The Gold Standard and the
Funding of Commercial Activity

by Christopher M. Quigley, B.Sc., M.M.I.I., M.A., WealthBuilder.ie | September 4, 2008

Print

There is a well known saying that goes: "if you want to understand the future
look to the past". The current banking crisis unfolding as a result of the Basel 1 agreement, put in place in the 1990's, is motivating more and more economists to evaluate the need for a return to a more stable monetary arrangement such as the old gold standard; the monetary system that served the world for many hundreds of years. However many critics of the gold standard state that the modern world economy has grown too large to be facilitated by a commodity that has a limited supply. This line of reasoning is erroneous for the detractors do not understand how the commercial system actually operated prior to 1913, the year the Fed was set up. The western banking structure that was in place prior to the instigation of the Federal Reserve cartel evolved through common tradition from 1100 A.D. and functioned brilliantly. Gold never funded the entire economy, it was merely used as a commodity to clear net transaction balances. The real innovation facilitating commercial liquidity was bills of exchange. The ability to issue such bills and use them to barter or "net" against other bills constituted the personal ability to issue "private" money. This represented a great advance in freedom to the individual and was a major force in the growth of world trade and secular society. To gain a more through understanding of the history of this process I would like to quote from "The Age of Faith" by Will Durant:

"It was the Italians who developed banking to unprecedented heights in the thirteenth century. Great banking families rose to supply the sinews of far reaching trade. The strongest of the "Lombards" were the Florentine banking firms, of whom eighty are recorded between 1260 and 1347. When their tide ebbed they left some of their terms: - banco, debito, cassa (money box, cash), conto, disconto, conto corrente, netto, bilanza, banca rotta (bank broken, bankruptcy) - in almost all European languages.

As early as 1171 the bank of Venice arranged exchange accounts among its clients by mere bookkeeping operations. Through their international connections they were able to issue letters of credit by which a deposit made in one country would be returned to the depositor, or his/her appointee, in another- a device long known to the Jews, the Moslems, and the Templars. Conversely, they wrote bills of exchange: a merchant, in return for goods or a loan, gave a promissory note to pay at one of the great fairs or international banks by a stated time; these notes were balanced against one another at fair or bank, AND ONLY THE FINAL BALANCE WAS PAID IN MONEY (GOLD). Hundreds of transactions could now take place without the nuisance of carrying or exchanging great sums and weights of coin.

As the banking centres became clearing houses, the bankers avoided the long journey to the fairs. Merchants throughout Europe and the Levant could draw on their accounts in the banks of Italy, and have their balances settled by interbank bookkeeping. In effect the utility and circulation of money (gold) was increased ten fold. This "credit system" - made possible by mutual trust - was not the least important or honourable aspect of the economic revolution".

Thus we can see that from the gold "standard", which had grown for millennia from "folk ways", a fully functioning commercial credit system evolved in the 12th. and 13th. centuries. This structure continued to develop to facilitate the rise of a great Western civilization culminating in the growth of the United States of America on the back of the British world empire. In the main, throughout this 800 year period, prices generally remained stable. Perhaps it is time to revisit the decision to scrap this time honoured system and return to common folk the "money issue" and "store of value" rights upon which the freedom of the western tradition was built upon.

Reference:

"The Story of Civilization"
Book IV: "The Age of Faith"
Will Durant
Simon and Schuster
New York, USA.

 

Copyright © 2008 Christopher M. Quigley
Editorial Archive

contact information

Christopher M. Quigley, B.Sc., M.M.I.I., M.A. | Dublin, Ireland | Email | Website

The opinions of FSU contributors do not necessarily reflect those of Financial Sense.