentioned letter to the new Queen, Gresham himself observed in 1558 “that good and bad coin cannot circulate together”, as the Gresham’s explanation for the “unexampled state of badness” that the England’s coinage had been left in following the “Great Debasements” of Henry VIII and Edward VI, which reduced the metallic value of English silver coins to a small fraction of what that value had been previously, at the time of Henry VII. It was owing to these debasements that Gresham observed to the Queen, that “all your fine gold was conveyed ought of this your realm.” Importantly, as Giffen (1891, pp. 304-5) also observed at that time, Gresham was making no direct reference to bimetallism or to “the analogous case of inconvertible paper when the paper drives the metal out of circulation.” However, Giffen283 errs in claiming that Gresham was the “only responsible for the suggestion that bad coins . . . drive good ones of the same metal out of circulation,” for Gresham’s letter to Elizabeth clearly points to the debasement of silver coins as a factor leading to the disappearance of gold (Fetter 1932, pp. 490-1). It remains true nonetheless that the treatment of Gresham’s Law as an argument against bimetallism or resort to any sort of paper money are modern extensions of the law’s original meaning, the merits of (and implicit or explicit assumptions underlying which) must be assessed separately from those of early versions (Redish 2010). References to such a tendency284 occur in various medieval writings285, where the prevalence of bad politicians is attributed to forces Who appears here to have followed Jevons’s lead (Fetter 1932, pp. 490-1). Sometimes accompanied by discussion of conditions promoting it (Redish 2010). 285 Most notably Nicholas Oresme’s (c. 1357) Treatise on money, and can even be found in much earlier works, including the Aristophanes’ The Frogs. 283 284

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similar to those favoring bad money over good. There were in reality two interpretations of the above enounced “Law”. The one is earlier in time (contemporary) and noticing that the so-called bad coins—the ones possessing a relatively low metallic content (“intrinsic value”)—were continuing to be offered in routine payments, while “good” coins were withdrawn into hoards, exported, or reduced through clipping or “sweating”286 to an intrinsic value no greater than that possessed by their “bad” counterparts. Only later writers tended to stretch the meaning of Gresham’s Law by invoking it as an argument against bimetallism and the competitive production of money and as the reason for the historical substitution of paper for metallic moneys287. Or, the today question risen regards rather the later non-contemporary writings and polemics. Actually, polemics about the Gresham’s Law, in its largest sense, might start on admitting or not this above proposition as the enunciation of an economic law—be it more than three hundred years before that the first treaty on economics was written288. This question raised is whether the Gresham’s Law might restrict to the bimetallism era, or its meaning might be able to extend to all over “bad, versus good moneys”. As for example, Mundell (1998) observes that “strong” currencies—meaning ones that tended to retain their precious metal value over long periods of time—tended to dominate and drive-out “weak” (that is, less reputable) ones: “the florins, ducats and sequins of the Italian city-states did not become ‘dollars of the Middle Ages’ because they were bad coins; they were among the best coins ever made.” Mundell here asserts simply an instance of the general (free-market) tendency for lower-cost substitutes to replace dearer ones capable of accomplishing the same ends, so in his view the Gresham’s Law also accounts for the historical tendency of redeemable banknotes, lacking legal tender status, to take the place of gold or silver coins. Earlier than that, Fetter (1932, pp. 494-5) had observed the tendency for good coins—metal made by melting metal from good coins—to actually leave the country is the result, not of debasement per se, but of the tendency for prices, including the price of bullion, to increase in consequence of an That is, purposeful erosion by chemical or mechanical means. Redish (2010) says something about recent works, which even go so far as to treat the law as being nothing more than an instance of the rule that rational agents prefer less expensive means of accomplishing their ends to dearer ones (no suplementary details). 288 See again the “Wealth of Nations” of Adam Smith. 286 287

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overall excess supply of coins. And even earlier, the famous William Stanley Jevons (1882) argued that Gresham’s Law supplies sufficient grounds for rejecting Herbert Spencer’s (1851, pp. 396-402) arguments for private coinage289. Spencer was not an economist, but his arguments appear to have been more consistent with a proper understanding of Gresham’s Law, as well as with evidence from actual private coinage episodes in California and elsewhere (Redish 2010). As for another line of arguing, while many writers have abused Gresham’s Law by treating it as being more generally valid than is in fact the case, Rolnick and Weber (1986) err in the opposite direction in calling the law a “fallacy.” Their argument draws on examples involving either bimetallic legislation or the introduction of paper substitutes for gold or silver coin but not, significantly, on episodes involving debasement, to which all early statements of Gresham’s Law refer (Redish 2010). With respect to bimetallism, Rolnick and Weber claim that conventional appeals to Gresham’s Law are based on the untenable assumption that government and private agents actually offer to exchange gold for silver and vice versa at some official non-market rate. Such a policy, they observe, “would imply potentially unbounded profits for currency traders at the expense of a very ephemeral mint or a very naive public” (Rolnick and Weber 1986 p. 186). IV.3.4 Bimetallism explained Bimetallism has historically preceded gold standard by starting in Middle Ages for ending in 1900, as definitively giving up to gold standard. As Redish (2000; 2010) notes, this was a world of full-bodied coins—that is, the coins circulated at roughly their intrinsic value, and there were no bank notes, as in the vicinity of commodity money and primitive monetary systems—whereas both low and high value transactions were needed (as ever) all over on market and in the everyday life. As for the 19th century, during which the transition to gold standard took place, the underlying factors affecting the choice of monetary standard were technological change and globalization(Redish 2010). In the early nineteenth century steam engines were harnessed to rolling mills and coining presses. This mechanization made it possible to produce coins that were virtually uniform in dimension

289

See his highly influential Money and the Mechanism of Exchange (1882 [1875], pp. 64 and 82), cited by. Redish (2010).

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and that had very high definition impressions on their faces290. Similarly convertible bank notes became more common as a medium of exchange. Both factors meant that it was possible to have high and low denomination money without bimetallism. In the early nineteenth century, as well, Britain formally rejected bimetallism and fixed the value of the pound in terms of its gold content only. The same nineteenth century saw dramatic reductions in transportation costs and a resulting integration of economies that is only now being recreated. This raised the benefits of a common currency, indeed in the 1860s a world monetary conference endorsed a world money based on a gold coin—this proposal was not ratified and fell victim to the Franco-Prussian War291(Redish 2010)292. As equally explained by the author, bimetallism concomitantly encountered a kind of endemic problem by its double-standard of pricing, irrespective of the name (e.g. Thomas Gresham293) that it bearded. Plus, bimetallism and gold standard differ by their historically and economically defined contexts: whereas gold standard was coming to be defined also by an international context preceding the today globalizing and integration, bimetallism had remained in its heterogeneous pre-modern environment making it rather confused, as monetary system, and differ in different countries. As in our view, the above succession of events—as between bimetallism and gold standard, as the final option of the society of the 19th century—is supposed to be clarified. There is not only bimetallism to talk about, in this context. In some western European countries of the late Middle Ages, silver was priory coined for a monetary system. Jinga (1981) and Davies (1994) conclude that even during the 18th century, silver formed the money bases of Asian and Middle East countries, whereas gold prevailed in the same position for the Euro-American monetary space—and that was preceding the next century of unifying value standards. As “confused” that it appears Such coins were much more difficult to counterfeit so that it became feasible to produce coins that were not full-bodied and yet would not be counterfeited. 291 But so the later post-wars Bretton Woods Conference (1944) was meeting some precedents (see the next chapters). 292 The next option for the unique metal (gold) standard, instead of bimetallism, appears not enough clearly based to the author—there might be something between the higher value of gold and the Great Britain’s economic success at that time. 293 But the Gresham’s Law, in our view, quite reduces a much larger understanding of facts, as here needed. 290

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to be, bimetallism was feeling all over the place both the end of a whole artificial selection—i.e. market competition—among commodity moneys, as mediums of exchange and concomitance between the last two metal money bases in race. In other words, selection between gold and silver was a kind of peak of an iceberg attributed to a much longer era than the one of bimetallism. Otherwise, bimetallism did not equal this last phase of the mediums of exchange selection on markets—as for instance, lawmakers of bimetallic monetary system settled a kind of “subordination” between the two metals, as money bases, the one viewed as beneficial for the same system. Or, as “confused” that it appears to be, however, bimetallism was different forms mainly for such kinds of relations between money bases and for the work regimes of minting. As “confused” that it appears to be, once again, bimetallism equally felt that just gold, and especially in the early stage of gold specie standard, was so hardly fulfilling its task of monetary system just by itself—silver was needed to complete the construction or paper money (bank notes) instead. Last, but not least, the double-standard of pricing, as specific to bimetallism and specifically destructing a system does not reduce to the Gresham’s Law—which, actually, consists in the most transparent face of another larger process and monetary-economic problem common to several time periods, as another “peak of an iceberg”. See also Marx (1958) for the need of a single value base for the modern economy of his times, but also much later on McKinnon (1993) claiming the single nominal anchor even for international money and monetary systems. Or, it was the same for bimetallism, this time restricted to one home market: despite its specific monetary law provisions and despite that the system seemed to work well enough at its time, the same double-standard of pricing and barter type selection between pricing systems were inducing both a temporary withdrawal of gold from market to reserves and its later come-back to the same leader monetary base position. Or, Gresham or his later interpreters failed to explain either how the previously withdrawer gold saw itself strengthened this way, or which one of silver or gold metals, as coined for currencies, actually was the “bad” or the “good” part of the issue—as for having driven the other part out of the system. As in our view, once more, the most obvious and certain aspect of bimetallism lies elsewhere: would it be neighbouring gold standard—as unanimously accepted in the literature —, it certainly belongs to the barter type—not monetary—development—as gold standard requires to be considered for a consistent historical process on a so long time. 196

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IV.4 Related history (explaining facts) IV.4.1 The pre-modern times To be here made the difference between the modern gold standard that we are dealing with in this chapter and developments starting much earlier in the Roman Empire times and the Middle Ages294. But with the ending of the Byzantine Empire, the civilized world tended to use the silver standard, such as in the case of the silver pennies that became the staple coin of Britain around the time of King Offa in the year 796 AD. The Spanish discovery of the great silver deposits at Potosi in the 16th century, led to an international silver standard in conjunction with the famous pieces of eight, which carried on in earnest until the nineteenth century. So, as for centuries, Britain was on an effective silver standard under legal bimetallism. The country switched (back) to an effective gold standard early in the eighteenth century (see both the above and the next below subparagraphs). The United States, in their turn, were on an effective silver standard dating back to colonial times, legally bimetallic from 1786, and on an effective gold standard from 1834. The legal gold standard began in 1873-1874, when Acts ended silver-dollar coinage and limited legal tender of existing silver coins. Ironically again, the move from formal bimetallism to a legal gold standard occurred during a paper standard (the “greenback period,” of 1861-1878), with a dual legal and effective gold standard from 1879 (Officer 2010). IV.4.2 The “classical” gold standard IV.4.2.1 Adopting the gold standard, as formally In 1704, the British West Indies ‘de facto’ were following Queen Anne’s proclamation. In 1717, the Kingdom of Great Britain switched to an effective gold standard, solidified by the (mistakenly) gold-overvalued mint-price ratio established by Isaac Newton, Master of the Mint, in 1717295. Later on, in 1774 the legal-tender property of silver was restricted, and Britain entered the gold standard in the full sense (effectively) on 294 295

As related in the above Parts Two and Three. This was ‘de facto’ following Isaac Newton’s revision of the mint ratio, at 1 guinea to 129.438 grains (8.38 g) of 22 carat crown gold. 197

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that date. In 1798 coining of silver was suspended, and in 1816 the gold standard was formally adopted—as above already mentioned, during a paper-standard regime (the “Bank Restriction Period,” of 1797-1821), with the gold standard effectively resuming in 1821(Kindleberger 1993)296. Earlier, in 1818, Netherlands had adopted the gold standard at one guilder to 0.60561 g gold. This was later on, in 1853 for Canada, in conjunction with the American Gold Eagle coin equal to ten US dollars and also to the British gold sovereign equal to four dollars eighty-six and two thirds cents. The Canadian unit was made equal to the American unit in the year 1858. It was the same for Portugal in 1854 at 1000 réis to 1.62585 g gold. In 1865, Newfoundland was the only country in the British Empire to introduce its own gold coin apart from the British gold sovereign. The Newfoundland gold dollar was equal to the Spanish dollar unit that was being used in the British Eastern Caribbean Territories and in British Guiana. In 1873, the German Empire adopted the system at 2790 Goldmarks to 1 kg gold. The same year, the United States did ‘de facto’ the same at 20.67 dollars to 1 troy oz (31.1 g) gold297. And the same for France and Spain298 (1876), Grand Duchy of Finland (1878)299, Austrian Empire (1879)300, Argentina (1881)301, Egypt (1885), Russia (1897)302, Japan (1897)303, India (1898), US (1900)304, Philippines (1903)305 and Siam (1908)306.

This was in 1821 ‘de jure’ the gold sovereign for the United Kingdom: one sovereign to 123.27447 grains of 22 carat crown gold. See also: Newton, Isaac: Treasury Papers, vol. ccviii. 43, Mint Office, 21 Sept. 1717 and BJ Eichengreen & M Flandreau: “The Gold Standard in Theory and History”. 297 See Coinage Act of 1873 in “The Pocket money book . . .”(2006). 298 At 31 pesetas to 9.0 g gold. 299 At 31 marks to 9.0 g gold. 300 See Austrian florin and Austrian crown. 301 At 1 peso to 1.4516 g gold. 302 At 31 roubles to 24.0 g gold. 303 At 1 yen to 0.75 g gold. 304 See the Gold Standard Act. 305 See Gold Exchange/US dollar. 306 Gold Exchange/pound sterling. 296

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1873, again, was the year of founding modern monetary unions: see the Latin Monetary Union (Belgium, Italy, Switzerland, France) at 31 francs to 9.0 g gold and in 1875 the Scandinavian monetary union (Denmark, Norway and Sweden) at 2480 kroner to 1 kg gold307. IV.4.2.2 The gold standard, as international The international gold standard—defined as the period of time during which all four core countries were on the gold standard—existed from 1879 to 1914 (36 years) in the classical period and from 1926 or 1928 to 1931 (four or six years) in the interwar period308. Under the gold standard system, all participating currencies were convertible based on its gold value309. The rush to the gold standard occurred in the 1870s, with the adherence of Germany, the Scandinavian countries, France, and other European countries. Legal bimetallism shifted from effective silver to effective gold mono-metallism around 1850, as gold discoveries in the United States and Australia resulted in overvalued gold at the mints. The old/silver market situation subsequently reversed itself, and, to avoid a huge inflow of silver, many European countries suspended the coinage of silver and limited its legal-tender property. Some countries (France, Belgium and Switzerland) adopted a “limping” gold standard, in which existing former-standard silver coin retained full legal tender, permitting the monetary authority to redeem its notes in silver as well as gold (Officer 2010). Most countries were on a gold-coin (always meaning mixed) standard. The gold-bullion standard did not exist in the classical period—although in Britain that standard was embedded in legislation of 1819 that established a transition to restoration of the gold standard. A number of countries in the periphery were on a gold-exchange standard, usually because they were colonies or territories of a country on a gold-coin standard. In situations in which the periphery country lacked its own (even-coined) currency, the gold-exchange standard existed almost by default. Some countries—China, Persia, parts of Latin America—never joined the classical gold standard, instead retaining their silver or bimetallic standards (Officer 2010). See Wikipedia. The free Encyclopedia. As for the next interwar gold standard there was a dismal failure in longevity, as well as in its association with the greatest depression the world has known (Officer 2010). 309 Abdel-Monem, Tarik (op.cit.) 307 308

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IV.4.2.3 Stability in the “classical” gold standard Recall from above, that stability—meaning for: prices, exchange rates and balance of payments—is called for the main performance of the gold standard. Seen above as gold standard related to barter and as the relation between the two models (II, as related to I), we will meet below the description of the available literature, as much more skeptical on principles facing facts on the historical ground. IV.4.2.3.1 Adjusting the rules of the game So, let us have the list of principles, as called by literature the “rules of the game”, then to be revised, as essentially. IV.4.2.3.2 Central bank and monetary policy The first rule to be adjusted on the ground was the no-central bank and no monetary policy. Central banks existed and represented the State’s interests, as non-neutrality entity—see another rule of the game eliminated. And Bank of England was the very model of the central bank institution310. Central banks were supposed to reinforce, rather than “sterilize” (moderate or eliminate) or ignore, the effect of gold flows on the monetary supply—the money supply was not just money demand turned into money supply311. IV.4.2.3.3 “Price specie-flow “mechanism To the extent that wages and prices are inflexible, movements of real income in the same direction as money income occur; in particular, the deficit country suffers unemployment but the payments imbalance is nevertheless corrected. The capital account also acts to restore balance, via interest-rate increases in the deficit country inducing a net inflow of capital. The interest-rate increases also reduce real investment and thence real income and imports. Similarly, interest-rate decreases in the surplus country elicit capital outflow and increase real investment, income, and imports. This process enhances the current-account correction of the imbalance. As engendered to the member States of the gold standard monetary system. See (Officer 2010).

310 311

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One problem with the “rules of the game” is that, on “global-monetarist” theoretical grounds, they were inconsequential. Under fixed exchange rates, gold flows simply adjust money supply to money demand—the money supply is not determined by policy. Also, prices, interest rates, and incomes are determined worldwide. Even core countries can influence these variables domestically only to the extent that they help determine them in the global marketplace. Therefore, the price-specie-flow and alike mechanisms cannot occur. Besides this, when gold left a nation, the ideal balancing effect would not occur immediately. Instead, recessions and unemployment would often occur. This was because nations with a balance of payments deficit often neglected to take appropriate measures to stimulate economic growth. Instead of altering tax rates or increasing expenditures—measures which should stimulate growth—governments opted to not interfere with their nations’ economies. Thus, trade deficits would persist, resulting in chronic recessions and unemployment312. Historical data support this conclusion: gold flows were too small to be suggestive of these mechanisms; and prices, incomes, and interest rates moved closely in correspondence (rather than in the opposite directions predicted by the adjustment mechanisms induced by the “rules of the game”)—at least among non-periphery countries, especially the core group (Officer 2010). IV.4.2.3.4 The “sterilization” effect And when gold outflow typically decreases the international assets of the central bank and hence the monetary base and money supply, the central-bank’s proper response was: (1) raise its “discount rate,” the central-bank interest rate for rediscounting securities313, thereby inducing commercial banks to adopt a higher reserves/deposit ratio and therefore decreasing the money multiplier; and (2) decrease lending and sell securities, thereby decreasing domestic assets and thence the monetary base. On both counts the money supply is further decreased. Should the central bank rather increase its domestic assets when it loses gold, it engages in “sterilization” of the gold flow and is decidedly not following the “rules of the game.” The converse argument314 also holds, with sterilization involving the Tarik Abdel-Monem (op.cit.) Cashing, at a further deduction from face value, a short-term security from a financial institution that previously discounted the security. 314 Involving gold inflow and increases in the money supply. 312 313

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central bank decreasing its domestic assets when it gains gold. So, since the central-bank’s domestic and international assets move in the same direction; in fact the opposite behaviour, sterilization, was dominant (Bloomfield 1959, p. 49; Nurkse 1944, p. 69). Bank of England followed the rule more than any other central bank, but even so violated it more often than not! How then did the classical gold standard cope with payments imbalances? Why was it a really stable system? IV.4.2.3.5 Discount rate rule and central banks However, the Bank of England did, in effect, manage its discount rate (called “Bank Rate”) in accordance with rule (1). The Bank’s primary objective was to maintain convertibility of its notes into gold, that is, to preserve the gold standard, and its principal policy tool was bank rate. When its “liquidity ratio” of gold reserves to outstanding note liabilities decreased, it would usually increase bank rate. The increase in bank rate carried with it market short-term increase rates, inducing a short-term capital inflow and thereby moving the exchange rate away from the gold-export point by increasing the exchange value of the pound. The converse also held, with a rise in the liquidity ratio involving a bank rate decrease, capital outflow, and movement of the exchange rate away from the gold import point. The Bank was constantly monitoring its liquidity ratio, and in response altered Bank Rate almost 200 times over 1880-1913315. While the Reichsbank316, like the Bank of England, generally moved its discount rate inversely to its liquidity ratio, most other central banks often violated the rule, with changes in their discount rates of inappropriate direction, or of insufficient amount or frequency. The Bank of France, in particular, kept its discount rate stable. Unlike the Bank of England, it chose to have large gold reserves (Lindert 1969, pp. 10-11, 19), with payments imbalances accommodated by fluctuations in its gold rather than financed by short-term capital flows. The United States, lacking a central bank, had no discount rate to use as a policy instrument.

Officer (2010). The German central bank.

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IV.4.2.3.6 “Core”, versus “periphery” countries IV.4.2.3.6.1 “Core” countries Britain—the predominant reserve-currency country—was in a particularly sensitive situation. Again considering end-of 1913 data, almost half of world foreign-exchange reserves were in sterling, but the Bank of England had only three percent of world gold reserves317. Defining the “reserve ratio” of the reserve-currency-country monetary authority as the ratio of (i) official reserves to (ii) liabilities to foreign monetary authorities held in financial institutions in the country, in 1913 this ratio was only 31 percent for the Bank of England, far lower than those of the monetary authorities of the other core countries(BG 1943, p. 331318). An official run on sterling could easily force Britain off the gold standard. Because sterling was an international currency, private foreigners also held considerable liquid assets in London, and could they initiate a run on sterling. The United States, though a center country, was a great source of instability to the gold standard. Its Treasury held a high percentage of world gold reserves319, resulting in an absurdly high reserve ratio (Lindert (1969, pp. 18-19). With no central bank and a decentralized banking system, financial crises were frequent. Far from the United States assisting Britain, gold often flowed from the Bank of England to the United States to satisfy increases in U.S. demand for money. Though in economic size the United States was the largest of the core countries, in many years it was a net importer rather than exporter of capital to the rest of the world—the opposite of the other core countries. The political power of silver interests and recurrent financial panics led to imperfect credibility in the U.S. commitment to the gold standard. Runs on banks and runs on the Treasury gold reserve placed the U.S. gold standard near collapse in the early and mid-1890s. During that period, the credibility of the Treasury’s commitment to the gold standard was shaken. Indeed, the gold standard was saved in 1895 (and again in 1896) only by cooperative action of the Treasury and a bankers’ syndicate that stemmed gold exports. See: Lindert (1969, pp. 18-19); Triffin (1964, pp. 22, 66); Sayers (1976, pp. 348, 352). 318 Board of Governors of the Federal Reserve System [cited as BG] (1943, p. 331) for Federal Reserve Banks holdings of foreign-currency bills. 319 More than that of the three other core countries combined in 1913. 317

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IV.4.2.3.6.2 The “periphery” countries’ condition and experience An important reason for periphery countries to join and maintain the gold standard was the access to the capital markets of the core countries thereby fostered. Adherence to the gold standard connoted that the peripheral country would follow responsible monetary, fiscal, and debt-management policies—and, in particular, faithfully repays the interest on and principal of debt. This “good housekeeping seal of approval” (the term coined by Bordo and Rockoff, 1996), by reducing the risk premium, involved a lower interest rate on the country’s bonds sold abroad, and very likely a higher volume of borrowing. The favourable terms and greater borrowing enhanced the country’s economic development. However, periphery countries bore the brunt of the burden of adjustment of payments imbalances with the core (and other Western European) countries, for three reasons. First, some of the periphery countries were on a gold-exchange standard. When they ran a surplus, they typically increased—and with a deficit, decreased—their liquid balances in London (or other reserve-currency country) rather than withdraw gold from the reserve-currency country. The monetary base of the periphery country would increase, or decrease, but that of the reserve-currency country would remain unchanged. This meant that such changes in domestic variables—prices, incomes, interest rates, portfolios, etc.—that occurred to correct the surplus or deficit were primarily in the periphery country. The periphery, rather than the core, “bore the burden of adjustment.” Second, when bank rate increased, London drew funds from France and Germany that attracted funds from other Western European and Scandinavian countries that drew capital from the periphery. Also, it was easy for a core country to correct a deficit by reducing lending to, or bringing capital home from, the periphery. Third, the periphery countries were underdeveloped; their exports were largely primary products (agriculture and mining), which inherently were extremely sensitive to world market conditions (Officer 2010). This feature made adjustment in the periphery compared to the core take the form more of real than financial correction. This conclusion also follows from the fact that capital obtained from core countries for the purpose of economic development was subject to interruption and even reversal. While the periphery was probably better off with access to the capital than in isolation, its welfare gain was reduced by the instability of capital import. 204

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The experience on adherence to the gold standard differed among periphery groups. The important British dominions and colonies—Australia, New Zealand, Canada, and India—successfully maintained the gold standard. They were politically stable and, of course, heavily influenced by Britain. They paid the price of serving as an economic cushion to the Bank of England’s financial situation; but, compared to the rest of the periphery, gained a relatively stable long-term capital inflow. In undeveloped Latin American and Asia, adherence to the gold standard was fragile, with lack of complete credibility in the commitment to convertibility (Officer 2010). Many of the reasons for credible commitment that applied to the core countries were absent—for example, there were powerful inflationary interests, strong balance-of-payments shocks, and rudimentary banking sectors. For Latin America and Asia, the cost of adhering to the gold standard was very apparent: loss of the ability to depreciate the currency to counter reductions in exports. Yet the gain, in terms of a steady capital inflow from the core countries, was not as stable or reliable as for the British dominions and colonies. IV.4.2.3.7 Implications for money supply For the domestic gold standard and under a pure coin standard definition, the gold in circulation, monetary base, and money supply are all one. With a mixed standard, the money supply is the product of the money multiplier320. The monetary authority alters the monetary base by changing its gold holdings and its loans, discounts, and securities portfolio (non gold assets, called its “domestic assets”). However, the level of its domestic assets is dependent on its gold reserves, because the authority generates demand liabilities (notes and deposits) by increasing its assets, and convertibility of these liabilities must be supported by a gold reserve, if the gold standard is to be maintained. Therefore the gold standard provides a constraint on the level (or growth) of the money supply. As for the international gold standard, it involves balance-of-payments surpluses settled by gold imports at the gold-import point, and deficits

As dependent on the commercial-banks’ reserves (deposit and the non-bank-public’s currency/deposit ratios), on the one hand, and the monetary base (the actual and potential reserves of the commercial banking system, with potential reserves held by the non-bank public), on the other.

320

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financed by gold exports at the gold-export point321. As stated above for the mathematical approach, the change in the money supply is then the product of the money multiplier and the gold flow322, providing that the monetary authority does not change its domestic assets. For a country on a gold—exchange standard, holdings of “foreign exchange” (the reserve currency) take the place of gold. In general, the “international assets” of a monetary authority may consist of both gold and foreign exchange (Officer 2010). IV.4.2.3.8 The real terms of stability in the classical gold standard IV.4.2.3.8.1 Credibility of the convertibility commitment The fundamental reason for the stability of the classical gold standard was323 that there was always absolute private-sector credibility in the commitment to the fixed domestic-currency price of gold on the part of the center country (Britain), two (France and Germany) of the three remaining core countries, and certain other European countries (Belgium, Netherlands, Switzerland, and Scandinavia)324. Certainly, that was true from the late-1870s onward. As for the United States’ case, this absolute credibility applied from about 1900. Also recall that in earlier periods, that commitment had a contingency aspect, it was recognized that convertibility could be suspended in the event of dire emergency (such as war); but, after normal conditions were restored, convertibility would be re-established at the pre-existing mint price and gold contracts would again be honored and the bank restriction period was an example of the proper application of the contingency, as is the greenback period (even though the United States, effectively on the gold standard, was legally on bimetallism). The absolute credibility in countries’ commitment to convertibility at the existing mint price implied that there was extremely low, essentially zero, convertibility risk—see the probability that Treasury or central-bank notes would not be redeemed in gold at the established mint price—and exchange risk—see the probability that the mint parity between two currencies would be altered, or that exchange control or prohibition Within the spread, there are no gold flows and the balance of payments is in equilibrium. 322 See sub-paragraph IV.2.1.5.2. 323 Not exactly the qualities of the system, according to the literature, but . . . 324 Officer (2010). 321

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of gold export would be instituted. Officer (2010) finds many reasons why the commitment to convertibility on the State’s side was so credible on the private sector (see the Box below). Why the gold convertibility was so credible ? (1) Contracts were expressed in gold; if convertibility were abandoned, contracts would inevitably be violated—an undesirable outcome for the monetary authority. (2) Shocks to the domestic and world economies were infrequent and generally mild. There was basically international peace and domestic calm. (3) The London capital market was the largest, most open, most diversified in the world, and its gold market was also dominant. A high proportion of world trade was financed in sterling, London was the most important reserve-currency center, and balances of payments were often settled by transferring sterling assets rather than gold. Therefore sterling was an international currency—not merely supplemental to gold but perhaps better: a boon to non—center countries, because sterling involved positive, not zero, interest return and its transfer costs were much less than those of gold. Advantages to Britain were the charges for services as an international banker, differential interest returns on its financial intermediation, and the practice of countries on a sterling (gold-exchange) standard of financing payments surpluses with Britain by piling up short-term sterling assets rather than demanding Bank of England gold. (4) There was widespread ideology—and practice—of “orthodox metallism,” involving authorities’ commitment to an anti-inflation, balanced-budget, stable-money policy. In particular, the ideology implied low government spending and taxes and limited monetization of government debt (financing of budget deficits by printing money). Therefore it was not expected that a country’s price level or inflation would get out of line with that of other countries, with resulting pressure on the country’s adherence to the gold standard. (5) This ideology was mirrored in, and supported by, domestic politics. Gold had won over silver and paper, and stable-money interests (bankers, industrialists, manufacturers, merchants, professionals, creditors, urban groups) over inflationary interests (farmers, landowners, miners, debtors, rural groups). 207

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(6) There was freedom from government regulation and a competitive environment, domestically and internationally. Therefore prices and wages were more flexible than in other periods of human history (before and after). The core countries had virtually no capital controls; the center country (Britain) had adopted free trade, and the other core countries had moderate tariffs. Balance-of-payments financing and adjustment could proceed without serious impediments. (7) Internal balance (domestic macroeconomic stability, at a high level of real income and employment) was an unimportant goal of policy. Preservation of convertibility of paper currency into gold would not be superseded as the primary policy objective. While sterilization of gold flows was frequent (see above), the purpose was more “meeting the needs of trade” (passive monetary policy) than fighting unemployment (active monetary policy). (8) The gradual establishment of mint prices over time ensured that the implied mint parities (exchange rates) were in line with relative price levels; so countries joined the gold standard with exchange rates in equilibrium. (9) Current-account and capital-account imbalances tended to be offsetting for the core countries, especially for Britain. A trade deficit induced a gold loss and a higher interest rate, attracting a capital inflow and reducing capital outflow. Indeed, the capital—exporting core countries—Britain, France, and Germany—could eliminate a gold loss simply by reducing lending abroad (Officer 2010).

IV.4.2.3.8.2 Violations of gold points were rare Many of the above reasons not only enhanced credibility in existing mint prices and parities but also kept international-payments imbalances, and hence necessary adjustment, of small magnitude. Responding to the essentially zero convertibility and exchange risks implied by the credible commitment, private agents further reduced the need for balance-of-payments adjustment via gold-point arbitrage and also via a specific kind of speculation. When the exchange rate moved beyond a gold point, arbitrage acted to return it to the spread. So it is not surprising that “violations of the gold points” were rare on a monthly average basis325. 325

As for the dollar, franc, and mark exchange rates versus sterling, see Officer (1996, p. 235). and Giovannini (1993, pp. 130-31).

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Certainly, gold-point violations did occur, but they rarely persisted sufficiently to be counted on monthly average data (Officer 2010). Such measured violations were generally associated with financial crises326. IV.4.2.3.8.3 Speculation as rather stabilizing The perceived extremely low convertibility and exchange risks gave private agents profitable opportunities not only outside the spread (gold-point arbitrage) but also within the spread (exchange-rate speculation). As the exchange value of a country’s currency weakened, the exchange rate approaching the gold-export point, speculators had an ever greater incentive to purchase domestic currency with foreign currency (a capital inflow); for they had good reason to believe that the exchange rate would move in the opposite direction, whereupon they would reverse their transaction at a profit. Similarly, a strengthened currency, with the exchange rate approaching the gold-import point, involved speculators selling the domestic currency for foreign currency (a capital outflow). Clearly, the exchange rate would either not go beyond the gold point (via the actions of other speculators of the same ilk) or would quickly return to the spread (via gold-point arbitrage). The further the exchange rate moved toward the gold point, the greater the potential profit opportunity—for there was a decreased distance to that gold point and an increased distance from the other point. This “stabilizing speculation” enhanced the exchange value of depreciating currencies that were about to lose gold; and thus the gold loss could be prevented. The speculation was all the more powerful, because the absence of controls on capital movements meant private capital flows were highly responsive to exchange-rate changes. Officer (1996, pp. 182, 191, 272) finds that this speculation was extremely efficient in keeping the exchange rate away from the gold points—and increasingly effective over time. Interestingly, these statements hold even for the 1890s, during which at times U.S. maintenance of currency convertibility was precarious. 327 The number of dollar-sterling violations for 1890-1906 exceeding that for 1889-1908 is due to the results emanating from different researchers using different data. Nevertheless, the important common finding is the low percent of months encompassed by violations(Officer 2010). 327 The average deviation of the exchange rate from the midpoint of the spread fell decade-by-decade from about 1/3 of one percent of parity in 1881-1890 (23 326

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IV.4.2.3.8.4 Government policies in spite of the gold-standard stability, as well Government policies also enhanced gold-standard stability. First, by the turn of the century South Africa—the main world gold producer—sold all its gold in London, either to private parties or actively to the Bank of England, with the Bank serving also as residual purchaser of the gold. Thus the Bank had the means to replenish its gold reserves. Second, the orthodox—“metallist” ideology and the leadership of the Bank of England—other central banks would often gear their monetary policy to that of the Bank—kept monetary policies harmonized. Monetary discipline was maintained (Officer 2010). Third, countries used “gold devices,” primarily the manipulation of gold points, to affect gold flows. For example, the Bank of England would foster gold imports by lowering the foreign gold-export point328 through interest-free loans to gold importers or raising its purchase price for bars and foreign coin. The Bank would discourage gold exports by lowering the foreign gold-import point (the British gold-export point) via increasing its selling prices for gold bars and foreign coin, refusing to sell bars, or redeeming its notes in underweight domestic gold coin. These policies were alternative to increasing Bank Rate. The Bank of France and Reichsbank employed gold devices relative to discount-rate changes more than Britain did. Some additional policies included converting notes into gold only in Paris or Berlin rather than at branches elsewhere in the country, the Bank of France converting its notes in silver rather than gold (permitted under its “limping” gold standard), and the Reichsbank using moral suasion to discourage the export of gold. The U.S. Treasury followed similar policies at times. In addition to providing interest-free loans to gold importers and changing the premium at which it would sell bars (or refusing to sell bars outright), the Treasury condoned banking syndicates to put pressure on gold arbitrageurs to desist from gold export in 1895 and 1896, a time when the U.S. adherence to the gold standard was under stress. Fourth, the monetary system was adept at conserving gold329. This percent of the gold-point spread) to only 12/100th of one percent of parity in 1911-1914 (11 percent of the spread). 328 Here recalled the number of units of foreign currency per pound, as the British gold-import point. 329 See Triffin (1964, p. 62), and Sayers (1976, pp. 348, 352). 210

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was important, because the increased gold required for a growing world economy could be obtained only from mining or from non-monetary hoards. While the money supply for the eleven—major-country aggregate more than tripled from 1885 to 1913, the percent of the money supply in the form of metallic money (gold and silver) more than halved. This process did not make the gold standard unstable, because gold moved into commercial-bank and central-bank (or Treasury) reserves: the ratio of gold in official reserves to official plus money gold increased from 33 to 54 percent. The relative influence of the public versus private sector in reducing the proportion of metallic money in the money supply is an issue warranting exploration by monetary historians. Fifth, while not regular, central-bank cooperation was not generally required in the stable environment in which the gold standard operated. Yet this cooperation was forthcoming when needed, that is, during financial crises. Although Britain was the center country, the precarious liquidity position of the Bank of England meant that it was more often the recipient than the provider of financial assistance. In crises, it would obtain loans from the Bank of France (also on occasion from other central banks), and the Bank of France would sometimes purchase sterling to push up that currency’s exchange value. Assistance also went from the Bank of England to other central banks, as needed. Further, the credible commitment was so strong that private bankers did not hesitate to make loans to central banks in difficulty(Officer 2010). IV.4.2.3.8.5 As summarizing As summarizing, “virtuous” two-way interactions were responsible for the stability of the gold standard. The credible commitment to convertibility of paper money at the established mint price, and therefore the fixed mint parities were both a cause and a result of (1) the stable environment in which the gold standard operated, (2) the stabilizing behaviour of arbitrageurs and speculators, and (3) the responsible policies of the authorities—and (1), (2), and (3), and their individual elements, also interacted positively among themselves (Officer 2010).

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IV.4.2.4 Crisis and instability for the classical gold standard There was no proper crisis of the (international) gold standard up to what was coming for the later 1929-1933 interval330, but crises induced by some very external events—actually, just wars. The first example to be given was a period of suspension of the gold standard in different pattern cases: governments faced with the need to fund high levels of expenditure, but with limited sources of tax revenue, suspended convertibility of currency into gold on a number of occasions in the 19th century331. The British government suspended convertibility during the Napoleonic wars (Triffin 1973, pp. 24) as well as the US government during their earlier US Civil War332 (McKinnon 1993, pp. 7)— in both cases, convertibility was resumed after the war333. At the eastern end of the Asian continent—but following the very (European) Germany’s example after the Franco-Prussian War of extracting reparations to facilitate a move to the gold standard—Japan gained the needed reserves after the Sino-Japanese War of 1894-1895. Whether the gold standard provided government sufficient bona fides when it sought to borrow abroad is debated—otherwise, for that time, for Japan, moving to gold was considered vital to gain access to Western capital markets (Meltzler 2006). In the next early 20th century, it was another and even larger and more destructive war: World War I. As in previous major wars under the gold standard, the British government suspended the convertibility of Bank of England notes to gold in 1914 to fund military operations during the war. Or, the literature here indicates the suspension of gold payments to fund the war as specifically different as the suspension of the whole system functioning (Snowdon & Vane 2002). By the end of the war Britain was on a series of fiat currency regulations, which monetized Postal Money Orders and Treasury Notes. The UK Government later called these notes banknotes, which are different from the US Treasury notes. The United States government took In which context, Eichengreen (1992) actually blames the gold standard for the big economic crisis (see below). 331 Actually, Government acting like this was breaking the gold standard principle of neutrality against gold commodity, here including reserves. 332 It was about a 17 years interruption of the gold convertibility of the American currency. 333 For the British case, see Bordo (1984) and for the American one, see McKinnon (1993, pp.7) again. 330

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similar measures. After the war, Germany, having lost much of its gold in reparations, could no longer produce gold Reichsmarks, and was forced to issue un-backed paper money, leading to hyperinflation. Later on, Great Britain, Japan, and the Scandinavian countries left the gold standard “together” in 1931334. No proper crisis for the classical gold standard, as above asserted, but apart from the war-origin crises of the classical gold standard, Lindert (1969, pp. 22, 25) finds that the use of foreign exchange as reserves increased as the gold standard progressed, apparently favouring the gold-exchange standard. Available end-of-year data indicate that, worldwide, foreign exchange in official reserves (the international assets of the monetary authority) increased by 36 percent from 1880 to 1899 and by 356 percent from 1899 to 1913. In comparison, gold in official reserves increased by 160 percent from 1880 to 1903 but only by 88 percent from 1903 to 1913. While in 1913 only Germany among the center countries held any measurable amount of foreign exchange—15 percent of total reserves excluding silver (which was of limited use)—the percentage for the rest of the world was double that for Germany335. If there were a rush to cash in foreign exchange for gold, reduction or depletion of the gold of reserve-currency countries could place the gold standard in jeopardy. IV.4.2.5 The breakdown of the classical gold standard The classical gold standard was at its height at the end of 1913, ironically just before it came to an end336. The proximate cause of the breakdown of the classical gold standard, as above mentioned, was not economic or system related, but political: the advent of World War I in August 1914. However, it was the Bank of England’s precarious liquidity position and the gold-exchange standard that were the underlying cause. With the outbreak of war, a run on sterling led Britain to impose extreme exchange control—a postponement of both domestic and international payments—that made the international gold standard non-operational. Convertibility was not See: Template:Cite web url=http://www.youtube.com/watch?v=3 ex0sTsb I&feature=channel 335 Officer (2010/Table 6) 336 Officer (2010). So, this is equally a true controversial point in literature. Some authors here proclaimed the “death of the gold standard” (see Guitton & Bramoulé 1987, pp. 586), as a no-unanimously accepted opinion. 334

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legally suspended, but moral suasion, legalistic action, and regulation had the same effect. Gold exports were restricted by extralegal means (and by “Trading with the Enemy” legislation), with the Bank of England commandeering all gold imports and applying moral suasion to bankers and bullion brokers337. Almost all other gold-standard countries undertook similar policies in 1914 and 1915. The United States entered the war and ended its gold standard late, adopting extralegal restrictions on convertibility in 1917338. An effect of the universal removal of currency convertibility was the ineffectiveness of mint parities and inapplicability of gold points: floating exchange rates resulted (Officer 2010). With the outbreak of the First World War in 1914, the international trading system broke down and nations valued their currencies by fiat instead, i.e. governments took their currencies off the gold standard and simply dictated the value of their money339. Following the war, some nations attempted to reinstate the gold standard at pre-war rates, but drastic changes in the global economy made such attempts futile. The end of the gold standard in Britain was successfully affected by appeals to patriotism when somebody would request the Bank of England to redeem their paper money for gold specie. But it was in the year 1925 when Britain returned to the gold standard in conjunction with Australia and South Africa, that the gold specie standard was officially ended—the British act of Parliament that introduced the gold bullion standard that year simultaneously repealed the gold specie standard, so, the new gold bullion standard did not envisage any return to the circulation of gold specie coins. Instead, the law compelled the authorities to sell gold bullion on demand at a fixed price(Officer 2010).

Britain, which had previously been the world’s financial leader, reinstated the pound at its pre-war gold value, but because its economy was much weaker, the pound was overvalued by approximately 10%. Consequently, gold swept out of Britain, and the public was left with valueless notes, creating a surge in unemployment. By the time of the Second World War, the inherent problems of the gold standard became apparent to governments and economists alike (Abdel-Monem, Tarik/ op.cit.). 338 Although in 1914 New York banks had temporarily imposed an informal embargo on gold exports. 339 Abdel-Monem, Tarik (op.cit.) 337

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IV.4.3 The interwar Gold Standard IV.4.3.1 A specific—specific difference from the classical age Actually, there are two interwar periods to be identified: before and after the big economic crisis—a crisis which’s role on the following developments was essential on either economy or economics. As for the first period, in spite of the tremendous disruption to domestic economies and to the worldwide economy caused by World War I, a general return to gold took place. However, the resulting interwar gold standard differed institutionally from the classical gold standard in several respects. First, the new gold standard was led not by Britain but rather by the United States. The US embargo on gold exports (imposed in 1917) was removed in 1919, and currency convertibility at the prewar mint price was restored in 1922. The gold value of the dollar rather than of the pound sterling would typically serve as the reference point around which other currencies would be aligned and stabilized. Second, it follows that the core would now have two center countries, the United Kingdom and the United States. Third, for many countries there was a time lag between stabilizing a country’s currency in the foreign-exchange market (fixing the exchange rate or mint parity) and resuming currency convertibility. Given a lag, the former typically occurred first, currency stabilization operating via central-bank intervention in the foreign-exchange market340 (Bloomfield 1959). Fourth, the contingency aspect of convertibility conversion, that required restoration of convertibility at the mint price that existed prior to the emergency (World War I), was broken by various countries—even core countries. Some countries (including the United States, United Kingdom, Denmark, Norway, Netherlands, Sweden, Switzerland, Australia, Canada, Japan, Argentina) stabilized their currencies at the prewar mint price—on the contrary, other countries (France, Belgium, Italy, Portugal, Finland, Bulgaria, Romania, Greece, Chile) established a gold content of their currency that was a fraction of the prewar level: the currency was devalued in terms of gold, the mint price was higher than prewar. A third group of countries (Germany, Austria and Hungary) stabilized new currencies adopted after hyperinflation. A fourth group (Czechoslovakia, Danzig, Poland, Estonia, Latvia, Lithuania) consisted of countries that became Transacting in the domestic currency and a reserve currency, generally sterling or the dollar.

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independent or were created following the war and that joined the interwar gold standard. A fifth group (some Latin American countries) had been on silver or “paper standards” during the classical period but went on the interwar gold standard. A sixth country group (Russia) had been on the classical gold standard, but did not join the interwar gold standard. A seventh group (Spain, China, Iran) joined neither gold standard. The fifth way in which the interwar gold standard diverged from the classical experience was the mix of gold-standard types. The gold coin standard, dominant in the classical period, was far less prevalent in the interwar period. In particular, all four core countries had been on coin in the classical gold standard, but, of them, only the United States was on coin interwar. The gold-bullion standard—as nonexistent prewar—was adopted by two core countries (United Kingdom and France) as well as by two Scandinavian countries (Denmark and Norway). Most countries were on a gold-exchange standard. The central banks of countries on the gold-exchange standard would convert their currencies not into gold but rather into “gold-exchange” currencies (currencies themselves convertible into gold), in practice often sterling, sometimes the dollar (the reserve currencies)341. IV.4.3.2 Crisis and instability The features that fostered stability of the classical gold standard did not apply to the interwar standard—instead, many forces made for instability (Officer 2010). On the contrary, there came up number of factors of instability: fixed exchange rates were enlarging disequilibria among exchange rates342. The UK was meeting also large balance-of-payments difficulties; so the increasingly precarious Britain’s financial position world-wide, as in contrast with its leadership position; the conflict between the expansion of sterling and dollar liabilities to foreign central banks to expand world liquidity; overall scarcity and mal-distribution and so on.

See: Bloomfield (1959, pp. 13, 15; 1963), Bordo and Kydland (1995); Bordo and Schwartz (1996). 342 See in terms of mint parity, currencies of Denmark, Italy, and Norway strengthen, in contrast with currencies of France, Germany, and Belgium had undervalued currencies 341

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IV.4.3.3 Breakdown of the Interwar Gold Standard The beginning of the end of the interwar gold standard occurred, of course, with the Great Depression (1929-1933). The U.S. monetary policy was an important catalyst, by trying to fight the stock-market boom of 1927 and favouring destabilizing speculation on the base of the private sector’s non-confidence in such a policy. The neighbouring Canada was a special case at the time, first, by its drastic reaction to the high interest rates in the US—see trying to stop the stock market boom—and second by aiming the restriction of the gold exports from the country. In Europe, the Austrian and German experiences, as well as British budgetary and political difficulties, were among the factors that destroyed confidence in sterling, which occurred in mid-July 1931 and rune on sterling ensued, and the Bank of England lost much of its reserves343.The trust in the Bank of England had a long tradition, and the shock to confidence in sterling that occurred in July 1931 was unexpected by the British authorities. Following the UK abandonment of the gold standard, many countries followed, some to maintain their competitiveness via currency devaluation, others in response to destabilizing capital flows. Back to the United States, they held on until 1933, when both domestic and foreign demands for gold, manifested in runs on U.S. commercial banks, became intolerable. The “gold bloc” countries (France, Belgium, Netherlands, Switzerland, Italy, Poland) and Danzig lasted even longer; but, with their currencies now overvalued and susceptible to destabilizing speculation, these countries succumbed to the inevitable by the end of 1936. Albania stayed on gold until occupied by Italy in 1939. Eichengreen (1992) blames the gold standard of the 1920s for prolonging the Great Depression—the gold standard did limit the control of central banks over monetary policy. As a result, central banks could not lower interest rates in order to expand demand and stimulate the economy, deepening and prolonging the Great Depression344. The recovery Loans from abroad were insufficient, and in any event taken as a sign of weakness. The gold standard was abandoned by the UK in September, and the pound quickly and sharply depreciated on the foreign-exchange market, as overvaluation of the pound would imply (Officer 2010) 344 For example, in the early 1930s, the Federal Reserve (“the FED”)’ defended the fixed price of dollars in respect to the gold standard by raising interest rates, trying to increase the demand for dollars. Higher interest rates intensified the deflationary pressure on the dollar and reduced investment in U.S. banks. The banks also 343

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afterwards in the United States was slower than in Britain, in part due to the Federal Reserve’s reluctance to abandon the gold standard and float the U.S. currency as Britain had done. It was not until 1933 when the United States finally decided to abandon the gold standard that the economy began to improve. IV.4.4 The epilogue of the gold standard story Note that the second interwar period—see, the aftermath of the Great Depression—description will be developed in the next Part, as the international monetary disorder, between two existing international monetary systems (IMSs). So, let us limit here to just two significant aspects. First, leaving the gold standard equalized joining the zone and time of inflation. And here it is the voice of John Maynard Keynes—otherwise, another great adversary of the gold standard—to better express about: “. . . By a continuous process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method, they not only confiscate, but they confiscate arbitrarily; and while the process impoverishes many, it actually enriches some” (Keynes 1920). Second, it was the 1944 Bretton Woods Agreement for another international monetary system(IMS)—meaning that the world economy at the time was not able to bear any “non-IMS” 345 situation. Third, there is the story called “International Gold Pool”346—a name submitted to several changes over time, but as for the same reality (partly changing, together with its successive names)—as significant. Interruptions, like the case between 1944 (the year of the Bretton Woods Agreement) and 1961, were meat by this institution as well (Gold 1979, converted dollar assets into gold in 1931, reducing the Federal Reserve’s gold reserves. This speculative attack on the dollar created a panic in the U.S. banking system. Fearing imminent devaluation of the dollar, many foreign and domestic depositors withdrew funds from U.S. banks to convert them into gold or other assets. See:.http://www.federalreserve.gov/boarddocs/speeches/2004/200403022/ default.htm 345 This is an expression with a serious “come-back” in the final of this paper, as referred to the today monetary description of the world economy. See Wolf (1994). 346 See: US, Switzerland, Belgium, West Germany (and Germany after 1989), Italy, Netherlands, United Kingdom, at first. In 1967, the group was joined by France and later on, in 1999, by the European Union, as a new States formation. 218

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pp. 219). The “Pool” has kept a net purchaser position up to 1967, but then the next year 1968 was the moment of perceiving the opposite: a member States’ central banks spoiling of gold, due to causes like too high increasing of the American EBP deficit or devaluation of the UK’s pound sterling. As consequently, the famous London Stock Exchange, as the market negotiating space of the “Pool”, temporary closed. And as consequently, the International Monetary Fund (IMF)347 Governors’ Council’s reaction has been immediate for the (new) abolition of the “Pool”—that was in March 17, 1968. Concomitantly, however, the former “Pool” came to be replaced by a new (similar) international arrangement on gold aiming: (1) the monetary gold (certainly, the amounts of the international metal reserves of central banks) regime, as distinct from, but equally related to the (international) gold market; (2) sustaining the new IMF money, the “Special Drawing Rights” (SDR), as circulating (functioning) between the institution and member States. International transactions and free market arrangements with gold were allowed between member States of the “new Pool” and other States only. Back to the monetary gold, it keeps its official price up to July 12, 1975—when terms of the Bretton Woods Agreement were already fallen and the institution of the IMF was meeting a serious crisis of continuing its functioning, due to its SDR foundation348—after having permitted some transactions in earlier January, the same year. In a word, gold went back to specific trade restrictions after the gold standard era—as similarly to its “ivory tour” restrictions in the ancient eras, before becoming popular as commodity money (some authorities were just banning their peoples’ access to owing this metal). In the simplest view, gold actually came back to where it had come from once, and this looks like a true and sad destiny of this extraordinary character of the human history. There is no “monetary gold” either after Bretton Woods (1944-1971), more precisely since the SDR has finally reached a new valuation (1974), but it is still part of central banks’ reserves. On the one hand, the last aren’t yet able to sell it out on market, on the other one the free market itself (i.e. consumers) keeps unable to absorb all the gold stock amounts. The question is: is or will ever be gold becoming an ordinary market good and joining market as simply as the rest of goods do? Will the gold industry become as ordinary as all the others, as correspondingly? Will be the world of free market gold Which’s status and condition in the international financial area will be deepen in the next Part Five. 348 As equally to be detailed in the next and last Part Five. 347

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different from our current one ? Are these really important questions for the future, or not ? No literature so far, and not even this paper is able to explain it or predict facts in this matter. More literature might be expected on such an issue. One thing is for sure: the same as in the gold standard era, but now “back in its jail” gold is still an international issue—so, never a matter to play with. This is similarly to oil for the humanity, but even not so vital for human life like oil is.

IV.5 Related polemics White(1999) notes that the practical (i.e. essential) question is: under which system are the quantity and purchasing power of money better behaved? As is well known, the stock of gold did not grow at a perfectly steady rate during the era of the historical gold standard. Some increases in gold output349 were responses to previous increases in demand and the purchasing power of gold, and thus helped to stabilize the same purchasing power of gold over the long run. A historian economist like Rockoff (1983, p. 614) found that supply of fiat money in the postwar period (1949-79), by contrast to the behaviour of gold under the classical gold standard, had both higher annual rates of growth and a higher standard deviation of annual growth rates around decade averages. Plus, in retrospect, the gold standard had many weaknesses. Its foremost problem was that its theoretical balancing effect350 rarely worked in reality. A much more efficient means to resolve balance of payments problems is through government intervention in their economies and the exchange of reserve currencies ( . . .). Under a fiat standard, the future price level depends on the personalities of yet-to-be-appointed monetary authorities and thus is anybody’s guess351, whereas “a gold standard leaves the quantity of money to be determined by accidental forces352 “(White 1999, pp. 47). And even more than that, another “gold standard would be

Such as the Yukon discoveries and the development of the cyanide process. See the above “price specie-flow” mechanism. 351 See: Tarik Abdel-Monem (op.cit.) & The University of Iowa Center for International Finance and Development—but is that supposed to be a strength for the fiat money, or, on the contrary? 352 See even extreme questions and hypotheses that might come in context: “what if a golden meteorite hit the earth?”. Or: “a gold standard would allow Putin to buy the United States.” etc. 349 350

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a source of harmful deflation”353. In 1879 the United States have resumed gold redemption for the U.S. dollar, which had been suspended since the Civil War. Between 1880 and 1900 the United States experienced one of the most prolonged periods of deflation on record. The price level trended more or less steadily downward, beginning at 6.10 and ending at 5.49354. That works out to a total decline of 10 percent stretched over 20 years. But, on the contrary, this referred deflationary period was no disaster for the real economy. Real output per capita began the period at $3,379 and ended it at $4,943 (both in 2000 dollars). Total real per capita growth was thus a more than-healthy 46 percent and the real GDP itself more than doubled (Johnston & Williamson 2005). Another episode was the US monetary contraction of 1929-33—and that is even a more obvious example of the already called above “harmful deflation”. However, this happened on the Federal Reserve’s watch, so it should not be blamed on the gold standard, but on the combination of a weak banking system and a befuddled central bank. The U.S. banking system was prone to runs and panics in the late 19th century and continued to be so through the 1929-33 episodes in which the FED stood by and did not supply replacement reserves to keep the money stock from contracting. Other countries on the gold standard—Canada, for example—had no banking panic in 1929-33 (nor did Canada have panics in the late 19th century), so the gold standard couldn’t have been responsible for the panics. Rather the panics were due to completely avoidable legal restrictions (namely the ban on branch banking and compulsory bond collateral requirements that make the supply of banknotes “inelastic”) that weakened the US banking system. As falling costs of production in steel (i.e. productivity gains), for another example, do not discourage investment in steel, so a gradual anticipated deflation does not discourage investment, especially not when productivity gains are driving growth in the first place(Johnston & Williamson 2005). Actually, the gold standard was a source of mild benign deflation in periods when the output of goods grew faster than the stock of gold—while 353

The blogger Megan McArdle thus gets things almost exactly backward when she writes: “The gold standard cannot do what a well-run fiat currency can do, which is to tailor the money supply to the economy’s demand for money”. See: Megan McArdle, “There’s Gold in Them Thar Standards!” Asymmetrical Information blog, September 4, 2007, http://meganmcardle.theatlantic.com/archives/2007/09/ theres_gold_in_them_thar_stand.php.

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monetary economists distinguish a benign deflation—due to the output of goods growing rapidly while the stock of money grows slowly, as in the 1880-1900 period—from a harmful deflation—due to unanticipated shrinkage in the money stock. Prices particularly fell for those goods whose production enjoyed great technological improvement—for example oil and steel after 1880. Strong growth of real output, for particular goods or in general, cannot be considered harmful. It would be possible for the central bank under a fiat money standard to offset productivity-driven declines in some prices by expanding the quantity of money in order to drive others prices upward, thus eliminating deflation “on average.” But there is no social benefit in doing so. “The benefit of a gold standard (restraining inflation) is attainable at less cost by properly controlling the supply of fiat money” (Johnston & Williamson 2005). The gold standard system’s costs—called by the authors the resource costs—were previously rather overestimated by Friedman (1986): this was by assuming 100 percent reserves against all components of M2 (that is, against even time deposits)—although such a system has no advocates and no historical precedent. With a historically more reasonable fractional reserve ratio of 2 percent, the amount of gold needed in vaults and thus the resource cost of a gold standard shrinks by a factor of 50 (Friedman 1951/1953/1960). Actually, Friedman wanted to substitute for gold a less costly paper money standard bound by a strict money growth rule. Later on, in the 1980s he changed his mind about the feasibility of getting the FED to commit to anything of the sort, reconsidered the costs of inflation in the absence of a strict rule, and began to call for abolishing the Federal Reserve System—though not replacing it with a gold standard, because he thought no government would any longer consent to be constrained by a gold standard(Friedman 1984/1987). However, the previous Friedman’s idea of abolishing the FED remains interesting in a way, as taking into account the precedent of the same gold standard, for which no central bank (but just minting) was necessary. In such a context, Freedman and his “Chicago Monetarist” School of thinking were a kind of: “against gold standard and for the fiat money system, but . . .” Although growth in the stock of fiat money could in principle be as slow (or slower) than growth in the stock of gold under a gold standard, it has not been so in practice, as already noted355. In another study covering 355

For a thorough account of the benefits of allowing a productivity-driven deflation, see Selgin (1997).

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many decades in a large sample of countries, the Federal Reserve Bank of Minneapolis economists Arthur Rolnick and Weber (1997, p. 1317) found that “money growth and inflation are higher” under fiat standards than under gold and silver standards. Specifically, they reported that the average inflation rate for the fiat standard observations is 9.17 percent per year; the average inflation rate for the commodity standard observations is 1.75 percent per year356. The purchasing power of money under the gold standard was steadier and more predictable, whereas, certainly, inflation rate under the gold standard averaged close to zero over generations, sometimes slightly positive and sometimes slightly negative over individual decades. A gold standard free of a central bank provides a commitment to non-inflation made good by the impersonal economics of gold mining (for gold itself ) and by enforceable redemption contracts and the competitive market value of reputation for bank-issued money(Bordo.& Kydland 1995). The macro-economist Robert Barro and the former US Federal Reserve Chairman Alan Greenspan also join the advocates’ of returning to gold standard camp (Salerno 1982). Greenspan (1966) argues that the fiat money system of his day (pre-Nixon Shock) had retained the favorable properties of the gold standard because central bankers had pursued monetary policy as if a gold standard were still in place357. In context, Mr. Greenspan actually used to recommend controlling the fiat money supply to mimic the price-level behaviour of a gold standard358. The fiat money That is over the sample of gold and silver episodes reported in the published version of their paper; an earlier version using a different sample arrived at an average rate of—0.5 percent. Anyway, this result was not driven by a few extreme cases; in fact, in computing the average rates of inflation Rolnick and Weber deliberately omitted cases of hyperinflation (which occurred only under fiat money). Still, they noted, every country (in our sample) experienced a higher rate of inflation in the period during which it was operating under a fiat standard than in the period during which it was operating under a commodity standard. 357 The author famously argued the case for returning to a gold standard in his paper, in which he described supporters of fiat currencies as “welfare statists” intent on using monetary policies to finance deficit spending. 358 In response to questioning at a 2001 congressional hearing, Greenspan said: “Mr. Chairman, so long as you have fiat currency, which is a statutory issue, a central bank properly functioning will endeavor to, in many cases, replicate what a gold standard would itself generate”: an enforceable commitment not to use surprise monetary expansion and resulting inflation as a temporary stimulus to the economy (see also: www.usagold.com/gildedopinion/greenspangold.html). 356

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system never was a very anchor to the general price level, but “chronically and inevitably an inflation vehicle”. Central banks had created the inflation of the 1970s because the gold standard no longer constrained them, but they had been able to bring inflation back down by belatedly learning to emulate the restrained money growth that was characteristic of the gold standard. Here there comes another controversial issue. Recall from above that under the gold standard, market forces do in fact automatically tailor the money supply to the economy’s demand for money. The economics of gold mining operates to match world supply with world demand at the stable price level—though admittedly large demand shocks can take years to be accommodated —, while the “price-specie-flow mechanism” quickly brings gold from the rest of the world into any single country where demand for money has grown. There is not to be observed any central bank that has actually managed it. Peter (Bernholz 1990), for example, tells us that “a study of about 30 currencies shows that there has not been a single case of a currency freely manipulated by its government or central bank since 1700 which enjoyed price stability for at least 30 years running.” And just one more aspect is to be given in a huge range. Of course, a gold standard is not the only possible rule for constraining the creation of money—as seen above alternatives include a Friedman-type money-growth rule, or an inflation targeting rule. But the gold standard has a longer history, and is the only historically tested rule that does not presuppose a central bank. Leaving money issue in the hands of private banks rather than a government institution, as the United States did before 1913, removes the option to use surprise monetary expansion one step further. It remains true that government can suspend the gold standard in an emergency, as both sides did during the Civil War, but the spirit of the gold standard calls for returning to the parity afterward, as did the United States. Thus it is no surprise that inflation rose after gold money was abandoned (Barro & Gordon 1983)359. The current debate on gold standard—see, for or against it; that it was or not for real “rules of the game” or its history was actually different; that the gold metal might or not be a myth; that our world should be able to return to gold or, on the contrary etc.—is similar to the one of a couple of decades ago. Meutey (1972) was recording a pro and against gold dialogue between Jaques Rueff and Robert Triffin. The seventies and eighties were 359

Some authors point to these two authors as to an “alternative monetary” school.

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the time of the reforming international monetary system proposals after the Bretton Woods Conference360—another debate in which scholars like M. Stand361, Janos Fekete (1973), R.E. Harrod (1948) and some others were for remaking gold standard on the IMS, whereas on the other side Keynes (1926), Triffin (1973), but also Aglietta (1986), Cross (1989) and others were standing against or for remaking international money out of any gold reference, be it in very personal, diverse or chaotic ways of doing it. The debate repeats as genuine as it is, but unfortunately for remaking a kind of vicious circle. Given all of the above expressions, we believe that the most suitable attitude to be taken is, first, staying off and not to interfere in, and this might be in order to search for what actually lies beyond this debate. In our opinion, there are two levels of such a debate. The one is pretty practical, meaning interests involved in from all over. This is priory about an inflation-deflation debate—inflation harming consumers, general welfare and its distribution; deflation harming, on the contrary, the producers-suppliers side of market. To be equally noted, though, that inflation-deflation do not harm all the time, but when they climb up to high (harmful) levels—much less or not at all when low (benign) levels. As the result, price stability might be a key solution to all interests around market (and) economy, and there is not only the gold standard issue of economics in context to talk about362. Plus, price stability proves fragile in the economic and everyday life. Motivation on the debate for yes or no return to gold standard363 reflects, as summarizing, a very (social, but equally biological, sometimes) fear of crisis, instability, harmful inflation and/or deflation, of monopolies and oligopolies, but also of policies of authorities—see the example of money expanding for political reasons against the people’s welfare. Individuals and organizations keep enough interest in such circumstances, but also States and international business for fixed, versus floating exchange rates and EBP equilibrium-disequilibrium. The other level of debate is the scientific and academic one—this is about no reconciliation between the two thinking ways about money: That it will be about in the following chapters. Cited by Oprescu (1981). 362 See, for another example, the perfect competition model of the Vilfredo Pareto Marginal school of thinking (Hardwick coord. 1992). 363 As well as on remaking some market competition environment. 360 361

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representative versus fiat money. Representative money has already meat a quite long and honorable history through gold standard, bimetallism and their barter system precedents—now, in the years of gold standard overthrown (1931-1933) there might come the fiat money in turn to play its role. But we are currently in the next 21st century and the dilemma looks the same after another story of fiat (i. e. “real”) money—and details will come in the next following chapters. So, let us remain in the academic terms of debate and notice that representative versus fiat money means opposing to price stability and perfect competition vicinity the higher rates of inflation and growth-development, as associated to central banking and interventionism (economic policies). Free economy, versus interventionism—the latter brought in by the economic crisis of 1929-1933—yet proves the largest and most durable debate in the area of economics today—a kind of “debate of all debates”, which does not spare the one around the gold standard concept.

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In “Blue Points for Exchange Rate Management”. Morens Millar Publisher. White, Lawrence H.(1999): The Theory of Monetary Institutions Oxford: Blackwell, 1999, p. 47. Hardwick, Philip & Bahadur Khaan & John Langmead: An Introduction to Modern Economics. London-New York. Ed. Langman. 1992 Redish, Angela(2000): Bimetallism: An Economic and Historical Analysis. New York: Cambridge University Press, 2000. Macleod, Henry Dunning(1858): Elements of Political Economy. London: Longmans, Green & Co., 1858. Giffen, Robert. “The Gresham Law.” Economic Journal 1, no. 2 (1891): 304-6. Fetter, Frank W.(1932): “Some Neglected Aspects of Gresham’s Law.” Quarterly Journal of Economics 46, no. 3 (1932): 480-95. Mundell, Robert (1998): “Uses and Abuses of Gresham’s Law in the History of Money.” Zagreb Journal of Economics 2, no. 2 (1998): 3-38. http:// www.columbia.edu/~ram15/grash.html). Jevons, William Stanley (1882): Money and the Mechanism of Exchange. New York: D. Appleton and Company, 1882. Spencer, Herbert (1851): Social Statics. London: John Chapman, 1851 Rolnick, Arthur J., and Warren E. Weber (1986): “Gresham’s Law or Gresham’s Fallacy?” Journal of Political Economy 94, no. 1 (1986): 185-99. Davies, Glyn (1994): ‘‘A History of Money’’, University of Wales, 1994, Marx, Karl (1958): Contribution à la Critique de l’Économie Politique. Paris. Dunod. Translation by Laura Lafargo. 1958 Kindleberger, Charles P. (1993): A financial history of western Europe. Oxford: Oxford University Press. pp.  60-63. ISBN  0-19-507738-5. OCLC 26258644. xxx The Pocket money book: a monetary chronology of the United States. Great Barrington, Massachusetts: American Institute for Economic Research. 2006. pp. 4-6. ISBN 0-913610-46-1. OCLC 75968548. Bloomfield, Arthur I.(1959): Monetary Policy under the International Gold Standard, 1880-1914. Nurkse, Ragnar (1944): International Currency Experience: Lessons of the Inter-War Period. Geneva: League of Nations, 1944. Sayers, R. S.(1976): The Bank of England, 1891-1944, Appendixes. Cambridge: Cambridge University Press, 1976. 228

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Board of Governors of the Federal Reserve System(1943): Banking and Monetary Statistics 1914-1941. Washington, DC, 1943. Bordo, Michael D., and Hugh Rockoff (1996): “The Gold Standard as a ‘Good Housekeeping Seal of Approval’. In: “Journal of Economic History 56, no. 2 (1996): 389-428. Giovannini, Alberto(1993): “Bretton Woods and its Precursors: Rules versus Discretion in the History of International Monetary Regimes.” In A Retrospective on the Bretton Woods System: Lessons for International Monetary Reform, edited by Michael D. Bordo and Barry Eichengreen, 109-47. Chicago: University of Chicago Press, 1993. Snowdon, Brian; Howard R. Vane (2002). “Gold Standard”. An Encyclopedia of Macroeconomics. Edward Elgar Publishing. p. 293. ISBN 1840643870. http://books.google.com/books?id=HSVakrh8TToC&pg=PA293. Retrieved 2008-12-15. Bordo, Michael D.(1984): The Classical Gold Standard. Some Lessons for Today. In “Economic Review”. May 1981, pp. 2-17. Reprinted, in the “Federal Reserve Bank of St. Louis Review”. May 1984. Lindert, Peter H. (1969): Key Currencies and Gold, 1900-1913. Princeton: International Finance Section, Princeton University, 1969. Guitton, Henry & Richard Bramoulé (1987): La Monnaye. Paris. Dalloz. 6th edition. 1987 Bordo, Michael D & Finn E Kydland (1995): “The Gold Standard as a Rule: An Essay in Exploration.” In: “Explorations in Economic History” 32, no. 4 (1995): 423-64. Bordo, Michael D., and Anna J. Schwartz, eds.(1996): A Retrospective on the Classical Gold Standard, 1821-1931. Chicago: University of Chicago Press, 1984. Eichengreen, Barry (1992): Golden Fetters: The Gold Standard and the Great Depression, 1919-1939. Preface. Keynes, John Maynard (1920): Economic Consequences of the Peace, 1920. Wolf, Martin (1994): Éloge du Non-Système Monétaire International. In «  Problèmes Économiques. Nmb. 2394/19 October 1994. Article taken over from the Financial Times of 28 March 1994, under the title : In prize of the international monetary system. Gold, Joseph (1979): Legal and Institutional Aspects of the International Monetary System. Selected Essays. IMF. Washington DC. 1979 Johnston, Louis D. & Samuel H. Williamson (2005): “The Annual Real and Nominal GDP for the United States, 1790–Present.” Economic History Services, October 2005, www.eh.net/hmit/gdp/. 229

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Friedman, Milton (1986): “The Resource Cost of Irredeemable Paper Money,” Journal of Political Economy 94 (June 1986): 642-47. Friedman, Milton (1951/1953/1960): “Commodity-Reserve Currency”. In Journal of Political Economy 59 (June 1951): 203-32, reprinted in Milton Friedman, Essays in Positive Economics (Chicago: University of Chicago Press, 1953); Milton Friedman, A Program for Monetary Stability (New York: Fordham University Press, 1960). Friedman, Milton (1984/1987): “Monetary Policy for the 1980s” in “To Promote Prosperity: U.S. Domestic Policy in the Mid-1980s”, ed. John H. Moore (Stanford, CA: Hoover Institution Press, 1984). Reprinted in Kurt Leube, ed., The Essence of Friedman (Stanford, CA: Hoover Institution Press, 1987). George Selgin (1997): Less Than Zero: The Case for a Falling Price Level in a Growing Economy (London: Institute of Economic Affairs, 1997). Rolnick, Arthur J.& Warren E. Weber (1997): “Money, Inflation, and Output under Fiat and Commodity Standards,” Journal of Political Economy 105 (December 1997): 1308-1321. Bordo, Michael D.& Finn E. Kydland (1995): “The Gold Standard as a Rule: An Essay in Exploration,” Explorations in Economic History 32 (October 1995): 423-64. Salerno, Joseph T. (1982-09-09): “The Gold Standard: An Analysis of Some Recent Proposals”. Cato Policy Analysis. Cato Institute. http://www. cato.org/pubs/pas/pa016.html. Retrieved 2009-03-23 Greenspan, Alan (1966). “Gold and Economic Freedom”. The Objectivist 5 (7). http://www.constitution.org/mon/greenspan_gold.htm. Retrieved 2008-10-16. Bernholz, Peter (1990): “The Importance of Reorganizing Money, Credit, and Banking When Decentralizing Economic Decisionmaking,” Economic Reform in China, ed. James A. Dorn and Wang Xi (Chicago: University of Chicago Press, 1990), p. 104, citing Michael Parkin and Robin Bade, “Central Bank Laws and Monetary Policy. A Preliminary Investigation,” The Australian Monetary System in the 1970s, ed. M. A. Porter (Melbourne: Monash University, 1978), pp. 24-39. Barro, Robert & David B. Gordon (1983): “A Positive Theory of Monetary Policy in a Natural Rate Model”. In Journal of Political Economy 91 (August 1983): 589-610. Meutey, P. (1972): L’Or. Paris Dalloz.

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Fekete, Ianos (1973): Commentaire sur le Rapport d”Otmar Eminger. Contribution to the 10th Conference of the « Jackobson » Foundation. Basel. June. 1973. pp. 65-73. Harrod, R.E. (1948): Towards a Dynamic Economics. London. 1948 Keynes, John Maynard (1926): La Reforme Monetaire. Paris. Translation into French by Peter Frank Triffin, Robert (1973): Our International Monetary System. Yesterday, Today and Tomorrow. Yale University Press. 1973 Aglietta, M. (1986) : La Fin des Devises Clès. Algoma/La Découverte. Paris. 1986 Cross, Cristopher (1989): Les Enseignements de l’Évolution du Système Monétaire International. In Problèmes Économiques. Nmb. 213/23 August. 1989.

231

1.1

x

1.8

the same, as index

Gross domestic product growth rate (%), constant prices 0.7

1.0

4.8

46720.1

1,340

1.0

0.1

34866

1982

2.8

1.0

4.6

48853.0

1,400

1.0

0.1

34895

1983

4.9

1.0

4.4

50996.4

1,460

1.0

0.1

34929

1984

3.9

1.0

4.9

53494.5

1,530

1.0

0.1

34964

1985

3.5

1.1

5.3

56350.0

1,610

1.0

0.1

35000

1986

3.7

1.0

3.3

58204.6

1,660

1.0

0.2

35063

1987

x

0.0216

0.0063

Page 1

0.0273

Gross domestic product, current prices (billions of US$) 10,669.20 10,901.25 10,789.24 11,075.96

DMMVCoeff

364

0.0384

0.0336

0.0356 11,506.71 11,926.17 14,050.56 16,130.21

0.0480

GDP index x 1.0 1.0 1.0 1.0 1.0 1.0 1.0 To Part Four. Data for GDP are provided by the World Bank’s statistics. The sources of data for the gold statistics are the mineral GDP index/gold stock (reserves) statistics publications of the U.S. Bureau and1.01 the U.S. Geological Survey Yearbook (MYB) index x of Mines (USBM) 1.02 1.03 1.05 (USGS)—Minerals 1.04 1.03 1.04 and its predecessor, Mineral Resources of the United States (MR), and Mineral Commodity Summaries (MCS) and its predecessor, GDP variation/Gold Stck(tones) Commodity Data Summaries (CDS). The source for recent consumption data is Gold Fields Mineral Services Ltd. (GFMS) Gold variation x 27.50Prices in9.17 50.161998 (MP98). 39.72 The years 33.42of publication 20.83 annual reports. The metal’s price data were from Metal the United33.61 States through and corresponding years of data coverage are listed in the references section below. Blank cells in the worksheet indicate that data GDP variation/Gold Stck(value) were not available. variation x 0.45 0.15 0.62 1.12 0.81 0.65 1.14

2.2

5.0

44593.7

x

42468.8

total gold stock value (thousands of $)

1,280

the same, as annual variation (%)

1,220

1.0

unit value (US$/metric tone)

0.1

x x

34839

stock growth index

34810

reserve gold bars in central banks (in tones)

1981

stock growth rate (%)

1980

Basic item \ year

Basic data for the international gold standard, as simulated for the 1980-2003 interval

APPENDIX364

1.0

0.45 0.0216

x x x x x

GDP index/gold stock (reserves) index

Stck(tones)

Stck(value)

GDP index

GDP variation/Gold variation

GDP variation/Gold variation

DMMVCoeff

0.0063

0.15

9.17

1.01

1.0

0.7

1.0

0.0273

0.62

33.61

1.03

1.0

2.8

1.0

x x x x

the same, as index related to GDP in constant prices

GDP current prices index/gold stock index

GDP current price variation/Gold Stock(tones) variation

GDP current price variation/Gold Stock(value) variation

Page I

x

the same, as index

0.4

5.5

1.0

1.0

1.0

Page 2

-0.2

1.9

1.0

1.0

1.0

0.6

7.4

1.0

1.0

1.0

Gross domestic product, current prices (billions of US$) 10,669.20 10,901.25 10,789.24 11,075.96 the same, as annual variation (%) x 2.2 -1.0 2.7

27.50

1.02

2.2

1.8

Gross domestic product growth rate (%), constant prices

1.1

x

the same, as index

0.0384

0.81

39.72

1.04

1.0

3.9

1.0

0.0336

0.65

33.42

1.03

1.0

3.5

1.1

0.0356

1.14

20.83

1.04

1.0

3.7

1.0

0.9

11.4

0.9

1.0

1.0

0.7

8.1

1.0

1.0

1.0

3.3

6.3

1.1

1.1

1.2

4.5

6.3

1.1

1.1

1.1

11,506.71 11,926.17 14,050.56 16,130.21 3.9 3.6 17.8 14.8

0.0480

1.12

50.16

1.05

1.0

4.9

1.0

1.1

the same, as index

0.35

GDP variation/Gold Stck(tones) variation

GDP variation/Gold Stck(value) variation 0.0357

0.49

14.69

1.04

1.0

3.8

1.1

7.8

70814.0

2,010

1.0

0.3

35231

1989

0.0291

0.36

11.51

1.03

1.0

3.2

1.1

8.8

77016.4

2,180

1.0

0.3

35329

1990

0.0192

-3.45

7.88

1.02

1.0

2.2

1.0

-0.6

76523.6

2,160

1.0

0.3

35428

1991

0.0190

0.45

7.07

1.02

1.0

2.2

1.0

5.0

80317.0

2,260

1.0

0.3

35538

1992

0.0175

1.72

6.43

1.02

1.0

2.1

1.0

1.2

81289.6

2,280

1.0

0.3

35653

1993

12.2 1.1

the same, as index

Page 3

1.1

5.1

1.2

16.4

1.1

7.2

1.0

2.3

1.0

2.4

18,097.80 19,019.81 22,137.60 23,733.45 24,271.25 24,863.39

the same, as annual variation (%)

US$)

Gross domestic product, current prices (billions of

0.0425

20.68

GDP index/gold stock (reserves) index

DMMVCoeff

1.0 1.04

GDP index

4.5

prices

Gross domestic product growth rate (%), constant

12.9

65709.7

the same, as annual variation (%)

total gold stock value (thousands of $)

1,870

1.0

unit value (US$/metric tone)

0.2

stock growth index

35139

1988

stock growth rate (%)

reserve gold bars in central banks (in tones)

Basic item \ year

1.1

7.4

26,699.80

0.0304

-6.09

10.35

1.03

1.0

3.4

1.0

-0.6

80839.3

2,260

1.0

0.3

35770

1994

1.1

11.1

29,671.31

0.0296

-3.14

11.21

1.03

1.0

3.3

1.0

-1.0

79998.4

2,230

1.0

0.3

35874

1995

Page II

variation

GDP current price variation/Gold Stock(value)

variation 0.9

1.6

1.0

GDP current prices index/gold stock index

GDP current price variation/Gold Stock(tones)

1.1

prices

the same, as index related to GDP in constant

Page 4

0.7

1.9

1.0

1.0

1.9

1.3

1.1

1.1

-11.3

-12.3

1.0

1.0

0.5

1.4

1.0

1.0

2.0

5.3

1.0

1.0

-13.3

-18.7

1.0

1.0

-10.7

-10.8

1.0

1.1

12.55

1.25

GDP variation/Gold Stck(tones) variation

GDP variation/Gold Stck(value) variation

1.03

1.0

GDP index

stock

3.7

Gross domestic product growth rate (%), constant prices

GDP index/gold (reserves) index

1.0

the same, as index

82395.9

3.0

value

2,290

the same, as annual variation (%)

total gold stock (thousands of $)

(US$/metric

1.0

stock growth index

unit value tone)

0.3

35981

1996

stock growth rate (%)

reserve gold bars in central banks (in tones)

Basic item \ year

0.58

12.83

1.04

1.0

4.2

1.1

7.3

88444.1

2,450

1.0

0.3

36100

1997

1.11

10.49

1.03

1.0

3.5

1.0

3.1

93423.2

2,570

1.0

0.3

36351

1999

Page 5

1.06

7.06

1.02

1.0

2.6

1.0

2.4

90576.2

2,500

1.0

0.4

36230

1998

4.37

15.27

1.04

1.0

4.8

1.0

1.1

94444.6

2,590

1.0

0.3

36465

2000

3.34

7.67

1.02

1.0

2.3

1.0

0.7

95092.1

2,600

1.0

0.3

36574

2001

-1.74

10.88

1.03

1.0

2.9

1.0

-1.7

93511.2

2,550

1.0

0.3

36671

2002

-25.89

14.31

1.03

1.0

3.6

1.0

-0.1

93380.3

2,540

1.0

0.3

36764

2003

2.5

1.0

1.0

1.0

4.2

0.8

the same, as annual variation (%)

the same, as index

the same, as index related to GDP in constant prices

GDP current prices index/ gold stock index

GDP current price variation/Gold Stock(tones) variation

GDP current price variation/Gold Stock(value) variation

Page III

30,399.51

0.0343

Gross domestic product, current prices (billions of US$)

DMMVCoeff

-0.1

1.7

0.9

1.0

1.0

-0.4

30,265.15

0.0390

0.0316

1.2

3.3

1.0

1.0

1.0

3.8

31,196.00

Page 6

-0.3

2.9

0.9

1.0

1.0

-0.7

30,041.46

0.0219

2.8

14.0

0.9

1.0

1.0

3.1

32,148.60

0.0445

-0.9

11.2

1.0

1.0

1.0

-0.6

31,940.90

0.0198

-2.5

-6.5

1.0

1.0

1.0

4.1

33,243.90

0.0262

-88.8

-102.2

1.0

1.1

1.1

12.4

37,375.77

0.0336

0.03

DMMVCoeff

-2.7 -4.9

GDP current price variation/Gold Stock(tones) variation

reserve gold bars central banks (in tones)

Page 7

1.0

GDP current prices index/gold stock index

Page IV

1.0

1.059

5.9

the same, as index related to GDP in constant prices

the same, as index

the same, as annual variation (%)

23662.9

-0.94

GDP variation/Gold Stck(value) variation

Gross domestic product, current prices (billions US$)

1.03

1.0

GDP index 16.72

3.3

Gross domestic product growth rate (%), constant prices

GDP variation/Gold Stck(tones) variation

1.0

the same, as index

GDP index/gold stock (reserves) index

3.5

the same, as annual variation (%)

2106.4 75381.6

total gold stock value (thousands of $)

1.0

stock growth index

unit value (US$/metric tone)

0.2

36764

1982-2003

stock growth rate (%)

reserve gold bars central banks (in tones)

Basic item \ year

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

annual average

total

explaining

PART FIVE THE POST-GOLD AND CONTEMPORARY MONEY ERA V.1 The thirties: the interwar international money disorder Recall from the above chapter (Part Four) that some basics of the gold standard crisis were already present in the early interwar period—Mossé (1967) here uses the expression of “a half-century of instability” for attaching the interwar gold standard period to the “monetary disorder” of the next following thirties (Triffin 1973). The corresponding international monetary system (IMS) of gold standard was directly turning, from its initial “natural” structure, into the one managed by the central bank of the United Kingdom, and really developed by pound sterling, as internationally on the ground. Or, this was already interventionism, as so inappropriate for gold standard and opening a door to several aspects of crisis for this system. V.1.1 The brief picture of events The interventionism on national scale, born in and by crisis environment, had certainly at least two things in mind: the external balance of payments (EBP) and money’s exchange rate. In a concrete view, it was especially about losing some national wealth in favour of other nations, in the open economy context, and national currency directly affected by and threatening its owners with its volatility—since no more metal based. Moreover, these two levels of resenting events were found as directly correlated, as for a general rule. Formerly, in the gold standard functioning hypostasis, the EBP deficit was provoking outflows of metal, together with its representative money supply—now, out of this system working money supply stays in the domestic area, in the possession of its owners, but its value substance skips away in 239

Liviu C. Andrei

favour of winner nations in the international economic competition. Or, this becomes even more dangerous for some nations and their citizens. And this since the former system was equally disposing of the at least pretended mechanism of preserving the EBP equilibrium for all nations—the EBP imbalances in the gold standard was so pretended to be accidents, and never the rule, given the above referred price-specie-flow mechanism. Or, now, in early thirties, this rule saw itself reversed: no international EBP remaking equilibrium mechanism, so State was taking over this task and so will do monetary policy—together with trade policy, taxation an all items belonging to such a task—plus the EBP surplus was less embarrassing than the opposite deficit. The result was the State’s acting all ways for encouraging the EBP factors of surplus, these starting from pushing exports and braking imports in the area. Then, there comes the home money devaluation against the other currencies—or, such a policy was found as a very distinct way of favouring not only exports, but production and employment on large scales in the home area; unfortunately, on the other hand money devaluation is acting the same way as the money volatility (due to the international competition) and proves itself a policy of impoverishing the home area as in favour of production, exports and employment365. But, just let us stop with this new picture which starts looking like a “new economic system” revealed—a less liberal and more pro-domestic and pro-development and so national-distinct one. Was this engendering the international money disorder? not exactly. Disorder and crisis in the international area were coming together with all States acting the same way—see pushing exports and braking imports, money devaluing and the whole set of policies—against the other States’ interests, and not for a common interest, that had been the case of the former gold standard or that was coming to be the case of international conferences and economic integration undertakings. When all States act the same opposite ways for exports and imports that easily becomes another “world war”, see an economic one. When all States proceed to devaluing their own currencies that is just canceling the principle effect of currency devaluation itself in the international area, except for harming the ones who own these currencies or will acquire them in a way or another. 365

It is also true that the same devaluation might be able to cure the same money from its volatility germs on the longer run, due to able monetary policies (see Patat 1991).

240

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V.1.2 The larger picture Let us start from the same interventionism on national scale, as born in crisis context. First, the banking system basing on central bank366 started to be generalized throughout the world, as much as the economic power supporting gold standard was the first one breaking this rule of the initial game. Second, the same interventionism was generalizing within national economies, from central banks to the government’s attitude and then acting. Nevertheless, the interventionism of the Bank of England in the twenties was actually aiming the former system’s stability remade, but so breaking the same system’s rules of the game, that was creating and reinforcing a contradiction in terms. In such a context, a post World War One economic and financial recovery on the British side made the Bank believe in once more remaking the gold convertibility of the pound sterling at the prewar level of the mint parity (in the twenties)—but the end of the same decade was finding the harsh crisis, as internationalized. A new doctrine even was claimed to come up just “inside” the gold standard thinking: it was basing on “rising the metal reserves in favour of strengthening the monetary authority” (Triffin 1973, pp. 29). Meanwhile, the recovery of the twenties was including the gold production. Recall367 that the same remaking gold convertibility of the pound sterling was basing on all measures, from the revaluation of existing gold reserves to foreign financing, the way that the British currency worked as 10% overvalued during the 1925-1931 interval (Keynes 1936), here including the economic depression. The result of these was pressing on all: the pound’s value, official exchange rate (so forced to function as discontinuous) and the rest of the world’s condition. The transparent result came in 1931 for the UK, in 1933 for the US and in 1936 for France, all meaning series of currencies’ devaluations and suspending the gold convertibility of all currencies. An agreement also came to be negotiated between the UK and US—and that was the Strong-Montegu Agreement 368—in order to manage the international money order (Triffin 1973, pp. 165). Such an international See details in the below V.3. From the previous Part Four. 368 See the foreign offices of the two managed by Benjamin Strong (US) and Norman Montegu (UK). 366 367

241

Liviu C. Andrei

Act was implicitly recognizing that the UK was not only failing from its previous capacity of re-stabilizing international gold standard money, but even its “monopoly” of such a kind in favour of the other economic and financial superpower. However, the immediate difficulty here realized was the non-internationalized status of gold standard as a rule of law, so the need of each State to act as individually. As such, see for instance the anxiety about the sterling’s devaluation in France and then, in Germany and other countries. Triffin (1973, pp. 165) here mentions the States’ attitude called “beggar the neighbour”, as substitute for a real international monetary cooperation. So, where was the formerly existing international harmony of gold standard? That architecture was coming to be destructed piece by piece. Then, recall the Bank of England’s attitude of remaking stability, be it by reinforcing a “central” monetary authority, as international. This attitude even changed after 1931, when the UK stopped its pro-gold working throughout, as together with the gold convertibility of pound sterling suspended—huge outflows of gold had stroke the already fragile British money –, but this opposite maneuver was making even worse. The rest of the world’s natural reaction was remaking the monetary policy concept, as national—and that was a new hit on what was left from the old IMS. The home monetary policy saw itself in need of controlling both exchange rate levels and money flows; plus, the exchange rate level was required to correlate with the home price movement. This was the moment in which the purchasing power parity of money was asserted as a theory—see the Albert Aftalion variant (Mossé 1967, pp. 37-38). The idea of controlling the international capital flows was not far from this context, in its turn (McKinnon 1993, p. 12), since the economic collapse generalized, as international. Since cooperation among States proved then unable to solve the big crisis problem(s), some “national ways of acting” started animating the economic thinking at the time (Meade 1951).

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The exchange rate fundamentals, as in theories (1) The exchange-based theory relates the exchange rate to both the demand-supply of foreign exchange on the specific market and EBP’ balance and/or imbalances. Cross (1989, pp. 20, 21) sees this as linked to a plural exchange IMS, as materialized both during the postwar Bretton Woods IMS (1944-1971)369 and after 1971. (2) The quantitative theory of money—as a larger development of thinking—tries to reconsider the concept of money parity—as extended from its metal base understanding—as specifically for the home and international areas. Albert Aftalion370 here sees a price formation of money as priory on the home area, then the home price becomes a reference translated on the international market area. (3) The purchasing power parity (PPP)—equally as a theory—sees, on the contrary, the money’s neutrality all over market spaces where, in reality, prices prior money ( and not vice-versa /Guitton & Bramoulé 1987, pp. 626-630). Both (international) money flows and exchange rate movements here result and their common trend consists in unifying the price of the same good on all markets—as the other face of unifying the purchasing power of money all over. To be here noticed that whereas the above quantitative theory of money searches for enlarging the parity concept by a new different approach, so does the PPP one and as similarly between the home and international market spaces: the money purchasing power (parity) here comes to be claimed as the new genuine value reference to replace the previous gold one.

Besides, the so-called “Keynes’ turning point” (Keynes 1936) was meat by the monetary thinking in thirties. Economic historians and author’s biographers argue that the author had belonged to “classics” up to his maturity paper—see his contributions to the above referred quantitative theory; on the contrary, his representative paper designs a genuine retort to this. Plus, such bio—and biblio-graphy facts are seen in a whole historical post-crisis context of changing ideas. Keynes was a kind of representative scholars for such a time, the way that, in reality, it was “the events finding him” this way—and not conversely. The whole economic thinking picture at See the next paragraph V.2. As quoted by Guitton & Brammoulé (1987, pp. 624-625).

369 370

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the time was moving in the same direction: see theories of interventionism, inflation-unemployment (Keynes and post-Keynes) specific “national ways of development” and on. So, the rupture from the previously dominating “laisser faire”, “supply founding its own demand”371 and the economy’s remaking equilibrium capacity (Hardwick, coord. 1992) was obvious in this decade, as symptomatically. The “Keynes’ turning point” of thinking As previously contributing to the quantitative theory of money and yet being included in the classics’ current of thinking, John Maynard Keynes joint the debate on the basic price level function of money supply, as exogenous (Hardwick, coord. 1992). See: MxV = P x T where M is money supply, V velocity of money, P the aggregate price level and T the volume of transactions. The equation is required to be re-written as taking its explicit expression: P(M) = (V/T) x M as the simplest linear y(x) = ax type function. Then, a very debate started about taking the (V/T) report as an “a” constant—some authors here agree this assertion, others do not since V and T are both expected to vary. The Keynes’ involving in this debate came to be enough different. First, he equalized T (volume of transactions) with Q (production—production is hundred percent what transactions contain—and Y (national income—as the total of all productions in the macro area). Second, since V/Y report 371

See one of the classics’ contribution to macroeconomics. This theory is born in late eighteenth century and belongs to one of the first classic thinker: Jean Baptiste Say. Another scholar of that time, François Quesnay, was elaborating the pre-Keynes “circular macroeconomic flow” the way that Say and Quesnay founded together macroeconomics, as distinct topic area. Then, J.M. Keynes came to enrich this topic about one and a half centuries later by his famous “Macro-model”. Actually, the “Macro-model” here rejected the “J.B. Say’s law” and preferred to work on the previous F. Quesnay’s ‘circular flow”. In other words, Keynes is not claimed to be the “parent” of macroeconomics, but he took over a previous thinking model to work on as a non liberal thinker—this was pretty similar to how Karl Marx in the previous century had dealt with David Ricardo.

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comes into debate the author preferred to change view about: just searching for the economic causes making both numerator and denominator constant—the Keynes’ renewal of price level as function of money supply idea so was finding and defining the exact macroeconomic requirements for: (1) the short terms—in which V (velocity) does not varies; (2) full employment—in which production and so national income stack and no possible economic growth. On the contrary, on longer terms either velocity varies, or the economic growth gets able to extend its ways from increasing labour and/or consumable resources and raw materials, called as extensive. Such a contribution formed a premise of the later on inflation-employment debate, which equally belongs to what was in way to become the Keynesian thinking and to include a whole current of thinking away from classics. But there was not only the inflation-employment theory to talk about in the post-crisis era, since Keynes attributed it to the real economy. In his representative paper of 1936, the author was inventing the monetary economy concept, as distinct from real economy—containing production and output-related transactions —, and containing the money-related economic developments. A new view about this money involvement in economy was really opposed to the old quantitative theory of the classics. Money has its own (parallel) market, meaning money supply—see the M1, 2, 3, . . . components —, but equally demand of money, on different coordinates. This is the demand of money as called liquidity and includes transaction money, but equally speculation money, as the true knot of specific money involvement and behaviour in the economic context. Speculation arises when money purchases valuable titles (see bonds etc.) with specific maturity and return—so, the author assumes the selling-purchasing titles market zone as purely money (demand-supply) market; no connection to real economy. Equilibrium on this market depends on both total production and national income and interest rates, and it is similar to the real economy’s behaviour; on the contrary, disequilibria on this market are not supposed to find inflation—as the classical thinking —, but plus and minus liquidity. The Keynes’ innovation here comes to be the so called “liquidity-money” (LM) curve, as gathering all points (situations) which belong to money market equilibrium in the Keynes’ view, as related to national income and interest rates level. The comprehensive author’s view—see, the Macro-model (Keynes 1936)—sees the game here played by the monetary (LM curve) and real (“investment-saving” IS curve) economies (see the figure below).

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(IS)

i

(LM)

iE E (LM)

(IS)

ix

O

YE

Y

The “investment-saving” (IS) curve gathers all equilibrium points (values of national income, on the horizontal dimension, and interest rates, on the vertical dimension) regarding the real economy. It is decreasing slope and looks more homogenous (straight curve), as compared to the other LM curve, which here represents equally equilibrium points regarding the monetary economy, is increasing slope and less homogenous, due to mixed contributions of liquidity components (more or less related to the real economy). Two points are arising, as essential, for such a thinking: (1) the distinction of the two curves tries to locate the real economy and monetary economy related policies, as institutionalized: government for real economy; central bank for monetary economy372; (2) the “E” equilibrium point is assumed, in its turn, to represent both real and monetary parallel economies for just one level of national income and one level of interest rate. Criticism, on the other hand, here comes for too much separation between the two “economies”: increasing government expenses or even private investment and exports in the area is supposed to shift the IS curve to its right hand side, but how to figure out this without any liquidity-money variation—LM shifting to its right, as automatically, and so not autonomously —, except for theory? Other criticism finds that the “minimum level of the interest rate”—claimed by Keynes, but not enough explained—does not verify in practice(Hardwick, coord. 1992). Even monetary policy scholars can here find that the Keynes’ LM curve shifts to its right and left –see monetary policy 372

See details in below V.3.

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implemented—just by money supply-demand dynamics, whereas interest rate—proven as the essential monetary policy tool (Patat 1991)373—would not be here able but to along the curve dynamics. Plus, the today view on money and financial markets does not accept selling-purchasing titles as purely money market, but it includes bonds, as credit—and investment-related, so real-economy-related activities. Shortly, the monetary economy and economics was a too “shocking” innovation for not to meet criticism from all over, and especially from the neoclassic and liberal economists’ camp. But the crucial thinking movement of J.M. Keynes is the one of just rejecting all capacity and capabilities of his contemporary economy to make and remake its general equilibrium by itself—or, this assumption helped to directly conclude about imminent interventionism and build up some image of this newly entered concept, but equally “paid its price” at least by inconsistencies of reasoning. The polemics between “free economy” and interventionism are today a crucially “productive motor”. Vis-à-vis, nobody detains any monopoly of truth, no theory is entirely right or wrong, but the world is continuously moving on.

However, back in historical terms, how large might be imagined the limits of the above called “instability” or “international money disorder” by authorized voices of scholars ? There always is a limit of monetary instability that each State and its monetary authority can afford—this is: not destructing the international business and trade, as entirely. As the result, the exchange rates in thirties were still fixed, as of principle, meaning that they preserved their gold standard nature, but for applying devaluations— devaluation-revaluation is undertaken by monetary authority from the official and fixed exchange rate level; on the contrary, the opposite floating exchange rate is neither official, nor acted directly by monetary authority, but appreciating-depreciating on the foreign exchange market. The other limit of this monetary disorder was considering a perspective changing—that was in Genoa (1922) when the States Conference participants were declaring their attachment in principle (no commitments) to what was already called the “gold-exchange standard” (Bernstein 1989, pp. 27-37). The meaning of this event was that the “old” gold standard—as stated in the Latin Monetary Union (1867), as for instance—was getting too rigid, obsolete and redundant, so in need to be replaced by another forthcoming international monetary arrangement, as more flexible See also below V.3.

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and adaptive. In other words, the interwar world perceived facts also as transitory throughout a next following international money order of a similar type—and the post-war one was coming to confirm it. V.1.3 A conclusion Firstly, let us here have our polemic standpoint—as against the literature doubting (or even denying) the “real existence” of gold standard, as described above, in the previous Part Four. We believe that this post-gold money period does the same as the pre-gold bimetallism, meaning making distinct what the gold system actually was. Or, let us previously accept hypotheses of the gold standard’s weakness, or rather no price-specie-flow mechanism, just credibility instead, at that time, and so on. Or, now, since 1931, when gold convertibility of currencies suspended and the rules of the game were vanishing step by step, how could this new context turn directly into disorder, if not through a system breaking up, meaning—among other things—at least indirectly that this system had formerly been in place ?! Secondly, and polemics as well, the Robert Triffin (1960 & 1973)’s theory of IMS seemed confirmed: the non-IMS equals the international money disorder. Thirdly, Mossé (1967, pp. 35) also argues for “extending the period of instability” to the early sixties, so after the new Bretton Woods Agreement (1944) was already in place—in the author’s view, the same disorder was ended together with remaking the new convertibility of the western European currencies, as so “achieving” that “half-century of instability”. For Bordo (1993, pp.5) the floating exchange rate era was equally starting in this period374. As for the McKinnon (1993)’s full view about the same events (see another polemics), another paragraph below, in a different description context will be reserved. Finally, Triffin (1973, pp. 178-179) attributes to this period the real replacement of the representative by the fiat money, as world-wide. V.1.4 The epilogue of the interwar international money era Just two aspects referred above stay significant for the forthcoming events. The one is the Genoa Conference (1922) emphasizing the idea of gold-exchange standard—as opposite to just “gold” standard. The member States indirectly found themselves unable of acting for a new This is an idea that we do not fully agree.

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cooperation in the monetary area, but horizon was partly opened to new developments—everyone agrees that Genoa (1922) has been the precedent of Bretton Woods (1944). Or, this fact might be significant for a period of “no-IMS is international monetary disorder”, as in the above Robert Triffin’s view, so that the world of the interwar time rather has still got ready to remake the IMS picture, instead of fully accepting the gold standard’s irreversible overthrown. Then, the Second World War event was coming to strengthen such kind of historical feelings—historians believe even today that this war was the true solving problems of the previous big crisis and of all prewar crises. But the other fact, as significant for the same future, belonged to Robert Triffin, as well—as contradictory with himself, in a way: now there was the fiat money to enter the scene and play its role on, in its specific way; plus, representative and fiat moneys were now clear-cut separated from each other, as descriptions. Would this reconcile with the same (pro)IMS theory and historical feelings of that time ? The answer of this question was expected for the post-war era to come.

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V.2 1944-1971: the Bretton Woods International Agreement and Monetary System The allied of the World War II and later on the winner States had at that time the merit of thinking about the immediate future after war and this basing on a set of conclusions worked out by their analysis of the past—see especially the past which had provoked such two war crises in Europe and not only. V.2.1 Related history Two official initiatives resulted from analyses and political and diplomatic approaches. First, there was what remained famous up to present: the so-called “Marshall375 Plan” for reconstruction of Europe after the war destruction with the help of the US, but especially of the private initiative coming from beyond the Atlantic Ocean. The whole Western Europe, including the defeated Germany, was here targeted, as for a(n American) need of a “new” Europe re-developed, strengthen and with no more wars nearby the Soviet and communist system fully growing on the Eastern part of the old continent. The other initiative—which was equally American, the US being not only a recognized super-power, as economically and militarily, but also the only State entity reinforced by the War—has been the “Bretton Woods Conference” of 1944. Bretton Woods is a little locality near Washington DC and famous since then. European States—of both West and East, so here including the allied Soviet Union—and not only were here invited, as much as this Conference was aimed to be a very world-wide and not discriminatory one. Plus, there can be imagined that 1944 was yet a war period in Europe, with guns, cannons, tanks and jumbo-jets yet attacking and acting on war theaters—however, States’ representatives from around the world were already invited nearby the U.S. capital to reflect about presumable facts of some decades onwards. However, this brief description was just an introduction dealing with the past—the true story was to come and to reach an enough different paradigm. So, the States invited to the large dialogue of Bretton Woods 375

G. Marshall is the name of an ex-general in the U.S. army fighting in the recent World War Two, entering politics afterwards and being appointed as the American Secretary of State.

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1944 were finding not quite a “reflecting about future” environment, but a negotiation one—a negotiation auspice in which the American hosts were also powerful. Ironically, the U.S. representative was the Treasury Secretary Herbert D. White, a person who had enough reasons to feel uncomfortable face to European States’ representatives like: John Maynard Keynes, a very legend of economics at the time, as much as an informal leader of all the European groups, surrounded by R. Harrod, D. Robertson and the younger J. Meade, all on the British side, P. Mudes-France and Robert Mossé376, on the French side and so on—there were also other more or less famous economists from other European countries. It is true that, on the other side, the future American Nobel Prices for economics were just to come with the next following generations. But back to the Bretton Woods (1944) moment, the Conference picture was outlined like: power and financial resources on the one (American) side, versus ideas for the future—but also primary need of financing and capital—on the other (European) one. Though, a common interest of all was equally obvious—that was the international capital flows, in need to be safe as under a new control whereas no country could ever afford and allow volatile capitals neither as giver, nor as receiver positions (McKinnon 1993, pp. 13). Otherwise, the Conference talks were step by step turning into a true negotiation between a project pre-elaborated by J.M. Keynes and the American retort position to adjust it according to the U.S.’ interests(Guitton & Bramoulé 1987, pp. 706). Keynes was seeing (1) an international bank, as assumed to issue a total amount of US$ 23 billion as anti-deflationary credits (Dehem 1970, pp. 148) for (2) an international currency, named “bancor” by the author, a gold redeemable one, but besides (3) an international clearing house (Guitton & Bramoulé 1987, pp. 704-706), as no preliminary payments one and as working on the classic “banking principle” (Mossé 1967, pp. 246). As for the (already opposite) American side, its project was reducing to: (1) a coordination mechanism for national monetary policies to: (2) accept a presumable inflation and (3) adapt to a total credit amount resource of (just) US$ 2 billion (Dehem 1970, pp. 148), as coordinated by a “payment union” (instead of the “bank” considered by Keynes). This union was though agreed to work on the gold

376

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base, as in the Keynes’ view377. The result was the International Monetary Fund (IMF) and the International Bank for Reconstruction and Development (IBRD)378 “compromise”—international financing institutions which later on succeeded to survive on the “death” of the Bretton Woods IMS in early seventies379. Two other issues, as correlated, when coming back to the points agreed on both sides. The one was regarding the gold standard reference—all member States here recognized, and it was written down in the Conference’s document, the merits of the previous gold standard. It is so indirectly true that such a reference was meaning, as more important, a separation from this system380—its liquidity constraint was no longer useful to a new context in need of a much higher amount of capital world-wide. The other aspect consists in the later defined Jaques Rueff ’s “inflationist turning” whenever the separation from gold (Rueff 1973, pp. 19)—actually, all State parts were seen to have deliberately accepted the inflation that was to come; and this was “encouraging the money supply expansion” together with an “inflation-producing machine” (Zaharescu 1985). So, criticism comes on the Conference not only from the pro-gold side, but equally from extremist anti-market economy ideologists, for whom the “international capitalist monopolism manipulates market according to its own interests” (and so on)—but this was attributed to the American negotiating part only381. In reality, the new IMS was going to suffer from as much criticism as it has succeeded to be significant more by its negative aspects, than by its new international money defined and ruled (Andrei 1999, pp. 88). But as for a full, moderate and objective assessment of those facts, the European position was anchored on the Keynesian view of the early fourties, whereas Sir J.M. Keynes is related to have intended to leave the Conference’s works, due to the Americans’ negotiating position. 378 The IBRD was later on forming the present “World Bank” together with the institution of “International Rulings Bank”. 379 See the sub-paragraphs below. 380 This separation was however not a full one—the American FED was committed to redeem the US dollar amounts into gold when another member State was asking for, and that was once the case of France, under the General De Gaulle’s presidency. See details in the sub-paragraphs below. 381 In our view, there are at least three points to be separated from each other. The one is the position of each part in negotiations; the second is the written report of the Conference; the third consists in the facts coming in the aftermath of the Conference event. 377

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Americans were keeping an older “laisser-faire” economic philosophy—a view which, despite its intellectual handicap at the 1944 moment, was coming to be right on an extended period382. For a moderate view on the Bretton Woods Conference, once more, and on a different level of description, the American team proven not so inflexible to the European part’s suggestions—see the example of the current account currency convertibility, as an obligation including the normal commercial credit (McKinnon 1993, pp. 13). Moreover, Mossé(1967, pp. 292) was coming to recognize383 that the Bretton Woods IMS was (1) re-settling the specific IMS requirement of the States’ EBP equilibrium remade—as well as the former gold standard, but in a different, more coordinated and less illusory way than also the case of the previous gold standard—and (2) considering economic development—that the gold standard had never done, by its construction principles. In another development, despite that the Bretton Woods IMS tended to be world-wide—the States of the world were both invited to the Conference’s works and expected to join the Conference’s conclusions afterwards—it skipped some States, some of them important in the international area. Let us have just two examples. The one was, as above already mentioned, the Soviet Union, a former allied State preferring to create and run its own international area under the communist ideology—not to be forgotten that the Soviet Union was the one lead by Stalin, at that time. The other example is Canada, so close to the U.S. as for both geography and economy and business. Canada was not part of the Bretton Woods Conference and preferred an interesting converse monetary policy: a freely floating exchange rate when the Agreement just came into force, versus a tough monetary policy just after 1971, when the former Agreement area was turning into floating exchange rates—it is true that Canada had similarly played the opposite in the gold standard periods (Guitton&Bramoulé 1987; McKinnon 1993). It might be equally true that criticism came to be reinforced by the end of the Bretton Woods’ story, which was coming two and a half decades later, in 1971. Actually, on the one hand, the Conference was not immediately and automatically inducing a new international money order after 1945, when peace came into force, but the former disorder was yet in place. On the other one, whereas the Europeans, including the formerly 382 383

See details in the below paragraphs. A little later than when he was in the middle of the event. 253

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defeated Germany, and similarly Japan were seeing their currencies back to convertibility with the help of the Bretton Woods IMS, the two and a half decades of this international monetary rule have driven the US dollar into overvaluation, as directly resulting from its fixed exchange rate to the other currencies. Besides, the American FED saw itself threatened by an exhaustion of its assets, including gold, as similarly as the Bank of England about the early thirties. Or, just after not having ensured a hundred percent international monetary order during this period, the Bretton Woods IMS saw itself falling down in a very similar way to the one of the previous international gold standard IMS—meaning that it was finally bankrupted by its own supporter country, which was this time the United States. The last did not prefer—under the Richard Nixon’s presidency—to remake the former Conference auspices for the new situation, but to act unilaterally384 against its provisions. 1971385 was the year of either three successive dollar devaluations against gold, or the dollar gold convertibility suspended. Beyond the specific international money descriptions—which also will be detailed below—another aspect appears interesting as well: the one of the international law terms. The Bretton Woods IMS had been previously founded by an international Agreement, which was something more than the naturally harmonized laws on the gold based national monetary systems, meaning an inter-States engagement. In such a context, the 1971 moment produced the rupture between the U.S. and the rest of the Conference member States. It is obvious that the United States have broken the Agreement that they previously had founded—with the help of the other partner States—and so have created a complex situation which includes even the hilarious aspect of the Bretton Woods Agreement as still in force today. But, on the other hand no member State of the 1944 Agreement has denounced it so far, as formally—that rises questions upon the other member States’ attitude386 and might alter a criticism too much targeting the United States. Another important aspect of those facts comes back to the gold issue—as no longer monetary, but equally international once more. The previous criticism of this system was accusing the opportunity taken for leaving gold and engendering world inflation instead. Ironically, the Bretton See, by the FED. See, even the first half of this year. 386 It is true that a presumable denunciation of this Agreement would affect legality of the IMF institution—or, this might be reasoning the no denunciation. 384 385

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Woods IMS bankruptcy in 1971 came to be highlighted and marked by the central currency’s gold convertibility suspension—the 1971 dollar’s gold convertibility suspension measure taken has just copied the 1931 pound sterling’s gold convertibility suspension; and two IMSs were over as similarly. So, whether in 1931 it was about a gold related bankruptcy event, in 1971 it was a kind of the gold’s “revenge”, as taken “from outside” the system—recall from the above Part Four’s conclusions: gold has proven as a human history matter not to play with. And that for several times, at least since the David Ricardo’s time. Note that basically, neither the dollar’s devaluation against gold, nor its convertibility suspended were supposed to “shaken” the American currency’s exchange rate against the other national currencies inside the IMS (McKinnon 1993), but . . . Then, as once more similarly to the post-gold standard period, the interval between August 15, 1971—see, the dollar’s gold convertibility suspended by FED—and April 1, 1978—see, the IMF Amendment declaring the Institution’s Status reformed—has almost renewed the thirties international monetary disorder (Gold 1979, pp. 125-126). That was the floating and (sometimes) fluctuating exchange rates—with causes and consequences so similar to the ones of exactly four decades earlier. As between these two dates, 1973 was equally important as the moment of starting negotiations “inside” the IMF institution for a sinequanon necessary reform—recall that the International Monetary Fund (IMF) had been founded by the Bretton Woods Conference, so its abolition was becoming an enough vivid or imminent threat since the half 1971. Essentially, the Institution’s activity was (and still is) the one of an international bank, meaning that it was working directly with the member States, as individual depositors and clients. Or, the monetary relations between the Institution and member States– see the States credited by the Fund—were (and still are) basing on the special account currency which is the “Special Drawing Right”(SDR)387. And that was (equally) yet gold denominated in 1971, as well as the U.S.$, and the IMF’s reserves were denominated in national currencies, as dollar related, according to the 1944 founding Agreement. So, reforming the IMF was actually remaking the SDR’s value basis, as credible and especially reliable when the unique reliable value basis—as an IMS requirement—was fallen together with the IMS. In more concrete 387

The SDR currency is called “special”, as distinct from the “Ordinary” Drawing Right indicating the individual State’s contribution to the IMF reserves. 255

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terms, the unique internationally reliable value which was the U.S. dollar was largely floating and keeping the gold denomination of the SDR, on the other hand, was meaning the US’ FED’ reserves, which was out of all discussion. As the details of this difficult undertaking will be approached below, the primary step taken by the Institution was a double one: (1) not leaving the dollar for coming back to gold, but on the contrary, declaring the full gold demonetization; (2) separation from the dollar, as well. The IMF’s Council of Governors had a preliminary outline of reform on September 24, 1973, and this was going to be adjusted by dialogues with the member States up to June, the next year (Gold 1979, pp. 100 and following). Other issues—unfortunately, still theoretical, at the time—came up this way: see a “new monetary parity”, as non-metal base, as correlated to a debatable “non-fixed” or “adjustable” exchange rate”; finally, renewing the definition of currency convertibility388. In a word, the IMF’s reform seemed to be a “revolutionary”389 step; but it was not this: just the available “immediate” advance clearing the way for a “further substantial development” (Gold 1979, pp. 235). Namely, the solution for the SDR—the one aimed to reinforce this currency, as compulsorily—was (replacing its previous gold base by) an average value of several currencies, considered as floating on the exchange markets. Or, instead of so obtaining a SDR’s value, as more stable than all individual currency floating, such a new thinking then encountered new problems—see, of understanding what the international money was becoming off the previous IMSs’ pictures. Other ideas of reforming the IMS390 were concomitantly filling a whole literature in the seventies and eighties—it is sometimes so interesting to see a “green matter” developed on papers, but with no finality. As a retort of this, two other international money events were coming to mark the post-Bretton Woods era, both occurring in the next following eighties decade. It is about the international debt crisis and the (new) “La Platza-Louvre” inter-States Agreement (1985) and. Unfortunately, the significances of these two were so different from one-another. The first event was coming at the “bad” end of the scale—the external debt crisis was a “delayed explosion” of the Bretton Woods IMS and of its internal problems and developments. First, there was the liquidity resource See Articles VIII and XIV of the new IMF’s Status of 1978 (Gold 1979, pp. 100 and the following). 389 That means more than “reform”. 390 Some of them enough interesting, as detailed below. 388

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problem, as successively highlighted by J.M. Keynes and Robert Triffin. This was ended in 1967 after long negotiations inside the IMF—see the France’s restrictive standpoint, versus other member States—and the Rio Agreement(1965) approved a larger Fund’s disposal on financing resources management. Second, the enlargement of financing raised the international credit, but also provoked an international inflation, which, third, provoked interests explosively raising on the international scale. The crisis started when both the interests’ amounts over passed the principals of debts and some States—especially the third world economies—felt overwhelmed by their debt payments391. The oil crisis of the seventies (Anvers 1991, pp. 83-86), plus some EBP and money floating and plurality of poles392 problems have enlarged the effects of the crisis. Then, some indebted States formed an association to negotiate their position, but their front saw itself broken by Romania, under the Ceausescu regime at that time393—as the result, the debts in crisis came to be negotiated as individually between creditors and debtor States. Fortunately for the international area, besides, the crisis restricted to a limited number of undeveloped economies and did not extend to a point of renewing the earlier 1929-1933 financial and economic crisis. The other eighties event was the “La Platza-Louvre” Agreement of 1985394 and it came at the other (good) end of the scale. This was a new concerted interventionism in a different formula than the Bretton Woods Agreement of four decades earlier, and it proven successful as for tempering the international money floating—in reality, the floating was following a trend of tempering and adjusting already. Or, that was not only beneficial, but also raised consequences on a renewed picture of the international money and of its understanding—the earlier theories about remaking the IMS in the Triffin’s view have quickly got obsolete; a new thinking about (more or less international) money was required and it equally came up. Plus, this new stabilized international money was or was not a real new monetary order—but this certainly belonged to the fiat money, as international, for sure. See details below. See the below V.7 paragraph. 393 That was in late 1989 when the Romania’s U.S. dollars 13-15 billion external debt was announced to have been paid. Less than a month later, in December 22, 1989, the Ceausescu’s dictatorship regime was overturned by revolution. 394 See below V.6. 391 392

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V.2.2 Two IMSs compared Recall the above paragraph IV.1.2.2 of Part Four for the definition of the international monetary system (IMS), given by Triffin (1973). V.2.2.1 Liquidity resource produced Things were different for the two IMSs. The gold standard was basing on the metal base, as very reliable by its costs, scarcity, market value and natural (physical and chemical) resistance. Scarcity, however, also played for limiting money supply and liquidity, which lowered the gold standard potential for postwar development boom. On the other hand, the gold natural deposits spread as geographically—here despite their natural inequality—so, gold was (is) neutral for all nations and business parts in the area (no bias), so favouring free market and competition. Unlike the gold standard, the Bretton Woods IMS’ liquidity was different substance, origin and producing mechanism—that was the U.S. dollar. As much as gold, the dollar was both a value (price) base and liquidity forming international financing flows. Its unique national origin was encountering several unprecedented problems. First, there was its required neutrality, which so was lower than the previous gold metal case, as such—though, dollar qualified as freely-used money, as recognized by all parts and authors395. Second, the problem of the Bretton Woods IMS liquidity produced was coming on the dollar resources for the world economy. As coming from the U.S., the question risen was that whether they were able to produce—not paper money, but—purchasing power and credit-investment resources for all the other countries (economies) in need. As already mentioned above, this was a problem animating the Fund and engendering debates and negotiations—on the other hand, limiting the U.S. dollar outflows to the FED gold reserves was a Statutory provision intended to keep the U.S. really responsible of the international liquidity. Anyway, the Bretton Woods IMS was in need and had been intended for much more liquidity than the case of the previous gold standard, in which the international 395

To be here noticed that this conceptual neutrality is not supposed to be an absolute (positive) term, but at least a comparative one: a national currency in the international area is not neutral by its definition, whereas a matter like gold is not neutral either by its unequal distribution of natural deposits.

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investment and credit were much lower levels. Third, the U.S. was required to ensure the liquidity source for the other economies, so no restrictions for the dollar to get in or out of its issuing country. Or, that meant both no monetary and trade policies on the American side, and an enough large home market for all imports on the same side—and that when all the other member States were feeling free in the same two respects. Ultimately, this liquidity problem of the (whole) IMS, as to be solved by the U.S. part only was going to be a frustration for both the U.S. and the rest of the member States. McKinnon (1993) and other authors as well here indicate the intrinsic vice of the system, consisting in that, instead of a business cycle generalized throughout the IMS area, this area was splitting between the American part expanding (more exporting) when the other countries were receiving less liquidity resources from the other side, and the other countries which’s exports to America were always depending on the same American resources of paying for imports. This fully new aspect of the Bretton Woods IMS was the price to be paid for a larger liquidity flows involved in. V.2.2.2 Unique basic stable reference market value This reference value was actually double (hybrid) for the Bretton Woods IMS, meaning that it was formed by a national currency (see dollar) and gold behind it. The previous was the so called “active” part—as equally playing for the liquidity role and forming flows –, whereas the latter was already passive—reduced to the FED’s reserves—for a long while. As for the dollar, no monetary policy on the American side meant exposing it to depreciation in real terms and overvaluing—the opposite presumable “yes” monetary policy of the FED could be even worse: no freely usable dollar automatically equals the end of the IMS. Moreover, the IMS founded in 1944 had been intended to redevelop the member national economies. That was concomitantly reinforcing several national currencies as well, which were becoming convertible in early sixties—see the western European and Japanese currencies. Or, this was coming to a new question raised: what happens to an IMS of which’s central currency (reference value) falls—when no monetary policy on its side—whereas other currencies strengthen—when both economic development and monetary policy on their side? As for (the monetary) gold in the Bretton Woods IMS, the problem 259

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was different than for dollar. Appearances call this IMS as a “gold-exchange standard” variant. In reality, all gold standard variants—as identified in the previous Part Four—assume the internationalized regime for gold—the gold reserves of all national banks reserves, plus possibly flowing among these. Back to the Bretton Woods IMS, it was assuming just the gold reserves of one member State backing just one national currency in favour of all nations—the other gold reserves of national banks were out of the IMS—so, even the indirect (also subsequent) gold reference of the other member States’ currencies was claimed on the American’s gold reserves, and not otherwise. No gold standard variant is ever supposed to describe or function this way, so in reality it was no gold-exchange standard, but a reference of gold just subsequent, symbolic and psychological—gold movements from the FED reserves to other member States were quite accidental and no representative for this IMS. In reality, once more, critics accusing the Bretton Woods Conference of intending to through gold out of the monetary system were right and this intention was obvious from the very beginning. The true problem of the IMS’ reference value was born when the active part of it—the dollar—was becoming volatile through depreciation, whereas the subsequent part—the gold metal—was, on the contrary, reinforcing its value, as it had always done before (and afterwards). V.2.2.3 Remaking the EBP equilibrium of each member State Recall the previous Part Four for the debate about the gold standard’s qualifying for this IMS type requirement: followers pretend that it was natural, real, automatic, although acting in the long run only; adversaries pretend that it was just illusory. Unlike this previous IMS case, the Bretton Woods one obviously and transparently acted in this respect by its IMF institution. The IMF philosophy in such a way of acting was basing on the Keynes (1936)’s macro-model in its market equilibrium: S+T+M = I+G+X where, of course, S is savings, T is taxation, M is imports, I is investments, G is government (public) spending and X is exports. Simply re-writing this equality, as macroeconomic flows in equilibrium, is obtaining: (X-M) = (S-I) + (T-G) 260

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where, this time, (X-M) is the (foreign) trade balance, (S-I) is the savings-investment equilibrium on the short term and (T-G) is the State budget equilibrium, in its turn. The last equation postulates that, first, the trade balance equilibrium—as predominating on the whole external balance of payments’ one—might reduce to other two very domestic equilibriums, as correlated with each other: the saving-investment one and the State budget. Second, savings and taxation are resulted to have the same positive influence on the active dynamic of EBP, as exports do; on the contrary, investments and public spending acts in the negative way of EBP, just like imports. Or, on the contrary, disequilibria of the EBP act, on the one hand, on the home money’s exchange rate, on the other one accuse this list of macro aggregates classifying them as such. In the given circumstances, the home monetary policy exists, despite the IMS in place and a Triffin (1973)’s assertion as such—actually, there is no monetary policy for the central monetary authority (see FED), whereas the rest of member States were benefiting from the so-called “extra degree freedom” (McKinnon 1993). All central banks, except FED, felt free to act on the home money supply, on the interest, discount and commercial banks’ reserves rates396—just the home money exchange rate was supposed to be acted in cooperation with the Fund, as by Status, and correlated directly with the EBP imbalances. By the Fund’s Status, as well, the member State might ask for help in its money and EBP equilibrium problems, whereas the Fund’s response was primary regarding the above macro aggregates to be acted. To be so noticed that the Fund’s position is the one of helping member States and focusing on their EBP’s problems, as of principle. Besides working in the member States’ favour, the Fund’s functioning regards its own currency, which was the Special Drawing Right (SDR), as equally gold denominated, but as account money. The SDR was shadowed by the U.S. dollar, as by the same Status—resources and lending were accounted in SDRs, whereas effective credits operated in dollars under the IMS existing. So, the SDR was reduced flow to the credit relation between the Fund and member States, as parts. Things were changed after the IMS’ end in early seventies and the IMF’s post-IMS reform came to reinforce the SDR’s status as against the dollar and fully eliminating the gold reference. The two successive states and statuses of the SDR though keep a common feature: it was a parallel currency (and liquidity) reference to the national and freely used one in the system—or, this came together with the IMS 396

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acting by a central international financial institution, as necessarily. The difference between the Bretton Woods IMS and the one of gold standard on such a point might identify with the one between representative and fiat moneys—the previous one was becoming a fiat money IMS, at least step by step. V.2.2.4 The exchange rates, as fixed On the contrary, the same Bretton Woods IMS tried from its start—or, at least it was forced—to be built on a representative money structure, as similar to the previous gold money system. They were the Status—the specific new IMS’ “rule of the game”—and national banks’ reserves acquiring dollars directly acting this way—the dollars inflow to each member State was here considered as automatically provided by the IMS. The metal parity of the previous gold standard came to be conceptually doubled by the newly acceptable dollar parity of the Bretton Woods system. Actually, this was not a replacement as between the two concepts of parity—the old metal parity remained in the new Bretton Woods IMS together with both the Statutory dollar-gold parity and the indirect gold parity resulted for the other currencies: the gold reference of these was just translating their (direct) dollar parity into the American currency’s gold parity. All these were certainly creating all international gold claims on the American FED’s reserves. In such a context, the asymmetric American commitment for gold availability was an issue distinct from the one of keeping the exchange rates fixed within the IMS. Since exchange rates were aimed to be fixed, a well known aspect was considered: the fixed exchange rate belongs to the parity concept, and the last accuses the monetary metal terms. Or, facing an appearance indicating that gold was staying in the system for supporting metal parity for the fixed exchange rate, the real problem was that the metal was increasingly deprived from such a monetary status—which could enable it to rebuild the parity of the previous gold standard working. The other face of this issue was assumed to answer the question: why the exchange rates fixed? Or, the answer is not supposed to be a so simple one. First, the immediate postwar economic and financial situation world-wide was an extreme one—as briefly, the national countries, except for the same US dollar, were not able to become any representative or fiat money on their own; as internationally supported, on the other hand, only representative money could exist in the IMS context, and this as relaying 262

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just on a monetary authority as the FED was. Or, such a specific might be able, in its turn, to rise a similar question on the Bretton Woods IMS itself: would it be more than an “extreme crisis context” IMS? Moreover, whether the answer to this would be no, a further question is supposed to come up: reforming—namely, rebuilding—the post-Bretton Woods IMS . . . What for?397 Another answer to the last question398 regards the same EBP equilibrium dynamic, as related to the exchange rate types. Or, for the IMS here founded—actually, for the IMF institution—managing the EBP equilibrium, as basing on floating of “flexible” exchange rate was just theoretical issue with no practice and experience. Such a reality came to be underlined even in the post-Bretton Woods experience of the IMF, starting by its self-reforming undertaking of the early seventies—so difficult it was for the Fund to accept the post-Bretton Woods slogan of “stable, but adjustable money parity” (Gold 1981); but apart from this experience, the one of the European Monetary System (EMS) was coming to be the same for the exchange rate, as fixed, this time out of any money parity concept399. The truth about the money exchange rates contains that the fixed exchange rate really belongs to gold metal parity as much as the gold monetary system operates as representative money, and this works on both national and international scale when gold standard is international—namely generalized. Once international gold standard no longer exists and/or functions the way it did in its classical form, or sees itself “adjusted” in any way—recall that the gold standard could not be adjusted in either ways400—it “drags” parity and fixed exchange rate after, meaning off their correlated significances. Then, when no parity reliable for the exchange rate, any fixed exchange rate goes to encounter a new series of problems: (1) it becomes just a price category—the price of money, as more directly related to all goods’ prices in the market area, and these prices are not fixed, as by definition (they were not fixed even under gold standard, either); (2) the home money and foreign exchange markets here come to strengthen a real process of the exchange rate, as floating; (3) the home monetary authority However, there was a large reforming movement after 1971, for both the IMF and the literature, as described in the following sub-paragraph. 398 And, let us limit to these two answering aspects in this paragraph. 399 See the below V.7 and V.8. 400 See, by eliminating, or by adding to its “natural” rules of the game. 397

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is called to intervene—as permanently selling and purchasing the home currency from money and foreign exchange markets—in favour of keeping the exchange rate fixed, so this aim becomes increasingly costly; (4) when no more metal parity and fixed exchange rates in the international area, such home monetary authority interventions become not only increasingly costly, but equally obsolete, as missing any rational basic. Currently, the exchange rate flexibility becomes a both “indicative and normative formula” (Guitton & Bramoulé 1987, pp. 19). And actually, with or without IMS or international monetary-financial authority, the exchange rate is always internationally—and not nationally—determinated—that was the same for gold standard and afterwards, and for fixed and floating exchange rate types, as correspondingly. V.2.2.5 Formal and law terms Apparently, once more the Bretton Woods IMS was legally supported by the 1944 international Agreement, as opposite to gold standard—which, for diverse authors had not any States’ engagement, no legal support or, so it “did not exist” (but in some people’s, here including authors’ mind)401. Or, this is a new fallacy—as similar to the one related to “partly keeping the international gold standard conditions”, as for instance. In our view, any emphasis to the “non-formal” aspect or “no-States’ engagement” for the gold standard is false—and the “opposition” between the two IMSs in this respect is a false issue either. In reality, the gold standard had its own national laws in force, be they more or less similar and be their provisions more or less explicit and/or implicit in different States’ cases. These laws might be rather considered as (once more) naturally harmonized among States or just “inspired” or copied from one-another. Not even gold standard would ever be able to work in the absence of the State’s engagement—but the Bretton Woods IMS distinction reduces to reinforcing the States’ engagement by an Agreement amongst, as besides the same individual State’s commitment against its own citizens. This way thinking, the formal and legal aspect has, by far, much less 401

Or, could anybody ever conclude that the Bretton Woods IMS was the lonely one in its position?! And that when even the States’ representatives to the same Conference were primarily admitting the qualities of the previous gold standard and it still can prove some higher performances to the Bretton Woods IMS here and there ?

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opposite substance for the two IMSs, than for other above cases of analysis. A correct approach of this issue might rather be answering the question why such an international agreement was really necessary for the postwar context, as it had not been for a late nineteenth and early twentieth international gold standard? Or, the answer fully regards both IMSs. As for the gold standard, just recall from the previous Part Four that it was all: basing on the metal’s special qualities, an enough long market experience coming from the early and later phases of barter, evolving together with the enlarging of market areas to the international one, keeping both monetary—and barter-based markets; and, as the result, gold standard had an enough natural founding structure to make its corresponding law terms much easier as for both designed and implementation. On the contrary, any IMS replacing or just “adjusting” the gold standard’s rules of the game was coming to be artificial and/or improvised, at least partly, so in a very need to re-design rules, make them explicit and ensure implementations. V.2.3 A conclusion The reforming movement of this IMS will be approached in below V.4, so there the Bretton Woods IMS’ picture will finally be completed. This post-gold IMS has been all: more pretentious than its previous one, more complex and complicated, but also full of imperfections and non durable; as such, it could not end the story of the international money. On the contrary, questions about a possible scientifically based international money order here multiply. Ultimately, it is certain that the distinction between representative and fiat money might just have started in the post-gold money thirties decade, but not achieved ever since, neither as concept, nor in practice. As for instance, even gold standard has got some fiat money content since the money multiplier involved in; at the other end of facts, the postwar IMSs402 felt forced not to abandon the fixed exchange rates either; the gold metal reference for money looks both demonetized—as openly—and reinforcing its reference value concomitantly—as hidden back—and so on. The fact is that there isn’t yet any pure representative or pure fiat money system to talk about—or this may be the true knot or gist of problems.

402

Here meaning both the Bretton Woods’ case and the European Monetary System (EMS), as studied below in V.7 and V.8. 265

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V.3 The whole post-war era: the monetary policy Recall from above that the IMS theory of the Robert Triffin variant argues that: IMS in place for no national monetary policy, and conversely. Or, the “classic” hypostasis yet belongs to the international gold standard—see, its classical variant—in which the (little) minting house embodied the so little work that monetary policy meant at that time—see even the no monetary policy, as compared to the post gold and fiat money era. This paragraph below changes the money perspective from its above international picture to the other national—domestic and/or home—one. As for the national perspective, the below description might be compared directly to the one of the gold standard, in the previous Part Four; in such an order, the two descriptions will be as different as belonging to distinct systems on each side—and that due to the fact that the above assertion of the 1931-1944 period separating the previous representative from the current fiat money and making the latter replacing the previous was entirely true in the home areas (and less in the international area) V.3.1 Basics Actually, in our interpretation the “no monetary policy” is just an euphemism—in reality, the monetary policy category is in place since the first money minted by States; that is for what is token and bears the State’s sign and so, its responsibility. The truth is, in such an order, that the post-gold-representative money meets a new stage of what is called monetary policy; just a new and specific era. And that was definite since money becomes fiat—instead of metal representative—so, primary money supply gets not only accounted, but equally controlled. As differently approached, fiat money just changes the issued currency status—meaning even representation: formerly, the representative money was calling the metal reserves of the State; now, the fiat money is calling a State’s debt against all entities detaining its currency. Or, the similarity between the two so becomes obvious: both moneys involve a State’s debt in its own way—the difference between representative and fiat money, on the other hand, is that the fiat money gets similar to the larger category of valuable papers, as asserted in the new modern and current financial world and on money markets, and including bonds, (treasury) bills, cheques and all the

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other credit papers403. It is also true that—as similar to the whole category of valuable and credit papers—money—here called even the effective money—is concomitantly different (distinct) than that: (1) it belongs to the State, as a very specific financial entity in all areas; (2) has a different issuing regime and (3) is the most easy-payment—a quality called the highest liquidity, whereas the same liquidity decreases for the other valuable papers’ cases. Now recall the Triffin (1973)’s arguing classification for a pretended “incompatibility” between IMS and national monetary policy—in the true sense that the some of the latter’s tasks might be taken over by the IMS. The point is that the author’s meaning focuses on a restrictive understanding of the monetary policy in another two senses: (1) just a part of the monetary policy description; (2) a restrictive monetary policy, as for some money flows, see concretely home money exchanging into foreign exchange. In other words, this is not a full understanding of the monetary policy concept whatsoever—monetary policy is in place since the primitive monetary systems, the same for gold standard and, especially, later on, in the post gold money era, during the Bretton Woods IMS and in its aftermath. V.3.2 The central bank The above development of the late gold standard era (see Part Four again) finds the central bank replacing the old and little minting house, as institutionally, since the Bank of England’s assertion and strengthening role played for the international gold standard. Patat (1991) finds a generalization of central bank founding after the last World War, at least in all modern and financially developed economies, and this in a quite larger description of facts. First, the whole banking itself was supposed to be different in the new fiat money environment—commercial banks were becoming more dependent on. The old “national” banks re-became national by their inclusion in the State’s property—a non-liberal policy maneuver finally proved as efficient: no more private capital for national banks. Moreover, the author remarks that the last still kept the “national” title here and there, but the more appropriate calling was the one of central banks—and that was related to 403

Here including the shares of the organizations’ capital. Or, see in such a case how the modern financial economy reunites the concepts of credit and investment and today economists accuse correlations between. 267

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the new banking picture, as a banking system, as for the home area. Then, the central bank was supposed to coordinate a domestic banking system, gathering the ensemble of commercial banks. The coordinating the banking system role404 is one of the new functions of the central bank, in the sense that two other important roles were here attached: the one of commercial bank for just one customer—and this is the State, of course –, but the most important role of the central bank was the monetary policy exercised—the author also calls it the “free issuing money” competence405, actually the money supply unique control attributed to the central bank. The three roles of the central bank were certainly interconnected. But the monetary policy exercise can qualify for the most highly important position in context—note that all State’s policies belong to the (elected) Government’s competence, except for the monetary policy case, as attributed to another (central) institution. In such an order, there is no subordination between government and central bank—the last is likely to be formally subordinated to Parliament. Government and central bank are supposed to cooperate in a pretty corporatist way, meaning both commonly coordinating decisions and managing the contradictions inventory—see, for instance, the censorship exerted by the central bank on the other policies and political strategies on the costs’ and effects on money supply side etc. Or, the central bank’s position as a government’s bank here completes such a censorship role and requires an equal decision level and right. Finally, on the government’s side, the finance ministry (office)—actually, the financial-accounting department of the State—is the most direct communication way between the two central institutions. Back to coordinating the banking system role, this is founded (as already mentioned above) on the banks’ interdependence with the system—meaning on the increased vulnerability of each bank, given its complex cash flow406 in need to be refreshed everyday by new short term loans from the system (see, the central bank again). Finally, the conceptual central bank autonomy is defined as related to both government and the rest of commercial banks—it is a reality for all today States of the world, but both differently understood in national See the commercial banks’ activity supervision, here founded by some specialty competences. 405 See “liberté d’emissioin”. 406 Bank is the case of an organization which’s money in—and out-flows are the most highly dominated by other enities’ money. 404

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legislations and meeting various (autonomy) degrees in practice. The same autonomy of central banks is correlated to the State’s monetary policy “extra degree freedom”, as related to a presumable IMS. V.3.3 Objectives and instruments This below sub-paragraph is aimed to approach and clarify the relation between monetary policy and IMS. Each policy, so strategy or undertaking of all kinds is supposed to have and clarify its own objectives and instruments (tools) for achieving objectives. Two are the general objectives of the monetary policy in the postwar unanimous acceptance: (1) providing the liquidity needed to the home market area; (2) stability of the money value, as permanently ensured (Patat 1981)—actually the price stability, which might be in context the most important government’s responsibility taken over by the banking system. So, first to be noticed that the two are supposed to be correlated, as regarding the monetary policy and its principles, but practice might equally provide management contradiction of objectives—as for instance, too much or excess of liquidity might make money depreciation imminent etc. Second, these above reduce to general objectives, meaning once more a monetary exercise full of a huge diversity of circumstances and junctures—the economic states, as well as the other policies lead by government here play their roles and responsibilities. So, in reality the same general objectives stay beyond the effective policy objectives of each period, as specifically—these might be, as for examples, adapting market to a given money supply, an expected level of the inflation, interest or exchange rates and so on. The monetary policy instruments, o the other hand, divide in two sets, which are the so called (1) “primitive” set—directly limiting money supply, credit amounts and/or exchanges between the home money and foreign exchange on the home foreign exchange market; the author (Patat 1981) insists that this set stays enough present in the current practice of all modern States—and (2) “modern” set—see open market operations and the rates of: interests, discount, compulsory banking reserves and exchange. V.3.3.1 The interest rate Of which’s above description, the interest and exchange rates are defined as the two money prices: the interest rate is the home one—that is why 269

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it expresses in the abstract percentages, and not in any other reference, since the currency unit is the lonely value reference on the home area, as by definition —, whereas the exchange rate is supposed to translate the interest rate in the international context and contest of different national currencies. In such conditions, stability, versus instability of each of the two rates is expected to influence the stability-instability of the other, as an elementary principle of any monetary policy applied. On the other hand, each of the two monetary policy instruments keeps its own context and story. The interest rate, on its side, includes the discount rate—as another instrument here above mentioned —, but not only—this is about another set of (different) interest rate levels (Mankiw 1994, pp. 58). The interest rate multiplicity Why is there about several interest rate levels ? Because, first, there are several working criteria to talk about in such a respect: (A) The lender-related criterion considers that each commercial bank receives from its lenders (depositors) amounts flowing, as bank liabilities, into internal asset accounts classified as current account, deposits etc. Each kind of assets amount will be the lending resources of the bank onwards and so submitted to specific interest rate levels, as for remunerating the bank depositors. As for all liabilities, though, the corresponding interest rates—called „passive” interest rates, in their turn—go below the other interest rates corresponding set: the one called „active” interest rates, as attributed to credits that the same bank offers to its clients. (B) The bank’s and banking system’s self protection against inflation criterion makes the inerest rates classify as nominal (effective) and real—deducting the inflation rate from the nominal interest level. (C) The time-term of credit both received and offered credit criterion sees borrowings and loans which belong to banks classifying the corresponding interest rates as: (1) overnight, (2) short term and (3) long term interest rates, plus the principle of „the longer the credit term, the higher its specific interest rate applied”—the long term credits so break down into a diversity of interest rates. Actually, the banks appreciates the liability resource’s permanent availability as more than important for a its crediting activity, as much as a long-term loan makes it miss a certain amount for an important period. 270

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(D) According to the banking risk criterion, the bank feels free to rise its active interest rate when not-repayment loan risks are detected in the pre-investment analysis; there might be also other kinds of suplementary risk here considered. (E) The tax related criterion operates in some law contexts about State’s or municipalities’ bonds issued and/or about their individual returns as for some tax exemption. (F) Ultimately—whereas all of the above interest rates classifying criteria play for multiplying their area—the dynamic criterion is the one which, one the contrary, gathers the whole set and counteracts multiplying: all interest rate levels move in the same direction, as the result of specifically influential factors. The same principle is as comprehensive as including the individual bonds’ return category—otherwise, a quite normal economic and financial situation makes all bonds’ effective return join the existing interest rate’s (see the discount rate/ Mankiw 1994, pp. 58).

The interest rate’s multiplicity in the area is apparently due to the one of intersts and appropriated activities involved around. The deeper truth rather consists in the major significance of interests, as claimed by both short and long terms, by both monetary and real economies and by both classical-liberal and non-liberal Keynesian view economists (Hardwick, coord. 1992). Whereas theoretically, in monetary terms the interest rate is supposed to all be the price of money, remunerate banking, protect them from inflation and make the crediting activity distinct in the area, in real economic terms it is claimed to remunerate the capital production factor, so to join the profit rate level, as generalized, to be a price included in the price system and even to correlate with both saving-investment and national income levels407. Moreover, the capital remunerating interest paid meets the so-called „double Cambridge Schools’ controversy”. Cambridge (US)—see Sollow and Samuelson—argues that the marginal productivity of capital decreases when (conversely) capital stock increases—the meaning is that the interest rate would be supposed to lower when profitability in the area is doing the same due to factors which belong to capital only. Cambridge (UK)—see J. Robinson and Lord Kaldor—argues in its turn for the example of the capital accumulating rate, as non-correlated to the interest rate the way that one level of the previous might meet one or more 407

See also Keynes (1936). 271

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levels of the latter (Hardwick, coord. 1992). As specifically for the today monetary policy, the above box would also be supposed to include the ordinary active interest rates—as directly practiced by commercial banks for their loans to clients —, versus refinance interest rate—as practiced by the central bank on its loans to commercial banks usually for short term credits. Also recall from above V.3.2 that this kind of refinancing saw its role played increased in the fiat money and banking system post-war environment—the today commercial banks dispose of a much larger activity than the case of pre-war and gold-money system banking, that this aspect equally makes them more vulnerable the way that despite high performances their cash flow meats shortages and lacks every day. Or, this is certainly what is here called banking system, with its increasingly significant role played by the central bank—the last so becomes able to manipulate the interest rates’ range in the home area, according to its own commandments: the ordinary commercial banks’ interest rates increase and decrease when the refinance central bank’s interest rates do the same (Patat 1981). V.3.3.2 The bank reserves’ rate This is another rate in the composition of the banking system’s design. It is by law—see also the central bank’s rule for banks in the system—just a percentage (rate) of disposable resources is required to be kept for the direct use of the central bank. Actually, the ruled bank reserves’ rate is fixed, whereas its calculous on disposable resources is supposed to increase-decrease as permanently, as resulted from the resources amounts allowed on crediting and/or other activities. As focusing just on disposable money of banks, this part of resources pushed into the banking system’s disposal has several uses: State commits itself to repay to despositors a certain amount of bank deposits when banks go bankrupted or the money multiplier is supposed to be controlled and tempered by the central bank, as for another banking system’s component activity. But another use of the bank reserves’ rate is the most significant one for the monetary policy, and this is associated with the use of the interest rates (Patat 1981). It is the other end of the issue that the real meaning of the bank reserves’ amount apears—as monitored by the central bank. Or this amount might become either higher or lower with opposite significances: when it is too high, the investment resources are sticken inside the banking system, banks’ liabilities and passive interest rate paid are predominant 272

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upon the banks’ assets working for the real economy, so recession is already in place; when, on the contrary, the total bank reserves are reduced or nearby exhausted that means the other extreme, the economy’s overheating, so not yet, but imminent recession at the horizon of time. Whenever necessary—see approaching the one or the other extreme—the central bank disposes of the interest rate to be instrumented. So, to be here noticed that, first, that the central bank becomes more able to assess the economical state and business cycle of the area than the government is; and second, that such a function might be as crucial as the previous price stability ensured is. Both of these functions overpass the monetary area of competence and involve the real economy by price and growth-development levels, as for both short and longer terms. A problem might here arise since the government and central bank institutions stay different structures and responsibility levels. Factly, government is supposed to be democratically elected and changing strategies from time to time, whereas the central bank is supposed to be hundred percent technical as assignment—which might be good or bad, but casually anyway. Besides, the central bank—despite its increased responsabilities to focus on—does not compare with any government in such a respect—its activity is much more clear-cut and focused, so it might prove more efficient, as non-democratic, which is once more good or bad. V.3.3.3 The exchange rate The central bank’s focus equally includes dealing with the home foreign exchange market—at least, when and where the last is really existing; otherwise, in emergent economies there might be also the central bank’s assignment to build this parallel market. Dealing with foreign exchange market devolves from the same central bank’s focus on home money. When the home market exists and it is open, the central bank’s acting on is called as done by „interventions”, which actually are selling-purchasing national currency amounts on and from the foreign exchange market by using foreign exchange amounts—these latter form the (inter)national bank reserves in the State’s property. Or, this is the very moment of fixed exchange rate out of the metal base system problem to be strongly recalled: it requires the monetary authority’s permanent and so costly intervention on the home foreign exchange market, as of principle. Nevertheless, Krugman (1991) argues that the central bank’s power of providing stability to the exchange rate is pretty significant: not only the „target zone” of the 273

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exchange rate fluctuating, but even stability inside it might be worked out by interventions; plus, these interventions might not even be continuous—the market (meaning the other market operators) quickly understand and react for tempering floating basing on the previous central bank’s message, as presumable. An open foreign exchange market equals, on the other hand, here obtaining the national currency’s exchange rate corresponding to the interest rate level—as already mentioned above for the two price expressions of the home currency unit. In which case, the direct central bank’s intervention on the foreign exchange market might reduce, from a presumable rule, to its exceptions, once more—it depends on a complexity of facts. The exchange rate’s specific feature comes up since it actually remains internationally determined when both yes and no IMS—when IMS and fixed exchange rate system, the State’s monetary policy and central bank’s acting here stop; when no-IMS and floating exchange rate „system”, by consequince, the central bank is forced to work by dealing with home foreign exchange market, interest rate and all the other factors of up—and down-pressures on the given exchange rate level. This above is the way that the Bretton Woods IMS did allow and did not allow monetary policies: yes for all objectives and instruments, except for acting on changing the exchange rate level, which was supposed to be acted just together with the IMF institution (never otherwise)—on the contrary, since late seventies even IMF’s representatives do recommend to States to let their currency float in some cases. Back to the IMS sistuation, no monetary policy in the Triffin (1973)’s view means exactly no acting on exchange rate, on foreign exchange in—and out-flows and on the home foreign exchange free acting. On the contrary, as for non-IMS in the international area, Patat (1981) insists that exchange rate proves enough important for all policies, even by itself. It can be both a monetary objective and instrument, redirects exports and imports, but also influences production versus consumption. It can play for a specific export subsidy—except for no State’s interfering in the resource flow between importers and exporters —, whereas the subsidy concept here also keeps its disadvantages. On the contrary, the authority might use sometimes revaluation-appreciation in favour of reinforcing the domestic companies on international markets etc.

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V.3.3.4 Open market operations and the other monetary issues The open market here refers to the monetary and financial markets408. Commercial banks purchase value titles (called securities) during their maturity by applying their own discount rate—as here recalled from above and both included in the interest rates’ multiplicity and influenced by the central bank by the re-discount applyed when gathering all titles from market. Basically, these financial titles keep the status of debts on their issuers’ side, so they are supposed to back all banks’ assets. The second aspect, in context, is that the State and municipality bonds are traded on the monetary-financial market as actively by the central bank, as in the above case of the latter’s interventions on the foreign exchange market. In other words, the bonds’ flow essentially reduces to the banking system’s area, to the „distance” between the central bank and commercial banks, and so produces increasing-decreasing of the discount rate, as manipulated by the central bank in its complex playing in favour of the same interest rate’s consistent behaviour. The third aspect of the money-financial market regards money for its specific supply–demand context that includes enlarging money supply from effective money (M1)409 to the whole liquidity volume—„all titles included” (M4 / Hardwich, coord. 1992). Or, this equally plays for considering either some difference of individual regimes within the liquidity area, or another difference of acting between the central and commercial banks. Namely, the difference between the so-called (a) currency, versus (b) banking principles—the previous regards the effectively issued money (M1) and the central bank, the latter regards money and financial titles (see especially M4), that commercial banks feel more or less free to act on. Actually, the today money is the one on which banks—an not only—inevitably have their word to say and acting to do. Would that belong to the fiat money category, as splitting from the representative money ? This is pretty debatable: the liquidity enlarging might start by money multiplier, on the money supply side; or, the previous gold standard was including this as not Monetary theorists here see rather one simple criterion of distinction between the two: the (time term of) maturity of bond, bill and/or credit paper, meaning that “financial” might be attributed to the more than one year maturity, the rest belonging to the “monetary” market. The general economic theorists, in their turn, argue for the relation between financial and capital related topic areas, as well as for identifying credit with investment in normal economic conditions. 409 See previously the money base (Mo). 408

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acting against its representative money principles; the same for all the rest of financial market components. The money market demand-supply equilibrium This regards the price level behaviour, as resulted from its money supply behaviour and postulated by the classic quantitative theory of money: MV = ∑ pi qi where, certainly, M is money supply, V velocity, pi and qi prices and productions of “i” goods-industries. Or, M represents the money flow face to an Mo stock of money: a 3-6% of the total money supply, as identifying the basic money. Or, this belongs to the monetary authority (central bank) and varies according to the above called “currency principle”. Then, money aggregates on both supply (M) and demand (liquidity/L), as follows: (i)

the primary liquidity, L1, as “absolute” or “perfect” liquidity: L1 = Mo + overnight bank deposits = M1

where M1 is called effective money; (ii) the secondary liquidity L2 includes : short term deposits and funds working on similar terms. So: M2 = M1 + L2 is making the restricted money, M2; (iii) the third level of liquidity L3 meats a more obvious lowering liquidity degree, namely a decreasing capacity of selling-purchasing on the money market. This includes: long term savings, State’s bonds, rent titles, deposits of big corporations etc. So, money supply increases to: M3= M2+L3 where M3 is the large money supply.

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(iv) the fourth level of liquidity L4 here includes the rest of deposits and similar in all banks and financial institutions, treasury bills and re-discountable bank titles and is called liquid and semi-liquid assets: L = M3 + L4 Once more, Mo belongs to the central bank, whereas the rest of Mi becomes endogenous of the banking activity, and not only. The money supply is directly acted by the money multiplier, whereas the money demand stays closer to the real economy, than it is the case of the money supply. (Hardwick, coord. 1992)

V.3.3.5 Concluding remarks One conclusion might be that the international and home moneys came to be enough different in the essential respect of our analysis: the home money was already fiat money and the corresponding picture of the gold standard (see Part Four) was already swept out for long in the postwar era—there were: central bank to work on, so the money supply issued, controlled and managed, money multiplier, inflation, no parity working, as well as a new condition for the exchange rate as different than the one basing on metal parity. Besides, another difference between representative and fiat moneys becomes obvious: fiat money priory inclines towards the home money—so, less capabilities for remaking international money formulae; just opposite to representative money, rather proven able to enlarge markets and connect the home and international markets. On the contrary, the international money—since no longer gold standard—become a mixture of representative and fiat moneys—it just could not yet be otherwise—and this was the very problem in one word. Thirdly, there was really no incompatibility proven between IMS working and national monetary policy: In the IMS context, the “extra degree freedom” (McKinnon 1993) of ordinary member States for home monetary policy meant: freely acting on all from the money supply to the interest rate and related rates, except for the exchange rate—to be managed together with the IMF, actually, in coordination with the other member States monetary policies. When, on the contrary, no IMS, the same monetary policy extended to the exchange rate, meaning to the use of devaluation-depreciation or the opposites. The idea devolving from the above paragraph is that things were clear enough for the States’ monetary authorities’ job during the whole postwar period—the money problems 277

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were transferred to the international level and that for both IMS and no-IMS environments. However, the new Bretton Woods IMS brought in another new problem for both IMS and monetary policy: the asymmetry between all ordinary member States and the United States. Or, actually, the “rules of the game” for FED were different than all the other member States’ case—see the freely used money in the international area. As simply expressed, the US was not supposed to have any monetary policy: no restriction for dollar leaving its home area—that was meant to coordinate with a trade policy for no restrictions on imports. As differently expressed, even the US might take advantage of a specific “extra degree freedom”: monetary policy restrictions could exist, but as less restriction than for all the other member States’ cases. In a word, the IMS’ incompatibility with monetary policy was acting on the American side in its highest degree, as compared to the other States’ monetary authorities.

V.4 The seventies: confusion and reformism Facts were related in the above V.2.1; here there is the place and moment for a detailed technical explaining of these. V.4.1 Confusion, first 1971 was the year of the Bretton Woods IMS collapse, as related in the above V.2.1. That was exactly four decades after a similar event of 1931. That was about gold standard, actually about the UK pound sterling. Now, it was about the immediately post-war IMS in place, actually about the US dollar. Both IMSs have got bankrupted and both events were announced by the IMS’ coordinating States and their monetary authorities. In both cases, destruction of the IMS was equivalent to international money disorder410—in facts, since both IMSs also kept fixed exchange rates, floating devolved from both IMSs’ destructions. Ironically, both IMS destructions started by the central currencies’ of the systems gold-convertibility suspensions. As similarly to the early thirties case, floating in early seventies was both preceded by a number of devaluations announced (much less money revaluations world-wide) and devolving from the central currency’s 410

As in the above Triffin (1973)’s view.

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basic floating. Confusion on the international trade and finance was also the same for both moments. Panic among States for their EBP’s deficit and home resources’ outflows was remade in early seventies, as similarly to four decades earlier. Finally, the economic “world war”, started by the “devaluations war” equally came back. V.4.2 Reformism for the international money order However, the post-Bretton Woods era was going to be different story and the above described symptoms belong to a shorter period than the four decades earlier case. History did not repeat or, it was as different in the seventies post-IMS than in post-gold money era, as much as the Bretton Woods IMS’ development had been different than the previous gold standard IMS case. But it neither meant that it was easier or better in seventies, except for that national and world economies now were not destructed (by war), in their turn, but on the contrary411. Reform was a “lesson” that the world had already learned for a couple of decades, together with the one of searching for the inter-States cooperation in the area—earlier it had been approaching a new IMS at Bretton Woods; now, things might be different, but for a similar historic goal. V.4.2.1 International money reform in the literature Actually, the debate about reforming the IMS has been not entirely related to Bretton Woods (1944)’ development and end in early seventies. Arguing was coming before and even during the Bretton Woods IMS(1944-1971)’ well functioning. Some coordinates of this relevant literature come to be described here below. V.4.2.1.1 An over-national currency As for an over-national currency, precedents might be found even in a pre-Bretton Woods idea of John Maynard Keynes—see his proposed “clearing system/house”. Now, Aglietta (1986) sees a corresponding The post-war economic development was, though, marked by more obvious differences in pace between “West” (see the US and western Europe) and “East” (see, communist and Asian economies), as well as between “North” (developed economies) and “South” (underdevelopment).

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three advantages of this option: (1) fiat money, as defending from new international money centralization; so (2) money neutrality, as for the same, plus better dealing with the EBP exceeding, versus deficit; (3) avoiding convertibility related problems. The rest would be just credibility to be injected into the business area. Unfortunately, criticism related to the over-national currency idea is much larger than the proposition itself. First, the question is which “world authority” would be capable to issue such a “new strong currency” throughout the world, as for replacing the given strong currencies, as national, of course, already in place and enough experienced? A real international authority alternative might be found in the one arising from nations—see national economies—and these nations would prove able to feed an international liquidity. However, then, another problem arises: the amount of liquidity needed in the world market area, especially as basing on fiat money principle—this is just coming back to the “ever-forever” unknown. Besides, national hard currencies keep an already given international experience, as already mentioned above; plus, the international area also meat another “international-type” currency in the so-called “composite currency” or “currency cocktails”: see Special Drawing Right (SDR) of the IMF or the European ECU in a time (Denizet 1987). Moreover, Cross (1989, pp. 22) argues that, in reality all internationally experienced (national) currencies act similarly to over-national composite currency: this is about each national currency founded on a plural reserves system (Dumitrescu 1989, pp. 178). Or, since the SDR was required for an international experience reached, so the US dollar, the UK pound sterling and especially gold had been, what a newly introduced international currency—and this, on a much different acting principle—could do about, namely, how can it compete with the others in such a hard context ? (Guitton & Bramoulé 1987, pp. 601). The “over-national currency” so might be a quite false target for reformism of the international money; internationalization of the existent reserves and inter-States money cooperation here would be much more appropriate (Cross 1989, pp. 22 and the following). V.4.2.1.2 A new international money standard Cross (1989, pp. 21) considers two significant events, as related to some national authorities. First, the American secretary of Treasury was suggesting in September 1987 that his country would accept a “supplementary 280

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indicator for monetary policy”, as resulting from “coordination with the other State partners”—in other words, a raw materials bosket, including gold, might be accepted as founding all national currencies. Then, the other event came in the next February on the other side of Atlantic: the French minister of Economy was suggesting “three ways” for improving the “IMS in place”: (1) strengthening the spirit of the “La Platza-Louvre” Agreement in the sense of inter-States’ cooperation for controlling exchange rates; (2) elaborating a “commodities basket” for founding a new reference value for national currencies; so (3) a resulting international “new standard”, as for a genuine reserves asset. Whereas both nearly official expressions admit that the composition of such a reference value might still be under debate, the author asks whether these might announce entering the eve of a “new” gold standard. Or, this is the issue of a new standard for another IMS expected—and so, a true reformism to debate about. Reformism for the money standard and reserves comes to the “other end” than the above reformism for a new international currency—meaning, it keeps on an old IMS structure dealing with representative money. Curiously, this side of reformism equally deals previously with a Keynes’ idea: “a new non-metal standard” yet “unnoticed”, but “existing” (Keynes 1926, pp. 198-201). Thinking about international money standard, in context, regards two groups of options: (1) remaking the gold standard and (2) a really newly-built standard. As for (1) remaking gold standard, this could be ironical calling it “reformism”. Despite such aspect, this group is the largest one. At the opposite side of the “inexperienced international currency”, gold standard disposes of a quite long experience as both money and its internationalization. This group’s thinking was that “all reforms aiming out of gold standard” were short life and provisory; on the contrary, remaking gold terms after wars and crises always came up with remaking wealth (Rueff 1973). The real strength of this ideology was consisting in its inflation constraint; the weakness, in remaking the fixed exchange rates. Plus, all agree about a revaluation of gold reserves, so a common money parity which would rise all over; hopefully through another presumable inter-States agreement (Harrod 1965, pp. 64). It is likely to be figured out that a so large group of scholars was though not quite homogenous in thinking. The most interesting divergence arises between a sub-group of “radicals” and the one of the so-called “centrist”—see

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gold, just in the “center of the system”, as an older idea of the former French president Valéry Giscard D’Estaing412 (D’Estaing 1965). Or, the new ideas of centrists here get more interesting, in context. The Hungarian Janos Fekete (1973) here includes strengthening the international money cooperation, rearranging money parity according to the price of gold and the other prices—as similarly to the above Harrod (1965)’s view —, a strategy that might take into account even a general price rise (instead of lowering). M. Stand (Maioreanu 1976, pp. 100 and following) goes even further on: this cooperation keep the IMF institution in place and the last was even found of its self-reforming, as meanwhile. Or, there might be surprising for the pro-gold standard remaking camp to approach a pre-Bretton Woods Keynesian view about IMS—member States would increase their IMF reserves, the institution would issue gold parity “certificates of deposit”, as for the IMF’s currency and even importers would work with such a basic value in favour of their payments to be made to the exporters’ accounts. Reinforcing IMF and replacing its SDR by gold denominated “certificates” would either give up the old classic gold metal international shipping, or renew both an advantageous exchange rates’ stability and the old concept of currency convertibility—that the Fund is equally required to (re)consider for its self-reforming. So to be noticed that such a reforming proposal on the gold standard remaking base approaches not only the old Keynesian view of controlling international transactions, but equally the above view on a(unique)n internationally based currency. This way, the idea gets apparently strong, but concomitantly it bears retorts from all over—on the gold standard remaking side, the historical events stay more persuasive than any arguing against, whereas on the “controlled international gold standard” side, the States’ behaviour consistency might come under question; plus, the Fund, even reinforced, might be here overcharged by (too much) activities and responsibilities. The other (2) a really newly-built standard arguing has less numerous supporters and approaches, but certainly a comparable significance. Two kinds of views might be here classified. The one belongs to Robert Triffin (1961; 1973), a former IMF’s specialist. The author openly declares intention to replace the existing gold-exchange international money by an IMF institution based IMS. In which context, ironically, his view gets very

412

An economist himself.

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similar to the above M. Stand’s one: see the Triffin’s “bancor”413, versus the Stand’s “certificate”, as the new IMF’s currency; see the Fund’s reinforcing in both views either. The difference consists in that the reserves basing this IMF’s international currency gets more complicated in the Triffin’s view: the material composition of reserves is less significant—otherwise, it is called as flexible and heterogenous matter, of which gold might be missing—; more important is the IMF member States’ contribution to these reserves, as proportional to their involvement in the total amount of international transactions. Moreover, the author considers the democratic structure and decision taken inside the Institution, but besides some independent and profitable activities of it, in the aim of the same self-reinforcing trend. The other view of the newly-built standard consists in a new material base for the IMF’s reserves—the idea was also considered by the previous above Robert Triffin’s view already, but this other arguing position tries to make clear that it was about representative international money and just replacing gold by another material base, as more appropriate, namely more adaptive and easy to be updated by the States’ and Fund’s cooperation in the area. Or, this was finally the really proper sense of “replacing gold by another money standard”. Nevertheless, the proper sense of such a maneuver leads just to a plural commodity value standard, as disposable for the IMF’s reserves (Oprescu 1981). The author sees once more a commodity basket—formed in the composite currencies procedural way, meaning percentage shared among contributing values of individual commodities—basing the IMF’s currency, whichever its adopted title would be. It might be quite interesting that a substantial literature in the area considers or re-considers the IMF institution as a point reached for the IMS reformism—see below that the IMF’s position about facts was going to be significantly different, but it is certain that the theoretical views have been taken into account for all reforming strategies as well. Unfortunately, criticism is not here missing either: any new IMF’s currency, irrespective of its founding procedure adopted, would found an international currency distinct from the already existing international money and working just among States and the Fund—so was the above Aglietta’s view about an internationally independent currency—with difficulties on convertibility, communications and exchange with (into and out-of ) national currencies, except for the M. Stand’s way of re-imposing gold standard in its classical Also see the American Triffin’s empathy for the British Keynes’ position at the Bretton Woods conference of 1945.

413

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form. Plus, the material composition of reserves is as important as each component valuable item is supposed to change pricing and/or work in favour of some member States (the opposite for the others), so neutrality of the internationally accepted currency might be in question. Last, but not least, the commodity basket replacing gold raises another question: as much as the historically previous gold standard had resulted just from a similarly plural commodity market competition, would such a strategy be expected to work differently than that ?! Plus, inclusion or exclusion of gold in or from such a commodity basket might be here differently expected, except for the handicap on the other commodities than gold. V.4.2.1.3 Monetarism An interesting biographical and anecdotic detail might be here considered: Milton Friedman, the leader of the “Chicago Monetarist School”414, had been a John Maynard Keynes’ student—otherwise, Keynes himself owed something for his scientific career to Alfred Marshall, in his turn; both cases are here for students rejecting their masters’ views when growing scientifically mature themselves, as rather a common feature in the social sciences area. The Friedman’s view came to be more highly perceived by the literature since his Nobel Price in early seventies415 and rejecting some Keynes’ stand points. Actually, the “Chicago School” monetarism—as defined by its leader in: Friedman (1953a); (1953b); (1956); (1973)—nearly organically rejected gold standard and representative money, but nearly equally the fiat money of any above proposal for international currency or interventionism either. As the result: money is taken as it concretely is, no monetary policy, except for keeping money supply constant or, alternatively, increasing in a constant and reduced pace in the short time, and preferring the largest view about money—namely, conceptually, again, and not reducing to just international money environment—plus, and significantly, accepting floating, as openly—the interesting point is here that all the other views were hesitating enough about this aspect in reformism context. Besides these, no need for IMF. However, as “extreme” as the monetarism was looking like, such an arguing here searches for the same money stability aimed. Keeping money supply in its restriction of extending would be able to solve all: EBPs’ 414 415

A name and qualification given by other authors. The author of these lines was a student at that time.

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equilibrium, money and price stability, here including exchange rates’ stability and so currency convertibility. In reality, the “Chicago School” belongs to the “classic-neoclassic” economic thinking—as started in late 18th century with W. Petty, A. Smith and D. Ricardo and since reinforced by each generation of “neoclassics”—was reiterating the same way of its ever developing, now in essentially new post-Keynesian conditions. So, this late neoclassic thinking tries to revive and underline the idea of self regulating economic system, face to a minimum of interventionism—in which case, all related criticism, except for just a few technical aspects, belongs to classics, neoclassics and liberal economic thinking at the same, e.g. favouring inequality and enlarging inequality development among national economies and their currencies and neglecting casual and special needs of less developed economies, here including even individual markets’ development degrees. But rather than criticism, another aspect is noticeable about monetarism: rejecting gold standard with all forces and consistency might de facto remake a similar way of acting, see money supply stacked or very constrained in its growth face to a natural (see non-interventionism) development without coordinating institutions. V.4.2.1.4 Other reforming proposals and a conclusion This zone of thinking is an alternative one and regards “no new IMS”—so, this is less substantial and expected to bear less criticism. Cross(1989) argues for a fluctuating exchange rates system (see, page 22416); States are recommended to go into individual agreements with each other establishing target zones of currencies’ fluctuation. Or, that is either (1) replacing the institutionalized and too centralized and imposed IMF system by a more liberal option, also found as more efficient as for a “tissue” of agreements world-wide and serving a new international money discipline and order, or (2) considering the exchange rates’ fluctuation, similarly as monetarism above—and also in a liberal way. Bourguignat (1987) suggests that a minimal and all over supportive 0.5% supplementary tax on international transactions might help development (less developed and developing economies) by totalizing about US$ 300 billion yearly—that was the so-called “Tobin” tax, which’s system could extend to financial transactions. Finally, the so called “Cooke Committee” was proposed to 416

In which the name of John Williamson is also cited. 285

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be formed by representatives of twelve States in order to elaborate rules for banking operations—this was resulting from the example of an agreement between the monetary authorities of the UK and US (McKinnon 1993). As the general rule for all of the above: the deeper the reform proposed, the higher its controversial aspects and afferent criticism. This above paragraph might be an extraordinary symposium type debate—as demonstrating the tremendous substance of the money concept in this 20th century end, but this huge thinking effort was proving dramatically useless in practice, a practice to be expected on the IMF side, as obvious in the next following sub-paragraph. It is, in our view, even the “useless in practice debate” that is meaningful for such a larger history of money, as in this paper: as prophecies are ever rejected by scientists, including when they prove right, money succeeds to work for economy and its developing when scholars fail to comprise its whole topic area. V.4.2.2 Reforming the IMF institution Basically, when no more IMS, the IMF institution was supposed to be abolished—however, in its legal terms, the Bretton Woods Agreement was still in place. The literature’s signals were pretty contradictory, in their turn: except for some radical pro-gold or monetarist proposals, all the IMS remaking proposals considered the Fund—the authorized voices proven both satisfied with its work and aware of what was positive in the inter-States monetary cooperation idea since the end of the war. Despite this, such proposals saw the Fund in an enough “palette” of positions, as irreconcilable with one-another. So, what was the Fund supposed to do? Actually, there is no secret about what it did, as read in the above V.2.1, and details will come up in the below lines. There were three problems to be solved in line. First, was it for an IMS remaking, or for another alternative of international money? Here, the Fund chosen to limit its condition to an international bank working for its member States, as perfectly similarly to what it had done before 1971—interestingly, the institution was getting even more able to deepen and enlarge such services. On the contrary, the former IMS was doing some constraint for the Fund, e.g. either when working for fixed exchange rates, as exclusively, or when the reference value of the system was the US $, and not the IMF’s SDR. Or, broadly speaking these aspects succeeded to prevail for the IMF staying in place, instead of being abolished while the IMS was out. 286

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Second, as much as no IMS was meaning either more assignment for the IMF, or reversing the dollar-SDR order in the Fund-States’ monetary relationships, remaking SDR became the crucial problem to solve—when, subsequently and theoretically at least, the gold parity was remaining an alternative; moreover, this was yet existent, as in the IMF’s Status(Gold 1981). Or, not only the gold-based alternative of the SDR had been eliminated while involving the US’ FED’s gold reserves—as according to the Bretton Woods Agreement —, but on the other hand accepting the currency floating as an already given and realistic alternative was proving serious limits in all thinking and presumable strategies of the Fund during seventies. The result was the slogan of: “stable, but adjustable money parity”—concretely, the SDR would be able to choose a “currencies bosket” (see “currency cocktail”), as more stable market value than the case of any individual currency for its reference value. Then third, it took about a half decade choosing—finally deciding about—such a “currency-basket” reference value (Gold 1981). The author gives all details about the three SDR’s remaking stages during that time—the summarizing idea is that a previously long list of reference currencies in the basket has become shorter and shorter up to 1978. Or, a full explanation about this fact—in our view—is formed by two parts. The first part refers to the idea of “currency basket”, as immediately available in the currency floating picture. This is not a bad idea in itself, despite reservations of the theory in such a respect—finally, it was also borrowed by the European Monetary System and even by the central banks’ reference exchange rate for some individual national currencies either417. The “currency basket” reference value is bad since considering all component currencies floating on a single common base418—i.e. when it does simply not exist—so ignoring inequality among individual currencies’ influence upon the international money comprehensive (and even changing) picture. Put in its simpler terms, individual (national) currencies might look more stable value at the first sight, but more deeply in floating they either

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might be less influential on international trade and finance419, or their apparently “stable value” identifies exchange rates referring to the most influential currencies world-wide. In other words, the exchange rate stability results from the “extra degree freedom” of the monetary policy of less influential States’ currencies. The individual currencies are so different size in the international money area that more or less stable exchange rates—see larger, versus narrower floating spread—becomes (much) less relevant—floating itself is produced and dictated by hard currencies, whereas less influential currencies on the whole international money area might (paradoxically) stay more stable thanks to their home monetary policies420. That is supposed to be the currency floating exchange rate matter and it means “no IMS”, of course—but this truth extends to the fact that all IMS type organizations have ignored such differences within, whereas “no-IMS” and floating bring significantly more transparency on. The IMF organization hardly understood that floating was an international money rule, in the post-IMS pictures, as strong as fixed exchange rates had been under the international gold standard—all money “stability”, in context, was becoming just an exception, and never a real retort for. The other part of the same reducing the SDR’s value reference currencies basket explanation will come up in the below V.7—shortly, a significantly low number of currencies421 finally shows the highest reference value for the current international money. Then fourth, the IMF institution’s Status was required to be modified according to the “new SDR” concept. Or, that was meaning first “no more monetary gold reference”—ironically, the Bretton Woods Agreement of two and a half decades earlier was alleged for some hidden intentions in such a sense eversince; now see such intentions as openly declared when no-Bretton Woods IMS and the Agreement was modifying provisions. The IMF’s reforming achieved so contains the first international official declaration of “gold, out of money references” ever—also recall from above that the metal was coming under the rule of the “Gold Pool” (Gold 1979, pp. 219). Even by rule—see the below V.7. See the above V.3, as explaining how the exchange rate’s stability might (artificially) result from monetary policy applied (“extra degree freedom”), here including its restrictions. 421 See, instead of a larger one for rather defining a trend to regaining a kind of “majority” for the international money area. 419 420

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Then, finally, the IMF’s Status was supposed to change its provisions accordingly. In which context, the most important provisions were coming under the “other change/reform”: the one of defining the concept of currency convertibility, equally in the post-gold era. Two articles of the new Status regard this: Article VIII defines convertibility as free movement of currency—actually, its (free) exchange into other currencies—and the lowest expense as correspondingly. The new definition of the currency convertibility finally looks for the national money’s reached capacity to fulfill all its five functions422 in the international area, as basically, in the domestic one—see that this is about a typically fiat money definition of convertibility, as more complicated that the former gold based money one. The article defines basic requirements for this IMF related understanding aware of the fact that just some States would here be found as complying with. Article XIV is the other article, defined as the reservation one—it identifies convertibility defaults but equally clears the way for all States to become full members of the IMF and recommends strategies for regaining convertibility. The aspect that the same Article misses all about a supposable deadline in such regaining convertibility strategies stays significant for the openness of the Fund to all memberships throughout the world. V.4.3 Summary and conclusion The seventies began by displaying similarities with the period of four decades earlier, see gold convertibility of the US$ suspended with its domino effect on: money floating and volatility, not any IMS type capability of remaking the EBPs’ equilibrium, discovering the monetary policy, as for domestic instruments in such a respect applied, here including “virtues” of money devaluation and depreciation, so international money disorder remade by non-coordination among the States’ monetary policy and devaluation-depreciation. And all these when the IMF found itself in a defensive position: to be abolished, versus to reform itself in a credible and genuine way. Otherwise, the Fund—see, the international (inter-States) financial institution They are: (1) ensuring market circulation of goods sold and bought; (2) the same for all payments (see, of debts and/or all delayed payments); (3) “universal” money, as the capacity of being exchanged (with and/or into other currencies) on foreign exchange markets; (4) so, the making valuable reserves capacity for all commercial banks, central banks and all the other economic entities; (5) and all these basing on the value measuring capacity.

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previously founded for supporting the IMS—found itself in a paradoxically favoured position: it was the lonely entity able to work for its member States, as for EBP equilibrium, money stability and the rest of monetary and financial problems. That was why, in our view, the previous Bretton Woods Agreement (1944) has not been denounced by any member State. Then, the Fund succeeded its reforming—that was for: (1) reformulating the SDR value base and it remained the inter-States currency that previously had been, (2) a new currency convertibility definition and (3) getting promoted as the world financial authority that it hadn’t been even under the previous Bretton Woods IMS. The IMF reformed finally was a success for a new era of the international money, although results expected delayed their appearance. On the contrary, the immediate obvious aspect was that a really IMS remaking not only stayed far from the seventies everyday life, it looked even further on—that was proved, even indirectly and step by step, by the literature of the time dedicated to IMS reformism. As long as the literature’s approaches proven “parallel” to the present of the seventies, the Fund could not involve in any profound standpoints here revealed—however, it succeeded (as in our view) to become another kind of “scientific authority” in the monetary and financial area, besides being an inter-States bank and working for EBP and money-finance problems of its member States. As concluding, the seventies were the period of a slow pace turning the post-IMS international money disorder into a new era—although the last was not quite clear perspective and injurious “belongings” of the former IMS were yet present and delayed in acting, as it will be seen in the following paragraphs. On the other hand and also step by step this period of IMS reformism was turning into “post-reformism”, in its turn—starting points of this kind of thinking was the newly arising question: was the old type of IMS really feasible to be remade in the new international picture, or the former Bretton Woods IMS had been possible in and limited to an immediate post-war economic crisis and “Marshall Plan” reconstruction picture?

V.5 The eighties: the external debt crisis A new aspect in the world history and in the one of the State concept here revealed in this period: States indebted and unable to pay their debts to other States and other legal entities, whereas nobody could execute such 290

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kind of debts. Plus, this aspect internationalized. Apparently, interest rates on international crediting exploded and two points came to define the crisis in another domino effect: (1) interest rates and debt services rising up to equalizing and even over-passing principals; (2) total debt over-passing the State’s capacity of payment at maturity. V.5.1 The events The other aspect is that this was the result of the former Bretton Woods IMS, as externalized—when not “internalized”, meaning not present or transparent under the IMS still in place. The cause and source of this consisted in the above V.2 described initiative of enlarging liquidity of the dollar-based IMS. The American payment for imports and even huge EBP deficit had grown insufficient to the world-wide need for liquidities—as in context, the Robert Triffin’s initiative and Rio Agreement of the IMF (V.2) played their role for this enlarging liquidity operation. The IMF and other international banks and financial authorities have got stimulated to promote international credits. Shortly, a kind of “dolce vita” environment had been the very precedent of the later on crisis—even whether nobody likes to remember this aspect. Then, after and even previously of this liquidity enlargement initiative the Bretton Woods IMS was failing to distribute resources as rationally all over—on the contrary, there were both missing liquidity regions, face to “purses” of the so-called euro-dollars accumulated areas. Shortly, again, world inflation became imminent and it strengthened since the IMS was out, together with its fixed exchange rates imposed. The early seventies international oil crisis came to worsen the situation by its produced petro-dollars attached to euro-dollars. Then, what does inflation produce immediately? Rising interest rates, by creditors, as for sure—international credit institutions were the first feeling jeopardized this way. On the other hand, the indebted States regrouped for taking the opportunity of a “front” raised to face humiliating requirements of the creditors’ side. Then, a dramatic event breaks this “front”: Romania, under the Ceausescu regime, decides and hurries its thirteen or fifteen thousand dollars debt payment in late 1989—and even makes a lot of noise about this “brave” gesture, while actually playing against debtor States and in favour of international creditors. As the result, that external debt came to be negotiated directly between each indebted State and its creditors. 291

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V.5.2 Synthesis and conclusion This was a crisis enlarging the post-war development gap between industrialized countries and the developing “third world”—as some ideologies still like to express their views about the world history. But this way a limiting crisis effect here comes up: this was not properly called as “external debt” crisis, while it was a crisis regarding the debt-payment capacity of some States. So being, the crisis did not enlarge and did not affect the main liquidity flows throughout the world economy; these indebted States have by far not collected relevant amounts of international debt at the time—on the one hand, the highest international debt still belongs to the industrialized world, on the other one, if a real external debt crisis had been in place, that would be remaking the previous 1929-1933 world financial (and economic) crisis, or the one of the later 2008-2009. The same crisis succeeded to compromise the international financing and crediting institutionalized concept and cleared the way for a new change in States’ policies of development, since not only such a crisis, but this international crediting also failed in sustaining development—the foreign investments were going to reach a considerable up-pressure in the following years; see their no-interest rates or debt producing qualifying. Finally, what about Romania, in the context of hurrying its debt-payment? See the Romanian revolution just one month after this event and everybody gets able to understand that this was just like a dreadful austerity policy that the people of this country came to reject in the most violent way. Plus, Romania then came back into indebtedness, thanks also to its new needs of development—but not only, in our view: Failing to pay its debt by the sequence of credit received for investment made profitable does not do, but re-creating the need for (a new) indebtedness; or, this stays valid for all, here including organizations, companies and individuals; plus, this stays valid irrespective of an existent money disorder or even order, on both international and national economic areas either.

V.6 1985: the “LaPlatza-Louvre” Agreement and international money re-stabilizing in a non-IMS picture There is another post-Bretton Woods IMS problem to face: the US$, as reference currency (value even) when floating—in other words, this was: “the dollar as the United States’ national currency and all the other States’ 292

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problem”, as equally here rephrasing the expression of a former American secretary of Treasury. Answering such a question will be deepened in the below V.7. Shortly, the US$ was the freely used money world-wide, the former IMS so had massively injected it into the world market space, instead of making it benefit from a usual monetary policy home (see also the above V.3)—monetary policy including usual restrictions that all the other currencies than dollar resented from their monetary authorities. The dollar was continuously depreciating, as consequently and obviously throughout decades. In other words, the other national currencies were benefiting from the “extra degree freedom” of the State’s monetary policy, whereas the dollar was benefiting (and still does today) from what was called “benign negligence” from the FED—this expression shortly means that the American monetary authority stays not interested in the dollar’s floating outside its home area. The dollar was everybody’s problem since depreciating, due to its spread throughout the world, to its part in every State’s national reserves and in all individual fortunes—or, the question here raised was how to intervene on the dollar’s floating without the US’ and FED’s cooperation? Diplomatic approaches of such an issue might here have their own role played (who knows?); the fact that the US finally has got attached to the internationalized idea of tempering the dollar floating is for certain: a new international conference came to be organized in middle eighties. V.6.1 The Conference event “LaPlatza-Louvre” is the name of a hotel in New York, where the Conference was going to be hosted in February 1985. There was a “core” group of central banks and governments (G3) organizing it, meaning the ones of the US, Germany and Japan—a total of 16 States and monetary authorities were going to join works of the Conference and related market interventions up to the end of 1991(McKinnon 1993, pp. 32). The object of the dialogue was very precise and restricted: a new concerted intervention in favour of the American currency on foreign exchanges markets; this whole action was also supposed both to be as time limited (1986-1992) as individual interventions themselves and “discrete” (not ostentatious). Basically, the concerted intervention was here defined as: (i) at least two of the G3 central banks working together for an individual intervention; (ii) at least one of the two continues the same intervention for just five weak days on. 293

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This was a real success—the pre-defined concerted interventions were in reality going to be rarer than expected: there were years time without any intervention and years of just one intervention, as the case of 1986 and the one of 1992 (July 10-August 11) on which 13 central banks worked together (McKinnon 1993, pp. 33-34)423. However, different degrees of success have been meat by individual interventions—there were nine, as the total. V.6.2 A larger conclusion The overall success of the “LaPlatza-Louvre” Agreement consisted in the temporary blotting the dollar depreciation against the Japanese Yen and German “Deutsche Mark”. The aspect here required to be made clear and transparent is how an international conference like this can be finally successful? Or, comparing “La Platza-Louvre” (1985) and “Bretton Woods”(1944) events automatically comes up. Enough talking about Bretton Woods (1944-1971), in such an order—so, how about “La Platza-Louvre” once again ? “La Platza-Louvre” (1985) was similar to Bretton Woods (1944) as being an international conference with State authorities as participants and American auspices. The difference seems to consist first in the restricted scope of dialogue and works: just tempering some floating in a professional way—on its other side, Bretton Woods (1944) had been so ambitious in its broad debates about a newly projected IMS. But behind these aspects at the first sight, then another question raises, as double, once more: could that be otherwise? as for each of the two conferences. We believe that the answer is no for both cases. The Bretton Woods (1944) event was for an extreme world-wide economic and political crisis and for founding a new era of developments in a specifically ostentatious way, as necessary; “La Platza-Louvre” (1985) was so coming after another four decades of developments which could have been changed the face of the world. States were no longer as weak as in the immediate World War aftermath; and finally the money floating was facing the States’ authorities’ repressive tools; just some cooperation among States was here expected. The Bretton Woods (1944) event could be for a Keynesian type intervention 423

The author here cites a 1992 study of the Italian researchers Pierre Catle, Gianpaolo Galli and Salvatore Rubechini as well as articles of the “New York Times” dated July 12 and August 12, the same year.

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throughout the world; on the contrary, “La Platza-Louvre” had its way cleared for a new liberalism in favour of the same individual States’ acting. No more need for the “clearing house” once proposed by Keynes or for controlling international trade—the fact that States were now able to limit their Conference dialogue to a so narrowly defined object says that (unfortunately) the Americans had been right over time at the previous Conference of 1944, despite their “less educated” at that time point of view, face to the one of the European delegation lead by J.M. Keynes in person. The absence of the IMF’s representation at the 1985 Conference was equally significant, in our view. In reality, in 1985 the monetary cooperation among States needed a Conference organized for a limited scope of debate just as “an exception” from the “rule” of a new liberal world in favour of States and not only—rule and requirements had been much different in 1944, meaning, on the contrary, in favour of centralizing initiatives as world-wide. As concluding, the real profound difference between “La Platza-Louvre” (1985) and “Bretton Woods” (1944) did not consist neither in scopes of debates, nor in terms of success, versus failure. That was the environment difference between the two events: just two different eras.

V.7 The nineties: “OCA” versus IMS So, the world was already changed face in late eighties, despite its very partial de facto reformism, as viewed in the seventies’ and eighties’ literature. Recall from above the “passage” between reformism of the seventies and what was going to be “post-reformism” (Andrei 1999) in the aftermath. V.7.1 Post-reformism The very moment was the one of the “rupture” from the old obsession about IMS (Wolf 1994, pp. 25) since the exchange rates had reached a significant stability already—and that was for a “seven years interval”, as remarked by the British professor Max Corden (1994). Not only this stability was reached, but the last suggests how “better” an alternative fixed exchange rates system would be for the opposite effects of the American and British EBPs as meanwhile. Bordo (1994) here deepens the historical picture of the international money with exact distinctions of representative periods. Corden (1994) argues for a “new laisser-faire” meaning decentralizing all 295

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economic entities’ market initiatives for a kind of “non-IMS” with no viable or pragmatic alternatives, or what Wolf (1994) ironically qualifies as the “worst system, as possible, except for what previously was” instead. V.7.2 The optimum currency area (OCA) This paragraph is aimed to emphasize the very separation between the post-1931 and the post-1971 pictures of the international money this way, but not only. Here below the analysis will be completed by answering the question: what finally made the international money’s stable exchange rates in eighties, nineties and on ? Or, was it a new aspect ? McKinnon (1993) here has another theory, in which the author associates to an older one exposed by Robert Mundell (1967): the optimum currency area (OCA). The last is assumed as a distinct region or group of economies in a certain interdependence degree. The intra-regional trade is compulsory in such a sense and is likely to dominate the amount of the economies’ international trade, as a whole; besides, there might come investment and other business matters across national boundaries (see “interior” boundaries). Apparently, OCA is an “island of (price) stability”; in reality, the price stability is genuinely backed by the domains of costs, wages, labour force’s stability, versus migration and skills, productivity and finally life standard. Formalizing and/or commitments taken by States for customs union or other forms of economic integration are optional. Anyway, forming an OCA and individually participating to are benefits aiming and costs incurring on the member State’s side. A multi-country region is and/or remains an OCA as long as the afferent benefits overpass related costs for each individual member State. The McKinnon (1993) contribution to the OCA theory emphasizes the part of the member States’ currencies in the issue. Each OCA works around a single coordinating national currency, called by the author the “nominal anchor”—see also the “country” anchor, as the currency issuer. The condition of the nominal anchor, as related to the other currencies in the area, and the one of the country anchor, vis-à-vis the other member countries are equally important. The nominal anchor is required as a stable value reference for all the other currencies in the area; vis-à-vis, the country anchor is supposed to have no or less degree of monetary policy in order to provide the nominal anchor to—to let its national currency leave the country area for—the OCA region. The nominal anchor is asymmetric in the area by its free use—whereas the other countries keep their own high 296

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“extra degree freedom” of monetary policy—whereas the country anchor is also required to keep a representative and significant domestic market for imports—a market capable of issuing, besides the nominal anchor, market prices to propagate within the region. On the one hand, as for letting the nominal anchor go to the region and having a representative market for imports, the association is virtuous—however, on the other one, associating no monetary policy with imminent EBP deficit and these with stability of the nominal anchor is vicious, on the country anchor side. The latter form the basic cause of the perishable nature of all OCA. Plus, such a phenomenon comes to be more obvious on the country anchor side, once more—the previously optimum currency area is likely to become not optimum. The author this way emphasizes either why and how the OCA self implodes, or that the country anchor—previously supporting the whole OCA, as its real “heavy center”—becomes its same destruction origin location. The author identifies the post-OCA international monetary disorder with the bankruptcy of the nominal anchor plus argues that, during the monetary disorder, actually the region looks for new nominal anchors, which will bring new international money order in, but not only: some rearrangements in the geographical economy might also be expected. The OCA theory is an appropriate retort for the previous IMS theory, so achieving post-reformism in thinking about international money. It is another view on events like the two IMSs studied above, even plus the international money disorder of the thirties and fourties—this has just reduced to the bankruptcy of the pound sterling, as the nominal anchor for the entire gold standard area. While such a disorder is no longer accepted as “no-IMS” existence, IMS itself lowers its significance even when existing—IMS, as (re)viewed by McKinnon(1993), reduces to just formalizing a corresponding OCA existent by international agreements and/or other laws in force. Actually, the OCA theory is a liberal and fiat money related view. The OCA theory keeps equally a more relaxed view about the exchange rates stability and related home monetary policies: the exchange rates are aimed to stabilize, but admitted to be floating principle; monetary policies exist, here including in the country anchors, but less tough than in the rest of countries, which so benefit from “extra degree freedom”. The fixed exchange rates here become just a particular case, in context. All IMS was actually an OCA and this was when the OCA grows world-wide; actually, OCA is a structure able to work on both the entire 297

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international area and on limited regions424 with similar rules. Unlike the IMS theory which reduced to just some rules listed, the OCA theory both changes the picture of rules and, more, explains why and how OCA is constructed and destructed. In such a context, the McKinnon’s theory’s explanation on the country anchor as forced to initiate this last OCA’s destruction sounds really new on the issue. Last but not least, recall from above that this OCA theory belongs to the fiat money zone of monetary thinking: while so well explaining mid 20th century and on events, there is no international gold standard to be admitted, as previously, but as a pound sterling international standard of the same pattern that the dollar was going to act after the last World War. Otherwise, the McKinnon’s nominal anchor is the previous unique basic reference value, as renamed and claimed by a long gallery of names, as between Robert Triffin and even Karl Marx—with the precision here made that this newly referred nominal anchor is compulsorily a national currency as internationally working. V.7.3 Contemporary currency areas Previously than McKinnon(1993), Guitton&Bramoulé(1987) remark the existence of currency areas throughout the world as a current reality. V.7.3.1 The sterling area is the oldest one, as born in 1931 and including the British Common Wealth and other attached countries—so, the obvious fact is that the birth of this area is strictly related to the sterling’ s bankruptcy as world-wide nominal anchor in the McKinnon’s view: actually, this hard currency just restrained to some regions and this pattern of events was going to repeat for the dollar’s case exactly four decades later. The authors remark the good functioning of this area up to the end of the last World War, when things were going to change: as for instance, in 1975 Kuwait was leaving this area for the dollar one as “instantly” since this State decided to re-price

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In such a context, the author compares the Bretton Woods IMS (1944-1971) with the European IMS (1979-1999), that will be detailed in the last V.8 paragraph. See also the next V.7.3 subparagraph for describing some currency areas throughout the world after the early seventies.

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its oil reserves in the American currency425. Other literature already argues that this currency areas would be already dead. V.7.3.2 The French franc area is someway different issue. It was born in 1945, as institutionalized and run by France. This way, it appeared as more homogenous and organized than the cases of sterling or dollar areas. The authors remark this area as broken down into two components: (1) countries with their own currency issuing institution and special relationships with France, see: Tunisia (since 1959), Morocco (1959), Guinea (1968), Algeria (1964), Mauritania (1972) and Madagascar (1959); (2) Oversea French Territories, see strictly: Dahomey, Gabon, Mali and formerly the Central African Republic, Ivory Coast and Burkina Paso. There were also two currencies, as related to the French franc, working throughout this area: (1) the CEP franc for French territories of Pacific, as for around 5.5 French francs; (2) the CFA franc for African French and former French colonies, as for around 2 French centimes. The French treasury institution was receiving and managing amounts of these currencies, as converted in French francs, in a special account of “operations”; plus, Paris had its “Exchange Office” and subordinated “Monetary Committee” also working in this respect. Things changed since the French franc ceased to exist and melted into the euro currency in 1999. V.7.3.3 The dollar area is, certainly, specific by nature, surface and behaviour. See a double phenomenon here developing: first, the American currency keeps its largest reference value throughout the world, even in the post-Bretton woods era and including for the other hard currencies with their own individual currency areas; second, the dollar restraints on a specific area the way that the pounds had done in 1931 and here works as similarly as the other hard currencies on their areas. Then, the dollar area still is the largest currency area but not enough précised frontiers either: Central and South Americas, extreme eastern Asia, here including Japan and China, the Near East, South Africa etc. The dollar is chronically suffering from back-off since the fall of the Bretton Woods IMS and internationally depreciating since 1971. So does its restricted area when staying enlarged, but not organized at all in the 425

All Kuwaiti companies saw themselves forced to change their accounting money, as “overnight” (Guitton&Bramoulé 1987). 299

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former franc way. However, the already above mentioned Kuwait case (1975) proven a considerable force for this area. And not only: the 1975 small Kuwait pattern step taken was going to be repeated by the large Russia one in 1991, when the international communist States’ organization of “Reciprocal Economic Aid” collapsed; Russia joint the dollar area by a similar re-pricing its oil and gas resources and with an international monetary and economic force that made other former communist countries around to do the same. Or, it is obvious that any American interests were not here involved in, but this shock phenomenon explains just by the remaining force of the dollar currency area. V.7.3.4 The other currency areas Guitton&Bramoulé(1987) also mention Canada, as a specific currency area, despite its just one State territory. A mixture of historical—see the French, turning into a British colony later on —, economic—strong business and economic relations with its southern US neighbour —, monetary—see different behaviours since the international gold standard and Bretton Woods Agreement, of which Canada was never part—and other conditions engendering heterogeneity within this area made it special, including for a currency area. The above mentioned “Reciprocal Economic Aid” Organization of some Eastern Europe communist countries is also mentioned by Guitton&Bramoulé(1987); plus, the ECU426 area, as managed by the European Union up to the moment of euro (1999). The authors do not mention either the German mark area, or the Japanese yen one—as for the previous, details will come below in the V.8 paragraph; as for the latter, as much as the yen’s leaving Japan is banned by law, all existing currency area around is supposed to be a “black-green” foreign exchange market.

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“European Currency Unit”(ECU), as an account currency of the European Monetary System (EMS)—the European development in the matter will be detailed in the last V.8 paragraph below.

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V.7.4 Further reflecting about currency areas This is certainly a new full design of the international money in the post-IMS eras427. Recall from above that the IMF has finally proceeded to reduce the SDR value reference basket in late seventies to: dollar, mark, yen, sterling and franc; just the hard currencies with proper currency areas throughout the world map. This map can be easily imagined as the one with five different colours identifying each of the currency areas of those hard currencies; each of the same colours might also be differently intense on different country and/or region contours, as identifying spaces of more or less open economy. This design of post-IMS international money so demonstrates that and how a previous IMS-OCA was able to break down into several similar structures, as claimed by McKinnon(1993). And given all these, the contribution of currency areas to re-stabilizing exchange rates throughout the world economy does not require more demonstration. More aspects of this description stay important besides. The one is just opposite to the structural similarity among these currency areas: the variety or diversity that each of the currency areas brings in the international money picture as a whole: see more or less organization, coordination and so, homogeneity within; but also surface, number of countries involved, continental (versus island-related) specificity and/or length of experience; specificity induced by the country anchor etc. Variety of the international money throughout the world, as corroborated with plurality of currency areas has definitely changed the old gold system propensity of extension and globalizing—today, money stopped being a globalizing factor; such qualities belong to other concepts. Another aspect is the one arising from Japan—an economy of its own hard currency—is included in the dollar area and France and UK—other countries with their own hard currencies and currency areas outside Europe—once belonged to the Deutsche mark area. It might be about some hierarchy among these hard currencies, but more exactly about not so simply making the world market area just share among hard currencies. Actually, the benefic side of this aspect might consist in correlating hard currencies to each-other, as for the “peak” of the new system and as opposite to making the areas distinct from each-other. Or, 427

Note now how improper today is all expression in literature like: “the current IMS . . .” or so. 301

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a series of other aspects might here result. First, the whole international money picture as “tree-shaped”, meaning dollar as the “trunk” and the rest of hard currencies as “main branches”; then, that any other national currency than the given above five ones will compulsorily join the system as a secondary “branch” attached to one of the main branches, so each currency area identifying with a main branch with its all secondary branches hosted. As indirectly, the “tree-shaped” image (model) of the international money expresses the no-linkages between the less important national currencies (see, the “secondary branches” of the “tree”), except for indirect linkages through the main hard currencies (“branches”). The same description, as seen from Europe, might be a little differently shaped: instead of sterling, franc and mark autonomously attached to the dollar trunk, here the German mark appears as a main branch hosting the ones of sterling and franc, together with all the rest of western European currencies. Last but not least, let us imagine the “other end” of the currency areas description: the full condition of each country to belong to one of other of the existent currency areas. Every central bank feels committed to make known an indicative exchange rate level of the national currency, as related to the nominal anchor of it, every morning. Or, the question here remains the same: why this related currency? The answer sends to the availability of this currency in the home area: see, from banks’ reserves to all portfolios and the foreign exchange market supply—this one, as closely related to the home companies’ exports’(versus imports’) direction. Just one hard currency is likely to be dominant, and this is the symptom of the country’s inclusion in the given currency area; on the contrary, when two or more hard currencies dominate the home market area this is the symptom of a home economy found on the frontier of currency areas and the national currency’s exchange rate is forced to relate to a currency basket, as similarly to the one of the SDR or ECU—before joining the European Union, Hungary and Baltic countries had their own currencies basing on currency baskets, as symptomatically for their position between the dollar area bought by Russia on their eastern side and the mark area on the western one. Monetary policy does not control such facts in the home area, on the contrary, it sees itself forced to adapt to. However, a country leaving a currency area for another one tends to get usual since availability of individual hard currencies varies in the home area—as for instance, the whole eastern Europe area, as a post-communist and emergent economies one, has taken a series of 302

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strategic steps, here including sometimes leaving the dollar area for the euro one etc.428 It is equally true that the above outline of international money lasted up to the end of the 20th century, when the euro currency came into force and did absorb the Deutsche mark and French franc; plus, the sterling area comes under question and the yen one is rather negligible since the Japanese economy has all qualities, except for any extension propensity. Today, the same design has changed once more clearing the way for a whole international money picture relaying on just dollar and euro.

V.8 The two-thousands: the European integration and common currency model Europe is a different issue, and that will be deepened in this last paragraph: historically (formerly), it was a real source of wars, here including the two world wars of the 20th century, and even after the World War II in 1945 a so-called “cold war” did replace the old warrior state and so did split the continent between its “East” and “West” parts. Only the end of the century found a new atmosphere. However, our interest here keeps focusing on the money and market history and, so new money-related aspects will be found. V.8.1 Not just Europe, but “two Europes” Unfortunately, the continent stayed politically divided into its East and West for a half century; and there was not only the cold war time (1945-1989), but the years up to the European Union’s extension initiative are here included for just separate histories faced on each part. The eastern part of Europe fall under the Soviet power immediately after the end of the War, for which fact some historians allege the Yalta Conference (1945), more precisely the western countries’ too defensive attitude at that event. The communist “island” has actually extended at that moment from Russia not only to Europe, but also to east and south Asia—the Soviets had meat another strong communist country on their southern boundary that was China, of curse and it had suffered hard from the Japanese occupation during the War, as well. Then, the “cold war” was going to affect not 428

There will be more details given below, in the last V.8 paragraph, about what happen in the European economic and monetary area. 303

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Europe only, but Asia too, then even Africa and some communist influence did extend to South America in seventies. The communist ideology has been as strong as succeeding to design a strong economic thinking, as well. Two results were significant this way: (1) even western economists were accepting the idea of the “alternative” economic system as capable of producing the same welfare that the free economy; that was why even the communism’s collapse did take all scholars by surprise; (2) the communist States have got equally ready to form a kind of “international economic system” to fight the “capitalism” world-wide—recall from above the communist Organization of “Reciprocal Economic Aid” in the European area: it lasted up to 1991, while communist had been here overturned two years earlier. During that time, all communist States started the so-called “socialist industrialization”, for which long term programmes were drawn; their international Organization tried to achieve some coordination among these national programmes. Despite that, some polemics also came up inside the Organization, since at least some States’ leaders preferred to maintain national identities. Besides, the communist system’s lifetime has also divided into two periods, the previous one was related to the Stalin regime in the USSR. It was the USSR, as well, which took the initiative of “de-Stalinization” equally in mid fifties for the whole European communist area. Nevertheless, some States were going to “resist” to this: actually, “resisting” to this was becoming the old dictatorship strengthening—that is communism and its political tragedy429. Back to the communist international Organization in Europe, it tried to build an international trade basing on a clearing accounting system, as centralized and basing on the so-called “transferable ruble” account currency—a true “currency area” was resulted from (Guitton&Bramoulé1987). In reality, there were both the ideological aversion against money and presumed incapacity of reaching a true nominal anchor here acting. Plus, this Organization stayed far from the western community’s performances during the whole communist era. In such conditions, the “aware” economists of the communist system expressed for 429

See the opposite examples of the neighbouring Romania and Hungary. The previous played for the “terrible child” of the communist system, whereas in reality strengthen the Ceausescu’s dictatorship; the latter was called the country “missing all foreign policy” under the Ianos Kadar regime, the guy who was thought at that time that being able to win all presumable free election, when such a procedure never took place in the communist system.

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keeping and even promoting foreign trade with the “capitalist” west; these States have also got membership of the IMF. The end of communism was slightly similar to the end of the IMSs on the western side: see the collapse of the “country-anchor”; the Soviet Union bankrupted in its superpower ambitions—see feeding the other communist economies by its oil, gas, coal and other natural resources at the lowest prices world-wide; building and maintaining its space agency; maintaining a strong army and military influence world-wide; all these when producing welfare home was always a problem, not so different from the previous Russian Empire time situation. Moreover, some other communist countries were higher life standards performing, as “repaid” for their “staying inside” the system and maintaining communist regimes. The end of communism in the Eastern and Central Europe not only took many people, including western politicians, by surprise: it re-found enough diversity throughout the region, meaning differences among national economies, see: industrial development, productivity, average size of companies, agriculture and its organization, infrastructures, economic openness and, finally life standard. However, the economic transition to be faced at that time was unprecedented and more or less destructing an economic system, here including welfare produced. Then, the post-communist economic transition—as included in the larger “emergence” to the market economy world-wide—started with paradoxes and so continued in the last decade of the 20th century. Let us see just two examples, as keeping on the international condition of these countries: the first is the one of the unanimous option for remaking market economy of their pre-communist historical periods—and this as an unprecedented experience and an obvious corresponding “white spot” in the economic thinking and theories; plus, the market economy at this new time was enough different from each country’s experience of about four and a half decades earlier. As consequently, all countries preferred the trade and economic relationships outside their former communist camp and still geographical neighbourhood—all countries’ foreign trade is supposed to be dominated by business in proximity, except for the post-communist transition case in Central and Eastern Europe, at least for a good while. Such an aspect came to strengthen another sad aspect of the post-communist transition, as in a larger view: formerly, in the last World War’s aftermath these countries’ communist strategies had come under the Soviets’ political domination, but they could work together, as internationally; now, since 1989 each country was alone and forced to manage by itself, even in a new 305

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competition environment, as not pretty beneficial for all sides. The other example might be here corroborated: the monetary one, in the same international money context. Recall 1991, when the former “Reciprocal Economic Aid Organization” ended430; then, the yet Soviet Union took the step of reevaluating its oil and gas resources in US dollars and the corresponding dollar currency area had suddenly advanced onto the former “transferable ruble” area, as on the former Kuwaiti (1975) scenario and as now pushed by even the USSR. However, the dollar did not “occupy” the whole eastern and central Europe land—the other (west) part of this territory was “invaded” by the German mark area: see, first, the former Yugoslav countries, and not only; later on, Bulgaria was going to join the mark area in another shock juncture431. Whereas, besides Soviets, Poland, Romania and Bulgaria were coming under dollar, Yugoslavia and, then, the ex-Yugoslav countries stayed under mark. Then, a third part of this territory was getting another symptom that was even the most relevant one for the ex-communist European land: the very “frontier” between the dollar (east) and mark (west) currency areas in Europe was passing through the post-communist transitional group of countries’ area. Countries like Hungary, Czechoslovakia (and now the Czech and Slovak Republics) and Baltics were coming directly on this areas’ “frontier”, so their new national currencies were related to currency baskets of the two hard currencies. The ex-communist European country group was finally joining the common European history when negotiations with the European Union started in late nineties; all the today Central and Eastern member countries of the European Union were leaving the dollar area and the currency baskets for the euro (external) area since this “pre-joining” period. Besides, the other (western part of ) Europe’s post-war history was of course much more relevant for the continent and will develop in the next below sub-paragraph. V.8.2 Related history: the European Union (EU) built Even the last World War had been started by an ideology containing a “Europe united” idea—so the 19th century Napoleon wars had. Previously, initiatives like this stayed on the warrior side of history—can we currently 430 431

As against some other efforts of revive-it. This is the one of a serious financial crisis resulting from the Bulgarian refusal of an agreement with the IMF in 1996 (Andrei 2005).

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see it as a “paradoxical” aspect ?—whereas, on the contrary, maintaining national identities and nationalism in Europe accounts for peace. Just after the War, things changed as radically, the way that rebuilding the united Europe was one of the prior ideas of Europeans. Unfortunately, the “iron curtain” on the eastern side was still chronically limiting space of such a dream. There is also to be mentioned what the today European vanities try to hide: America has played a crucial role in this European undertaking—see the “Marshall Plan” for rebuilding the western Europe infrastructure and economy (1947) and the Organization for Economic and Cooperation in Europe (OECE/1948)432. Even previously, in 1945 NATO initiated the “European Defense Community” on the western side of the old continent. But it is equally certain that the “home European” initiation in such a way played the “other part” of this role: names like Monnet, Schuman and Churchill were later joined by Adenauer and De Gaulle, who elaborated and signed the peace French-German postwar Treaty (Ricketts 1996). In May 1949, the Council of Europe was founded as the first representative political organization in the post-war Europe—ten States were here represented. The fifties then came to bring a strong economic recovery and a real boom in territories so recently destructed by war. Another interesting post-war aspect consisted in that Germany meat the fastest recovery which made it quickly through out its previous defensive feelings; since the first post-war decade Germany and France were becoming leaders of the new European “unification”, whereas the UK—the former allied of France against Germany—now preferred some political reservations in such a respect. Then, on April 18, 1951, the Treaty of Paris found the “European Community of Coal and Steel” for a number of six countries: France, Germany, Belgium, Netherlands, Italy and Luxembourg—some industrial sectors coordination experience was now started this way, but inequalities in benefits’ distributing and no-unanimity in decisions taking were concomitantly revealing the real economic size inequalities throughout the new Europe. The well-known Treaty of Rome, in March 25, 1957—some corrections and completions made its text achieved in the next following January —, is ever since recalled as all European Communities’ and Union’s later on true 432

The one then becoming Organization for Economic, Cooperation and Development (OECD) in 1960, since extending on other developed economies throughout the world. 307

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start. This Treaty text was a programming document: its project contained in sequence: (i) a customs union to be built; (ii) free movements of persons and capitals throughout the territory; (iii) harmonizing national laws regarding market related issues. The idea of a European “common market” was explicit in the Treaty, and this was projected for a new welfare to be reached for all peoples. Then, two other European “Communities” were founded: (1) the one related to the atomic energy (EURATOM) and (2) the “European Community” (EC) itself: six member States and a long term integration project. The next decade, in 1967, the “European Communities” were so institutionalized under a “unique” European umbrella and so financial institutions like the “European Social Fund”, “European Development Fund” and “European Investment Bank” were then completing the same project. Despite their uniting Europe propensity, the European Communities were not the single economic and international market undertaking throughout Europe. In May 3, 1960, a Treaty of Stockholm found the very retort called the “European Free Trade Area” (EFTA), as actually dominated by the other economic power of the Western Europe: the United Kingdom. Austria, Denmark, Sweden, Norway, Switzerland and Portugal, besides the UK, here signed the Treaty for a much less ambitious aiming, see eliminating all tariffs and other obstacles for the free trade in Europe, since, though, differentiation in such concern was persisting—see the example of Austria, with the highest level of tariffs within the Association. Urwin (1991) here concludes a reinforcing position aimed for each of the “seven EFTA” as against the “six EC” at the time, whereas beyond such an expression all European States were actually strengthening all their relationships among them—enough political difference, as compared to the pre-war period in a Europe without any conflict ever since. In context, the UK was keeping its own reservations as related to the EC, for which’s membership was (otherwise) going to apply soon after, in August 1961. Plus, in its subtext EFTA was aimed to be always larger than EC just relaying on its relaxed and non-integration objectives and working with an essentially different European philosophy, the one of keeping differentiations as they were within –examples that could be given were the above mentioned Austrian case of high tariffs; another one comes on the political side of facts, meaning Portugal was still under dictatorship at that time and finally Switzerland was going to keep its franc under gold standard up to the century end. The two European Inter-States Organizations themselves tried to have 308

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good relationships between. The “heavy center” of EFTA that the UK was at that time then left the Association for the CE, “dragging” other States in line behind like a great power that it ever was, but EFTA is still alive today by the rest of its member countries. The step taken by the UK was as decisive as expected for the ever since political meaning of the European integration (Story & Water 1997)—despite that, EC has got in a new complex political picture at that moment. France, and actually its president, the general De Gaulle at that time was invoking presumptive economic “imbalances” as induced by the UK joining the EC for its veto in Council—the French political judgment was increasingly obvious behind: the country’s dominant position in the area, even together with Germany, was much more convenient than the third regional economic power’s new entry. This French attitude came to be equally consistent with the one against the American influence in the Western Europe. But this was going too far in mid sixties: France collided with other member States’ interests inside the EC and even provoked a crisis of financing the agricultural policy to be solved in 1965 by the Luxembourg “Compromise”433. Then, the other French veto to the UK joining EC made the already given tensions between the two States and even inside the Community nearly blow up—it became obvious that the UK wouldn’t be able to such a joining as long as President De Gaulle was still in power in France. Then, fortunately, this old symbol of French patriotism and heroism of the last World War that general De Gaulle was resigning in 1969, and so the other part of a unique truth came up: that cleared the way to both Britain joining EC and to a new impulse for the European integration. Despite that, Britain joining EC did not reduce to a happy end story: it took more than a decade time to make it since the first British application filled for (Soto 1999) and even previously some voices had expected some complex developments. The sixties were equally the period of starting the Common Agricultural Policy (CAP)—the CAP and unique currency later on might be recognized as the top achievements of the European Community in the sense that they specifically changed the face of the continent. However, in context, the “new” EC that included the UK’s membership had to face either a general economic growth slowdown, or some financial difficulties as regarding the UK’s contribution to a Community budget 433

A French diplomatic slogan at that time claimed that not even the Community’s welfare could be morally superior to the national interest. 309

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for agriculture: the new member State not only was paying a bill when its home agriculture was far from representative inside the same Community, but equally this payment was supposed to feed the French farmers, and later on the Spanish, Portuguese and other Mediterranean ones from whom British were importing food items434. Actually, CAP is as good as succeeding both of its primary targets—(i) feeding population and so ensuring a basic welfare and (ii) ensuring a favourable price level for both consumers and producers; later on, another target here got included in the context of the CAP’s development: (iii) producing the appropriate technical level for agriculture—and its permanence in acting up to present. Despite all these, this Programme is an example of imperfection and related contradictions, of which the budget functioning is just one—see also the sometimes injurious market competition among farmers of different member countries as turning into the one among the countries themselves; the basic contradictions between producers and consumers, especially on the price issue; the domestic European agricultural products’ competitiveness as against similar products imported from outside the Community; diverse subsidies for agriculture etc. In a word, CAP is neither bankrupted, nor fully successful, the way that Andrei (2009) finds its overall similarity with the whole process of the European integration. 1969 was the year of a new initiative of the EC: starting a monetary union for. A new programme was started under the direction of the Luxembourgian prime minister and minister of finance at that time, Pierre Werner. As in details, there were three steps to be taken in this direction, of which the early eighties were for the “Community reaching all monetary-financial tools under its control”. The next following year, the report about this programme was ready, but then the international money events of 1971, oil crisis and even some internal divergent positions concerning national policies came to postpone its launching at least to 1974 (Baker Peace 1999)435. 1969 was also the year of the European Communities turning into just one European Community and so, the sixties were overall a period of some tensions arisen, but of a rather good finish, as well.

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Especially, how to politically explain such facts to electors? “Baker Peace” (1999): The new Euro in the Global Economy. Conclusions of the annual Conference. [email protected] and www.ohiou.edu/onhist/chi2.htm

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Monetary unions, as precedents for the EMU As studying the history of monetary unions throughout Europe and the rest of the world, Vaknin (2000) finds that the unique currency would not be required, as necessarily. The “effective” exchange rate—as “realistic” and not susceptible to speculations, coordinated monetary policies in the area and a common member States’ attitude face to the rest of the world are here sufficient. The monetary union would be able to adjust the effects of diverse fiscal policies in the afferent area, but sometimes it skips issues like home money supply, inflation, interest rates’ level and even the last’s effects on the exchange rates. The States’ sovereignty is certainly affected when monetary union; as for compensation, a presumable unique currency is a good transmission mechanism among their economies—however, the author here emphasizes the misunderstanding of such an aspect as the crucial cause of such type of union’s destruction. Otherwise, the need for monetary unions dates from the ancient money—see the title of a CNN tv documentary entitled: “Learning from Romans” and produced by Paul Sussman in August 2001. “Romans were first” in the issues, says Sussman, who adds: “.  .  . about two thousand years ago a form of monetary union was in place roughly on the same European area. That was a single currency, besides a unique metric system; a rudimentary money supply control and revenues from taxation were accounted at Rome as well”. Otherwise, the “fiscal cohesion” was among the few and weak centralism tools of that time, as today understood, when (says the author) “it was taking about three months traveling from Rome to London”. The Roman currencies starting about BC 290—see “aureus”, “denarius” or “sestertius”—were wearing as much authority as the Latin language all over the Empire area. And that included the today southern Europe, plus Mediterranean Sea, the Near East and some lands of North Africa; “from Scotland to Sahara desert and from Portugal to Iran”, says the author. The monetary union at that time did not exclude regional price differentiations—the author here gives the examples of beer, of which’s litre price was as high as 16 “denarius” in Londonium (London), as double than in Barcino (Barcelona) and of lettuce, as 1 “denarius” price in the Roman Dace and double in Gallia. Back to the fiscal terms, this Roman monetary union was also a fiscal union and this is the single example in such a sense. In the 3rd century AD, the Roman emperor Caracalla ordered the capture and putting into slavery of “all Tracia inhabitants”, due to their refusal of 311

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accepting the Roman monetary system. Then, Zarlenga (2000) remarks the Roman currency’s involvement in the later on Empire’s decline. The Roman Empire was just the first precedent of the current EMU. Three centuries after the Empire’s overturned, in the 8th century AD king Charlemagne of Francs was imposing a “uniform” monetary system basing on a silver currency throughout the controlled territory: the today France, Germany, Italy, Belgium, Netherlands and Luxembourg. One century later, the so-called “Danegeld” system was applied as a “self-protection fee” against the savage Vikings’ attacks was applied by local communities on some European lands—see precedents for both monetary unions and municipal bonds of modern times. (Vaknin 2000). The author here simply considers that in the 9th century, when such a story was developing, there was not too much in common for country peoples of Saxony and Iberia, as for a good example—except for their common fear from Scandinavians. As for the modern times, the first example of monetary union can be given for the “New England” colonies, as including the today Massachusetts Bay, Rhode Island and the State of New Hampshire. Actually, these States were reciprocally recognizing currencies up to 1750, here including for taxes paid to their budgets. This union lasted for about one century time, during which Massachusetts stayed dominant position and other American States preferred to deal with this union from outside. Then, in 1751 the leader Massachusetts State took the option of repurchasing its issued currency around by silver; and the silver standard was then imposed and overturned all paper money in the area(Vaknin 2000). The other important example of monetary union in modern times was the “Latin Monetary Union” (1861-1926). A strong French influence was the core of an organization in which France, Belgium (just after having reached its political independence) and Switzerland proven able to persuade other States around to join status. Italy adhered in 1861, then Greece and Bulgaria in 1867. Austria and Spain preferred to join by a Treaty signed in December 23, 1865, after longer negotiations. There where special rules to be respected by member States and some of them were non-scientific and so revealed the non-communication with the political factors with the academic area. Basically, there was “gold standard” and this expression was for the first time written in an inter-States Agreement report. The 18 member States accepted the gold French franc as basic value currency, whereas four of them 312

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(France, Belgium, Italy and Switzerland) did the same for the gold-silver convertibility and other three limited their home money supply to 6 francs per inhabitant—recall the gold standard basic principle of non intervention or even control of money supply. As Germany and UK were getting once member States of the Latin Monetary Union (LMU), the last might be understood as promoting and strengthening gold standard in Europe in the second half of the 19th century. Otherwise, the LMU did not precede the today EMU with its euro currency, but member States were keeping their own national currencies, for which the inter-currency parity (exchange rate) was accepted, plus a 1.25% exchange commission on the exchange transactions. Central banks were accepting money exchanges at the agreed parity levels, plus automatically gold and silver have got their own exchange rate: it was the 1/15 gold-silver parity, the one ignoring both everyday price indices and international markets’ information. That made silver overvalued and the result then consisted in some supplementary export-import flows and shipping among member States, though which the metal was reaching its realistic market value; later on, the gold-silver convertibility came to be abolished and gold standard was finally in place as the unique value standard within Europe. There was also no sign of “common monetary policy” for the LMU, despite its previous perspective of “global money”, as inspired by gold standard. Then, the deadly stroke for the LMU came with the First World War and the Union officially ended later on in 1926. The “Scandinavian Monetary Union” (SMU) came into force by Sweden and Denmark in 1873, as joined by Norway in 1875 and basing on a well-known scenario already at that time: (i) member States reciprocally recognized their issued currencies; (ii) so were coins as legal supports; (iii) then, in 1900, the same for banknotes. The was no project for functioning, but for an important central banks reserves fund, and that was enough beneficial for crediting. There was a good time for this union between 1905 and 1924, when even no need for any official exchange rates. However, the Swedish crown supply stayed limited and the First World War changed this a bit: the metal money was temporarily withdrawn from market by the central banks for an inflationist paper money instead; behind it, central banks preferred to purchase gold from market and to sell it against a strong Swedish crown

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at that time; the Swedish central bank here reacted by banning home purchasing of the other member States’ currencies. The union abolishment in 1924 came from Sweden, which denounced it, was apparently political: the Norway’s pretended independence taken in its actions—in facts, the above maneuvers were leading to both throwing out currency convertibility and losing the fixed price of gold, as elementary basics of any monetary union at that time. An example of “successful” union—as opposite for the above examples—might be called on the name of a former German customs union that was “Zolverein”. A number of 39 State type organizations preceded the today Germany and each of them had its own currency issued and metric and weight measured system. Currencies were gold and silver based. A problem at that time consisted in the labour mobility throughout Europe and it came to be solved by the decisions taken by the Congress of Vienna in 1815; however, the money diversity remained the next obstacle to be removed, and that was the need of a monetary union in place. The German States’ monetary union was basically found in 1818, as resulting into other three groups of States (Northern, Central and Southern) which proceeded to a second stage of unifying later on in 1833. Besides, Prussia proceeded to harmonize its own tariffs with the ones of the rest of the Federation; customs fees and debts become payable in gold and silver amounts equally. The existent currencies then started anchoring with each other in a step by step process which included fixed exchange rates accepted; the process ended by a “super-currency” called “Vereismuze”. “Zolverein” itself came in 1834, as aimed to help trade and its expense reduction and anchored to other hard currencies of that time, meaning the gulden and thaler, as accepted by most of central banks in the area. An important event came in 1838, namely the central bank of Prussia: this was for the next eight years time and turning into the still today Central Bank of Germany. The northern thaler was fixed at 1.75 southern gulden, then at 1.5 Austrian florin in 1856, when Austria joined the union—unfortunately, that was temporary, as ended by the Prussia-Austria reciprocal declaration of war in 1866. In 1871 there came the first German reunification (“Reich”) under Bismarck and four years later the “Reichsbank” was founded to issue the also first unique currency of the Reich, the “reichsmark”. Vaknin (2000) calls this union a success for its survival against two World Wars and a devastating 314

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inflation in 1923. Nevertheless, the World War II meant the German’s full State’s destruction and a new situation coming up—unfortunately for the Germans, that was a new separation to last up to the last decade of the 20th century. In a new national and international environment, the West Germany was going to found its “Bundesbank” and “deutschemark”. The “Benelux” States’ Union—Belgium, Luxembourg and Netherlands; the last staying off the monetary arrangement—is currently “almost forgotten” by Europeans (Vaknin 2000), although recent story enough. Actually, that was not a monetary union in its full meaning—Belgium was the “big brother” with home monetary policy controlling the Luxembourg area, as equally, except for the exchanges control conveyed to a common States’ institution (called agency), which actually is the heavy center of “Benelux”. In both 1982 and 1993 the two States declared this formula over, but everybody in the area doubts the seriousness of such gestures—so no one can say that it is in place or not. A large monetary union example comes on the African continent in the interwar period: the “Central African Currency Area”, the one partly inspiring the future CFA franc currency area. The previous had British influence, as being formed by former British colonies: Kenya, Uganda, and Tanganyika, followed by Zanzibar in 1936. It was in 1922 when these States arranged even a common currency to be issued: the “east African shilling”. After 1931, the sterling area436 here successfully extended—see the pound sterling currencies’ convertibility ensured in the area—and these States preferred to keep their previous organized formation, except for the monetary aspect of it—that was a community of newly independent States. The CFA437 franc monetary union was the other example for African independent States’ common initiatives as States formations. It worked on the neighbouring Western and Central Africa with a huge variety of country, ethnic, habit and cultural formations—mainly French speaker, but also including a former Spanish colony—and lasted for more than three decades with serious devaluations and political changes. The last resulted into two large groups of States with proper central banks and exchanges and capital flows control. The generous assistance of France ought to be here considered for the successful developments in the area as well.

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The last two African examples equally account for conceptual distinction between monetary union and currency area438—in a larger view, the two concepts keep much in common.

The seventies were bringing the economic and monetary union (EMU) in—of course, not in facts, but in the thinking about the European integration that was strongly developing already on both the EC side and on a literature including “old” names like Bela Balassa and Jakob Viner and more recent names like Loukas Tsoukalis (Greece), Jaques Pelkmans (Netherlands) or Alan Meyhew (UK). The already above mentioned “Werner Plan”, as published in March 22, 1971, here inserted: monetary policies harmonized, money floating restricted, capital markets integrated and on, a new European unique currency (Urwin 1999)439. Once more, the “Werner Plan” had a double merit of its long term perspective while issued the year of the international dollar and post-Bretton Woods crisis—it was revealing a monetary cooperation among member States, as here required. The “Bale Agreement” (1972) with its “monetary snake” idea reached the common member States’ decision to intervene for the European currencies’ floating restricted to a +/—2.25% spread as against the dollar. This Agreement was a good primary test for the EC member States’ capacity of coordinating monetary decision—while the monetary area yet was a new area of work for the Community; recall that the Rome Treaty and the following EC’s acts had escaped all monetary approaches —; however, on the other hand the European States here saw themselves “lead” by America even when weakened and growing passive, as compared to its great precedents of anti-Nazis “landing”, Marshall Plan and hosting the Bretton Woods Conference. The “snake” reduced to an immediate and timid political reaction of Europeans in such a respect, as seen from today—no ambitions for monetary perspectives. Plus, that was when (recall from the above paragraphs) all States, including the European ones, were realizing the advantages of the general money floating for their home monetary policies, as autonomous (Urwin 1991), and States like Italy, UK and France then dealt with the “snake” their own ways as such. Despite all these, Andrei (2009) argues that this undertaking belongs to See the previous V.7, once more. As opposite to Baker Peace” (1999).

438 439

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the EC’s strategy throughout the monetary union as a whole440. In 1973, the UK, Denmark and Ireland achieved all formalities for joining the EC; the EC itself was though not in its best mood: there was another international economic crisis to be faced and the Community proven unable to make it just by itself. Fortunately, a common energy policy was drawn in the same 1973 and this event did ensure the Community’s next survival (Sotto 1999). In 1977, Roy Jenkins became president of the European Commission and declared priority in the monetary union’s achievement, although with some adjustments for the previous outline of it—so the “European Monetary System” (EMS) idea was born. Its real founding keeps origins in a meeting of April 1978 between the French president Valéry Giscard D’Estaing and German chancellor Helmuth Schmidt at that time. The European Council approved the system in December the same year and in March 1979 the European Monetary System (EMS) was agreed at Basilca among the central banks of the EC member States. As generally aiming the inter-currency reports strengthening, the effective EMS was going less ambitious than its previous Werner’s project, but more realistic as de facto. Once more for an international monetary system, the exchange rates were fixed, their adjustment intended as “less traumatic” and paving the way for a new common monetary policy (Urwin 1991). Money volatility was still feared at the time and able to panic investors and embarrass the common market achievement dynamic. The EMS here played the role of “collectively securing money” (Baker Peace 1999) after previously removing what the “snake” couldn’t: the Europe’s real monetary autonomy against the dollar and American influences. Fixed exchange rates, as non-metal based, but associated with a common ECU441 account currency on currencies basket model (see the SDR model), was the interesting new aspect of this system, although not quite innovative (McKinnon 1993). The ECU permitted to the member States to keep their own national currency, but required a +/—15% target

440 441

See V.8.3 below. See “European Currency Unit”, as ECU abbreviated was sounding as similar to an old French currency, an aspect which provoked some rumors in the German speaking zone of the EC; that was why the next following common currency was preferred to change name into “Euro”. 317

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zone of floating amongst442. There was an average inflation environment for the EMS launching in March 13, 1979; inflation rising was considered as dangerous for the System and central banks were called to temper floating once more; actually, tempering inflation, besides floating, was going to be equally successful up to mid eighties443 and the next future monetary union was genuinely prepared this way. The next eighties were for the unique European market: the Commission proposed a “financial market” consolidating in the area and this came to be agreed by the “Single European Act”(SEA), as a document signed by foreign offices’ ministers of the member States within two steps taken: the first one in February 28, 1986, at the Luxembourg Conference, when the “Unique European Market” was fully defined; the other in 1992, when the new Programme was finally launched for the Unique Market’s coming into force since January 1, 1993. Briefly, the “Unique Market” was able to be an ambitious strategy for removing all tariffs and other internal obstacles of goods, labour and capitals movement. Tsoukalis (2000) here remarks that the unique market was just the old “customs union achieved” and Urwin (1991) that the previous “six” meanwhile become “the twelve” EC member States. The SEA equally contains the “White Chart” of the European integration, a document of 282 listed rules (in law terms), plus the concept of “unlimited space”. The SEA strategy was besides strengthening the EC’s position in the world economy, actually as against the other economic forces of the planet which were and still are the US and Japan. A corresponding institutional reform was in place at the end of 1992. So the Act paved the way for the next to come monetary union, as the unique currency stage—the European Council session of 1988 in Hanover appointed a Committee lead by the president of the European Commission at that time, Jacques Delors, for drawing this new strategy. However, on the other hand Story & Walter (1997) here remark another opposite strengthening: the one of national interests in the area for countries as both parts of this Community and of the world economy, as open economies themselves. Then, the eighties ended by the shock event of Berlin Wall’s and communism’s fall in the Eastern part of Europe. The nineties belong to the EC turning into the “European Union” (EU),

Floating between the German mark and Netherlander gulden was even narrower than that. 443 Recall from above V.7 the “La Platza-Louvre” Agreement of 1985. 442

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as “Economic and Monetary” (EMU)—that was the Treaty of Mäastricht444 deciding it with its new programmes for: (i) introducing the new common currency, instead of the old EMS; (ii) the same for new foreign and defense common policies; (iii) defining the “subsidiary” principle, by which the Treaty’s provisions were predominating on national corresponding ones; (iv) the “European citizen” concept defined etc. All barriers of persons’ and capitals’ movement within the area were meanwhile removed. Then, the “European Monetary Institute” (EMI) was founded (and settled in Frankfurt) for working on scientifically basing the future EMU and unique currency (finally called “Euro”); this Institution was going to elaborate the so-called convergence criteria containing the inflation, exchange rate, budget deficit and public debt limits that the member States were required for joining the “Euro area (zone)”. The EMI was lead by a Council elected by the central banks of the member States; meanwhile, both these central banks were working for founding the future “European Banking System”(EBS) and the EMI for turning into the future “European Central Bank” (ECB), as the coordinator—this was partly copying the American FED system, vis-à-vis the relationship between the central US Reserve and the FED banks in each American State. Whereas joining the “Euro-Zone”—actually the EMU defined space—was not compulsory for the EU member States, two new distinct spaces were de facto defined on the old EC area: the EU one itself, and the Euro-Zone, as “interior” to this. Besides, joining the Euro-Zone qualified as the “superior” Statutory stage of both strategies: the EU’s and individual member State’s ones. As for the not yet Euro-Zone member States—called as “pré-in”—the EMS Status was still in place—see the “Exchange Rates Mechanism” (ERM II); ERM I had been the above provision for +/—15% floating admitted as “target zone” for the EMS; now, a similar rule regarded the EU member States still keeping their national currencies. Of course, the EMS was still in place at the time of the Mäastricht Treaty and was going to fully work up to the euro (1999). Then serious pressures arise on its fixed exchange rates. Italy proceeds for a temporary withdrawal and Spain and Portugal devalue peseta and escudo; though, in January 1995 the Austrian shilling joins the Mechanism, the same for the Finish mark in October 1996; the same year end, on November 25, the Italian lira comes back as well. It is 1996 the year of formulating the ERM Called as the “Treaty of the Union” ever since.

444

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II, together with the “Pact of Stability and Growth” (December 1996) reinforcing the financial discipline in the area. The euro currency came on two stages: 1999, as just bank account money, and 2002, as also effective: both stages started on January 1445. As for the EMU member States and their new “euro” currency, the last’s value was settled at the ECU currencies basket’s level at that moment. The “Euro-Zone” was already in place for the EU member economies satisfying the convergence criteria446 elaborated by the EMI; the last turned into the “European Central Bank”, as well, and formed the “European Banking System” together with central banks of the EMU area. The last was formed by eleven countries: Austria, Belgium, Finland, France, Germany, Ireland, Italy, Luxembourg, Netherlands, Portugal and Spain; Greece was yet failing to fulfill the convergence criteria, but it made it in January 1, 2001, one year before the effective euro; the rest of three EU member States at that time preferred not to join the Euro-Zone, despite their no problem for satisfying the Criteria: Denmark, Sweden and UK447. In an already advanced integration environment, the European Council adopted the document called the “2000 Agenda” for more issues to be approached: employment, versus unemployment, foreign and defense policies, the EU extension policy and intra-cooperation on justice and police terms. Several important events marked the two-thousands, but they so become just details of a continuous development—two of them might be taken as the most important, although “opposite” in effects. First, the EU’s extension policy resulted into two waves of Central and Eastern European (former communist) and Mediterranean States joining the Union: in 2004, Czech and Slovakia Republics, Poland, Hungary, Slovenia, all the three Baltics, plus Malta and Cyprus; in 2007, the same for Bulgaria and Romania. Second, and “opposite” to the EU’s and integration’s advance, it was a As for “Happy new Euro!”. See: (1) price stability or inflation rate not more than 1.5% upper than the one of the most stable price economy of the EMU; (2) budget deficit under 3% of GDP; (3) public debt, not higher than 60% of GDP; (4) long term interest rate, not more than two percentage points higher than the level corresponding to the same most stable national economy of the EMU; (5) stable exchange rate, meaning no devaluations for the last two years before the EMU joining date. 447 Currently, their situation has not changed either 445 446

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project for “European Constitution” rejected by the popular vote the next year—and that on the opposite Western part of the Union and continent. Or, there might be a whole debate about these new events. Certainly, the EU extended gets a stronger Union and few European territories still stay out448; on the other hand, the Union of “the twenty-seven” is much less homogenous than it previously ever was and the EMU inside become a “minority” of States. As economically, now the EU includes both developed and developing countries, and its picture essentially changed concretely by newly arisen and arising problems. In our view, the two lines of events relate to each other: the “no” for the first project of European Constitution was given by the Western population to an extension causing a feared immigration from the Eastern part, as in facts and/or just potential and as expected to bring much social problems in. In other words, the EU is expected to advance its integration together with its opposite national and local reactions. V.8.3 Reflecting about European integration and money Let us try to have the full contemporary Europe’s story as briefly in the below lines, whereas our text keeps focusing on the money issues and history about. V.8.3.1 Basics of economic integration In such an order, first, let us have the short story of the integration concept. The Hungarian by origin author of the sixties Bela Balassa (1961) has drawn a five stages outline of integration strategy: (1) free-trade area; (2) customs union; (3) common market; (4) economic union; (5) economic and monetary union. Or, in a way it might be a very genius the one talking about “monetary union” in early sixties, when the Bretton Woods IMS was in place and in its highest shape of working. Otherwise, this above five-stages outline needs enough corrections and improvements, as updated. As firstly, this can be a list of stages and objectives to be reached, as for a mixture of concepts. And let us have some 448

See the examples of Norway, of which’s high welfare would be expected rather to be affected by a presumable EU membership, of Switzerland, as another small country chronically keeping reservations for all international organizations membership, and of Iceland, the small country now approaching the EU. 321

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examples: Tsoukalis (2000) argues that the (3) common market would be the real achievement of the previous (2) customs union; Andrei (2009) sees the monetary union as a strategy started in early seventies, and not just as a final stage of integration; Andrei (2009/b) finds that the (2) customs union and (3) common market contain components of indirect taxation—see especially VAT—in a context of trade policies, as dominant—or taxation might presumably be completed by the direct taxes reforming in the next future. In a word, several policy domains are assumed by each strategy period and/or step taken, as a complexity in itself. Secondly, integration might not be assumed to stop on the monetary union (integration) achieved: see the fiscal aspect, once more, as in the above Vaknin (2000)’s view. Or, the fiscal union achieved might here become an increasing requirement, but also the one to be compared to the monetary one which took three decades (Andrei 2009/b). Thirdly, the above Balassa (1961)’s outline of integration might be supposed to change into a more appropriate two stage integration outline: (1) the “incipient” and (2) “advanced” states of integration (Andrei 2009). The difference between the two successive stages might consist in at least two aspects: the one that the (1) stage belongs to more than hundred States of the world involved in diverse forms of economic integration, whereas the (2) stage still remains “purely European”; the other that the (1) stage requires active and strong initiatives to be taken by member States, plus the reverse of States feeling free to give up the integration process whenever, whereas the (2) stage is the one of “naturally born” requirements for each next step taken, plus much higher and still increasing difficulties for each State to abandon integration ever-since. Besides, the (1) incipient integration bases on the above defined free trade area and customs union, whereas the (2) advanced integration focuses on two issues: economic convergence449 and the already known from above optimum currency area (OCA).

449

Some details will be coming below for a concept of which the above mentioned “convergence criteria” drawn by the EMI fill just a part.

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The non-European integration The “Arab Council for Economic Unity” (1964) was aiming an “Arab common market”, as similar to the European one. Cooperation in transports, monetary and financial policies harmonizing and a customs union to be built up within a decade time were also part of the programme. Then, political divergences in the area came up to block the undertaking. The “Cooperation Treaty of East-Africa” (1967) was signed in Kampala (Uganda) for a customs union, a common bank for development and a common market of the region. Once again, the further history came to be different than such aimings. The “Quioto Chart” (1948) comprised: Columbia, Venezuela and Ecuador, as country areas covering the Central America. Then, Venezuela left the Organization and the rest of States turned formed the “Economic Organization of the Great Columbia”. Here around, the “Organization of Central America States” with its “Chart of El Salvador” (1951) was signed by: Salvador, Honduras, Guatemala, Nicaragua and Costa Rica. Later on, in 1958 the member States decided and also signed the “Treaty for a Common Market”, containing reducing internal tariffs, a common tariff for the frontier of the area and building a central Central-American bank. Later on in Central America the “Common Market of the Central America” was founded in Tegucigalpa (Honduras) by the “Multilateral Treaty of Free Trade and Economic Integration”. After the Organization succeeded to reach an about 7% a year economic growth during sixties and seventies, it broke up in 1979. The “Latin American Free Trade Association” (1960) was formed by Argentina, Brazil, Chile, Mexico, Peru, Uruguay and Paraguay, that signed the Treaty of Montevideo. A twelve years period was here expected for removing all trade barriers amongst. As specifically, trade has since increased, but protectionism stayed on industrial developments. Two decades later, in 1980 the same member States refreshed their economic relationships by the new “Treaty of the Latin American Association for Development and Integration” focusing on a free trade area and economic preferences. On the same continent, the “Cartagena Agreement” was founding the “Andin Group”(1969) of Bolivia, Chile, Columbia, Ecuador and Peru. Here, the “old” common market concept came to be replaced by the more pretentious one of “global integration”. This was not a full success for 323

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reaching a common tariff, as for instance, but some organizational structures followed the EU model: (i) the Commission, as representing the member States; (ii) “Junta”, formed by three independent persons; (iii) Court of Justice; (iv) the Andin Parliament, the two last founded in 1979. Back to Central America, a significant alternative and/or completion for integration consisted in the economic cooperation forms. Two of the last were the most representative: the “vertical” one, as re-linking former colonies and metropolis; the “horizontal” ones with regional decision centers—see Aruba Islands, Curaçao, Saint Eustache and Saba (Netherlander colonies), Anguilla, Cayman and Cayacas (British colonies) and Antile and Guyana (French colonies).

Fourtly, all of the above integration stages, as referred, fill just a part of the economic integration issue, in their turn, the one that can be called “liberal”. Or, the today “European economy” overpasses all liberalism by concepts to be developed and listed on another column: budgeting, social and economic cohesion, social protection, intervention and policies, regionalism, regional and sustained development and governance. V.8.3.2 Economic convergence for advanced integration Recall the above convergence criteria, elaborated by the EMI and connected to the Mäastricht Treaty of Union (1991). Budget deficit and public debt of each individual member State of the EU regard inflation, in a connection context compared to “pipe tap”, versus “sink recipient”: the previous has to be closed, the later to be emptied. The interest rate, especially on its long term evolving, reflects the same inflation level, and the exchange rate is just the other money price than interest rate, whereas the money price conversely reflects the other prices. Then, the question to be asked: why inflation is mentioned, as distinctly, by the Criteria, as the authors are basically assumed to strongly believe in their theory ? The answer is simple, as apparently: budget deficit, public debt, interest and exchange rates come on the money part of inflation; inflation is supposed to meet other factors, as well. However, things become complicate in this moment, in which other questions automatically arise: so, why these “other factors” are not identified, as the previous ones ? Why the previous monetary factors of inflation are, on the contrary, required to be individually controlled ? Is the considered member State suspected to keep its monetary inflation factors proper and transparent and play with 324

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the “other factors” for keeping inflation present ? In such a context, the first finding is that the Mäastricht “Criteria” are actually defining just monetary convergence—the one related to inflation, versus price stability in a post-Keynesian view. Besides the money-related terms, the monetary convergence limits to the Union-member State reports, meaning not involving the Union in any direct interference with the private economy—the “other factors” of inflation identify the prices of production factors—as in the academic expression—actually, prices of natural resources and the wages zone. So, the full answer to “why inflation?” as distinctly in the Criteria is that the EU keeps interested in budget deficits, public debt, interest and exchange rates, but there are equally important issues that only States could be still assigned to manage. Or, this is both States’ sovereignty and Union’s weakness of acting even in an advanced integration context—a context that comes to be here defined this way. Then, the last question asked for the economic convergence, see the real (versus monetary) convergence: why the “Criteria” do not concern this part of the issue? Before answering this question, let us mention that the non-interference of the EMI of Treaty in such a concept proved beneficial for the large academic debate (Iancu 2006). The real economic convergence regards also prices, but together on a large scale with all and specific costs, economic growth, investment, unemployment and labour migration etc.; on a restricted view, the real convergence focuses on the searched concomitance of business cycle throughout the area, the way that this part of convergence does not limit to stable periods either. V.8.3.3 OCA and the unique currency strategy Recall from the above V.7.2 the OCA-IMS polemics, as promoted by McKinnon (1993). The American scholar does not here limit to general and theoretical descriptions, but concretely the Bretton Woods IMS and the EMS are compared as, let’s say on “two columns”: five basic components of the two international monetary systems are considered for the next little table:

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Comparing Bretton Woods IMS and the EMS Ord. 1 2 3 4 5

System components nominal anchor account currency financial institution exchange rates metal parity

Bretton Woods IMS US dollar SDR IMF fixed yes

EMS German mark ECU EMI fixed no

(McKinnon 1993)

A curious similarity seems resulting from comparing the EMS—as in place at the time of the article—with the old, fallen, immediately after war elaborated and enough criticized Bretton Woods IMS at its time, the way that the EMS was disadvantaged as for apparently “no progress in thinking”. On the basic similarity here found, the difference between the two Systems ironically consist in their similarly fixed exchange rates basing on metal parity, as properly, for the old IMS only—and that has failed. So, the question to be asked was coming on the current at that time EMS, of which’s fixed exchange rates were even not appropriate. Actually, McKinnon (1993) intended to demonstrate two things. The one is that all similarities between IMSs identify the OCA pattern behind—and that was why no apparent progress in thinking. The other is the imminent bankruptcy of all IMS, as equally OCA related developments. Or, McKinnon (1993) was actually both wrong and right. The American professor was wrong in foreseeing the EMS’ bankruptcy—instead of the awful end of the Bretton Woods IMS in early seventies, the EMS was going to be just replaced by the unique currency in a very programmatic, decent and genuine way by the EU’s decision makers. He was right when considering what Europeans had equally admitted, as previously: that all nominal anchor plus fixed exchange rates based IMS was supposed to fail sooner or later; and Europeans were very aware of what an alternative mark’s and German’s unique responsibility for the whole EU’s EMS was meaning. As the result, the EU’s monetary strategy chosen a new unique currency alternative—of course, with its problems that were going to be real enough—instead of such a System with no future. The merits of the McKinnon’s alarm were also real, in context, although some assessments on his comparison and especially on the EMS’ side are pretty arguable. As for instance, the two IMSs are here comparable for their 326

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nominal anchors and account currencies, except for that the Deutsche mark was much less than dollar as for its free used and flows within the EU area. As for financial management institution, the EMI was something different than the IMF since its foundation (1992) was later enough than the EMS starting (1979) and its assignment pretty different (than the IMF case), meaning working more for the future euro and EBC than for the current EMS in place. But the crucial McKinnon’s mistake comes rather on the metal parity, and so on the Bretton Woods IMS side: the metal parity of the latter was no longer the one of the international gold standard either, but only the FED’s gold reserves were here working, as internationally. So, let us keep the above double valid idea that either EMS couldn’t be but transitional—from the former “monetary snake” to the future unique currency –, or the OCA theory here verifies this way. This is the context in which both the monetary strategy of the EU was developed on a (three decades) long term—as concomitant with other no monetary developments and policies—and the difference between the above mentioned incipient and advanced integration periods was obviously to be made. The previous “snake” had timidly entrained the Community’s national currencies in a game played against the American dollar—so, it might belong to the incipient part of integration —; the EMS was already advanced integration: despite keeping the national currencies in place, the monetary sovereignty was partly abandoned and the horizon of the unique currency was already drawn. V.8.3.4 Further EU’s problems Let us continue from above the idea that the EMS had no future by itself and was so assumed as transitory—the unique currency was here preferred, with its expected “new” specific problems. Which might be these problems and what exactly about ?—there is not talking about the immediate euro’s depreciation against dollar on international markets in early two-thousands, about economic stagnation of the Euro-Zone as meanwhile, or about the world economic crisis since 2008. This might be about rather some EU member States’ intervention in favour of Greece, Ireland and Portugal during the crisis: why the “EU member States” and not the EU itself ? And such a question might be raised since the current EU—as different than the previous EMS based one—is already an international legal entity with its own currency issued and ECB coordinating the EMU’s central banks and imposing the Convergence Criteria to its member States. Even 327

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more deeply, the new European concept of common currency identifies an equally brand new problem for: to whom does the common currency belong ? Meaning: the Union, versus its member States. If the answer indicates the last, so what is the very difference from the previous IMS and from all previous monetary pictures? But when, on the contrary, the answer does indicate the Union as the “owner” of euro, some other things remain to be made; and this confirming the above idea that, contrary to taking the integration as done with the common currency in place, the current advanced integration stage requires a real speed-up. Previously, EMS had paved the way for the common currency; now, the new currency and banking system of the EU reveals that the Union is yet unable to manage its currency directly, the way an ordinary State does it by its monetary, but equally by its budgetary policy. The Union disposes of its own budget, but this is far from founding the euro’s stability in terms of inflation and exchange rate, despite those national monetary policies in the EMU area had been removed—the Union has its central bank (EBC), as unique monetary policy authority and it deals with each government in part for “imposing” the common “Criteria”. Individual States have this problem solved by cooperation between central bank and government—this is much more complicated for the EU and its EBC case. Briefly, a clear situation of the common currency requires for a domino order of: (1) a budget supporting the currency stability—see, for instance, its less than 3% of GDP size; (2) a fiscal union, as completing the monetary union, as in the Vaknin (2000)’s view; (3) politically reinforcing and centralizing the Union—see, for a Government as strong as all State formation case and a federative State formation—since the same Union works with a correspondingly strong monetary policy. It is very true that several problems are here expected. First, there might be about a new fiscal union strategy to talk about (Andrei 2009/b), and its important size of undertaking might compare with the previous monetary union strategy as for the 1971-2002 interval. The basic problem of this strategy is certainly the one dealing with re-centralizing that was ever feared in the European area; but, there might be also other aspects: see for instance the renewed East-West separation, as between the EMU—directly resenting the fiscal union strategy—and the rest of member countries—as keeping more autonomy and an increasingly different condition while this space is now enough representative inside the Union. Second, Europeans have always kept and are suppose to keep from now 328

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on the same reservations against centralizing and unique political power above the whole diversity in the continent area—would this be the real and unique alternative to the previous warrior state ? Third, the political zone of all democracies is expected as always important and no one doubts its attachment to keeping the “Europe of nations” untouched. The “re-centralized” Europe might encourage nationalism’s remaking in the area, but the truth is that it stays the lonely “perfect” perspective against an integration process as imperfect by its definition, since this was proved by its whole development(s) so far—if it might not be so, could the EU re-invent the political, democratic, monetary, economic and so on perfection, as different than what the available scientific inventory of these items does currently express ? However, another truth is to be here considered: Europe became a “different” and specific space in world-wide terms—thanks to its economic (and not only) integration of the post-war era. And one more truth: the EU’s international autonomy is regionalism and it was encouraged by a crisis or by incapacity of providing welfare and all satisfactions world-wide.

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Triffin, Robert (1960)  : Gold and the Dollar Crisis. New Haven Yale University Press. 1960 Bordo, Michael (1994): Une Comparaison des Régimes Monétaires Internationaux depuis le 19ème Siècle. In « Problèmes Économiques » Nmb. 2394/9. Octotber, 1994. Article re-publishing a previous version of Federal Reserve Bank of St. Louis Reveiew. March-April 1993, entitled: The Gold Standard, Bretton Woods and Other Monetary Regimes: a Historical Apprisal. Mc.Kinnon, Ronald (1993): International Money in a Historical Perspective. In “Journal of Economic Literature” (29). March1993. p. 1-45. Dehem, Roger (1970): L’Équilibre Économique International. Paris. Dunod. 1970 Guitton, Henry & Richard Branmoulé (1987): La Monnaie. Paris. Dalloz. The 6th edition. 1987 Mossé, Robert (1967): Les Problèmes Monétaires Internationaux. Etudes et Documents. Payob. 1967 Rueff, Jaques (1973): La Reformed u Systeme Monetaire International. Paris. Plon. 1973 Zaharescu, Barbu (1985): Aspecte ale Crizei Sistemului B[nesc Mondial Capitalist / Some Aspect of the Capitalist World System Crisis. In “Revista Economica” Bucharest. Nmb. 45. November. 1985. pp. 28-29. Article published in Romanian. Andrei, Liviu C. (1999): Etalonul si Sistemul Monetar International / The Value Standard and the IMS. Editura Ateneul Roman. Universitatea Ecologica Bucharest (UEB).Book written in Romanian. Gold, Joseph (1979): Legal and Institutional Aspects of the International Monetary System. Selected Essays. IMF. Washington D.C. 1979 Anvers, Denis (1991): Economie Mondiala. Translation into Romanian by Brandusa Prelipceanu. Humanitas. Bucharest. 1991 Gold, Joseph (1981): SDRs, Currencies and Gold. Fifth Survey of New Legal Developments. Pamphlet Series. IMF. Nmb. 36. Washington D.C. 1981 Mankiw, Gregory (1994): Macroeconomics. Second edition. Karword University. Worth Publishers. 1994. Hardwick, Philip & Bahadur Khaan & John Langmead (1992): An Introduction to Modern Economics. London-New York. Ed. Langman. 1992 Krugman, Paul (1991): Target Zones and Exchange Rate Dynamics. In “Quarterly Journal of Economics”. Vol. CVI. August, 1991 330

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Aglietta, M. (1986): La Fin Des Devises Clès. Algoma—La Découverte. 1986 Denizet, Jean (1987): Le Dollar: Histoire du Systeme Monetaire International Depuis 1945. Hachette. Collection « Pluriel ». 1987. Dumitrescu, Sterian, coord. (1989): Economie Mondiala / World Economics. Editura Didactica & Pedagogica. Bucharest. 1989. Book manual published in Romanian Harrod, R.E. (1965): Reforming the World’s Money. London. 1965 D’Estaing, Valery Giscard (1965) : La Politique Internationale de la France. In « Problèmes Économiques ». Nmb. 922/31 August, 1965. pp. 3-4 Fekete, Janos (1973): Commentaire sur le Rapporrt d’Otmar Emminger. The second Conference of the « Jackobson » Foundation. Basel. June. 1973, pp. 65-73. Maioreanu, C(1976): Aurul si Criza Relatiilor Valutar-Financiare Inter-Occidentale / Gold and the Inter-States Financial-Exchange Crisis in the Western Area. Editura Politica. Bucharest. 1976. Paper written in Romanian. Triffin, Robert (1969): Perspectives Actuelles d’Évolution et de Réforme du Système Monétaire Interntional. In « Revue Économique et Politique », Nmb. 3/1969. Oprescu, Dorel (1981): Sistemul Monetar International / The International Monetary System. Editura Stiintifica si Enciclopedica. Bucharest. 1981. Book published in Romanian. Friedman, Milton (1953a): The Case of Flexible Exchange Rates. University of Chicago Press. 1953 Friedman, Milton (1953b): Essays in Positive Economics. University of Chicago Press. 1953, pp. 157-203 Friedman, Milton (1956): The Quantity Theory of Money. A Restatement. In “Studies in the Quantitative Theory of Money”. Chicago. 1956 Friedman, Milton (1973): A Program for Monetary Stability. Plon. 1973 Bourguignat, H (1987) : Les Vertiges de la Finance Internationale. Economica. 1987 Wolf, Martin (1994): Éloge du Non-Système Monétaire International. In « Problèmes Économiques », Nmb. 2394/ October 19, 1994. Article assumed by « The Financial Times » of March 28, 1995, as entitled : In Praize of the International Monetary System. Corden, Max (1994): Economic Policy, Exchange Rate and the International System. Oxford University Press. 1994 331

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Mundell, Robert (1961): A theory of optimum currency areas, “American Economic Review”(51), New York. November 1961, p. 509-517. Andrei, Dalina(2005): Foreign Direct Investments and the integration of Bulgaria and Romania in the European Union—in the Volume entitled “The European Union in 2005. Candidate Countries’ Perspectives” (Sofia 2005), edited by the “Bulgarian European Community Studies Association” (BECSA) and comprising studies elaborated by several young scholars from the candidate countries for the EU, under the auspices of the “Jean Monnet” Programme, in 2005. Editors: Georgy Genov, Julia Zahareva and Krassimir Nikolov. Pag. 327-345. ISBN 954-9543-07-2 Ricketts, Martin (1996): Euro’s Introduction Made for Historical Achievement. See Forward. Monte Carlo. December 1996. Urwin, D. (1991): The Community of Europe. A History of European Integration since 1945. London. Longman Group. 1991 Story, J & Walter, I (1997): Political Economy of Financial Integration in Europe. Cambridge. MA: The MIT Press. 1997 Soto, Mauricio (1999): The Euro: History and Implications of the New Currency. April 1999. Texas Tech University. Lubbock. TX Andrei, Liviu C (2009): Economie Europeana / European Economics. Editura Economica. Bucharest. 2009. a book manual for students of the National School for Political Sciences and Public Administration (NSPSPA). Book written in Romanian. Vaknin, Sam (2000): Déja-Vu Euro. The History of Previous European Currency Unions. Paperback Narcissus Publications & Central Europe Review. CEENMI 2000. Zarlenga, Steven (2000): Rome’s Bronze Money—Better than Gold”. American Monetary Institute. AMI. PO Box 601. Valatie. NY. 12184 Tsoukalis, Loukas (2000): Noua Economie Europeana / The New European Economy.ABC Publisher. Bucharest. 2000. Translation into Romanian by Irina Dogaru and Nicolae Negru. Balassa, Bela (1961): The Theory of Economic Integration. London. Allew & Unwin. 1961 Andrei, Liviu C (2009/b): The EMU is done. How about the fiscal union . . . ? In „Theoretical and Applied Economics”. Editura Economică Nmb. 1(530)/2009 Iancu, Aurel coord.(2006): Convergenţă Economică/ Economic Convergence. Editura Academiei Române. 2006. Book written in Romanian 332

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VI. Summarizing and Conclusions Money has a quite long history and since this it was in turn: metal objects and flat coins, paper money, account money and today electronic money. Previously than the big quantitative theory, two basic “qualitative” theories are still distinct: (I) representative, versus (II) fiat money—and polemics do not stop here or today. Other aspects become more obvious: see that representative money more easily tends to grow global(ising) and fix national area in such a context, whereas fiat money is better managed domestically; see also that the gold metal reference is yet nearly impossible to be abandoned as basic money value reference, whereas the modern gold standard wasn’t hundred percent representative money, but keeping elements of fiat money as well. The previous primitive monetary systems, despite arising from commodity money, resented the fiat money issue by facts like reducing the metal quantity unit of flat coins and enforcing the State’s issued money by law in the area. In a larger view, such a basic theoretical lasting confusion about money might here admit the “mistery” of this concept as also including the three paradoxes enumerated in the Introductory chapter: (1) money experiment, as so old and repeated; (2) value-measuring money when value isn’t a clearly defined concept itself; (3) money’s “endless life” when man-made, as unique case or similar to the old Scriptures. Why not including the international monetary system (IMS) story in the same description? Once, this seemed crucially important for economy and civilization—and nobody could argue such a reality for that time—; another time came for proving it rather meaningless. And since no-IMS can anybody guarantee this international money order as definite and durable ? As for the gold metal issue: it is certain that it was once able to build and support national and international monetary systems in context—otherwise, the IMS concept would have to be included at least by the Adam Smith’s or David Ricardo’s first writings on economics. The question is: what if the gold metal had not existed and/or nature had not provided it the way it did ? Or, it is easy to reject the gold monetary system in today theories since the metal had founded the modern monetary system that we use today. Money, except for its above mentioned forms and basic theories about, might be national (even local, for some short time experiments), international, as convertible and/or freely used and regionally “common”, as the updated European case. Would this be more than that? 333

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This is finally a question very easy to answer: YES, certainly. MONEY IS AN ENDLESS STORY (and history).

* Also, let us take the following as an inventory of new ideas worked out by this paper. There might be reiterated that market (pricing) history contains the sequence of bartering and money working, but these compulsorily basing on private property on goods to be here sold-purchased and on the free individual option in such a respect. Barter came first in the oldest times, plus it evolved up to modern economy time. Barter (previously) as just a system handicapped, as compared to (later on) money, and so in need to just be replaced by was a whole literature inspired by Sir William Stanley Jevons’ thinking, but just reductionism, as approach. In reality, barter had its own huge merits—e.g. forming a macro-system where and when it was not even dominant economy, but working together with gift economy and individual farm economy and settling basic prices)of goods. It had equally its advantages and economic efficiency—e.g. launching and making work several market transactions for achieving just one utility, a characteristic fully missing to money, and even to commodity money. As for barter, once more, its evolving implies another sequence of facts: separating the old primitive barter—the one referred here above in Part One, with “no coincidence of wants”—from the next advanced barter—the one of: mediums of exchange, value standards and commodity money; of the artificial selection among those and further related to basing the money concept, as representative. Moreover, this artificial selection—as another market competition—among these special goods and basic values favoured and went hand in hand with enlarging and unifying the previous “cell”-market spaces of the primitive barter. Then, this market selection brought in both gold standard—as predominantly representative money—and its corresponding Ricardian and post-Ricardian types of market spaces, i.e. national and international. In other words, the strength of gold standard, as national and international, results directly from the multi-century long market selection of the gold metal—this meaning a (theory of a) unitary and tremendously long economic evolving world-wide; this might be similar with the above (Part One) Modelski type view about human history by communities. Then, gold standard succeeded to be what it was by its price and 334

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exchange rates stability, development of monetary and financial systems, and by the liberal way of building such a system as permitted by. This paper argues above that the gold standard’s “success” might be due to being both monetary system and the last stage of barter, as “modern” barter. Gold standard equally identifies the historical moment in which money replaces barter for good—this meaning that pre-modern and pre-gold money had stayed far from able of such an economic and historical (see, revolutionary) change. Gold standard also achieved the concept of international monetary system (IMS), starting by its stable basic value, as common to all goods on international (as well as previously national) market. The stable basic value of gold standard and IMS was the same with the nominal anchor of the optimum currency area (OCA)—the difference consists in the previous as representative and the latter as fiat money. The end of gold standard, first revealed symptoms of a system destructed—so it had existed previously, as contrary to arguing against in the literature—in a more persuasive way than all theories; but second, is that “real” money to come here instead? Or is that “fiat money, as replacing representative money”? Unfortunately, the clear-cut separation between the two philosophies about money is still missing in this paper. All we know is that nature-based money and liberalism belong to representative money, whereas human subjectivism and economic intervention belong to fiat money. Representative money favours open and international economies — fiat money works better on domestic monetary policy. Otherwise, gold standard is accepted as representative money, but not hundred percent, but just predominantly, since money multiplier here works as well as in fiat money environments. On the other hand, the post-gold modern and current money is predominantly fiat money, but its exchange rates stability achieved on international markets reminds of what gold standard was once in a fully different international money environment. Finally, gold rather seems not to have said its last word on the market economy—it might be as important for the human specie as the oil example. Once more to be repeated: MONEY IS AN ENDLESS STORY (and history).

335

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