The Rothschild’s Gold and exchange rates

Gerry Jackson

One can find numerous articles1 on the net defending what the authors call globalisation. They  strive to equate the great burst of international trade that took place from 1870 to 1914 with what today’s world has been experiencing for several decades, arguing that there is no fundamental difference between the two historical periods and that anti-globalism is a “zero sum game’. However, once we examine the facts we do find a fundamental difference between the two periods that destroys the globalist’s economic argument. But first, let us take a quick look at international trade as it was in the nineteenth century.

The period 1800 to 1913 did witness  rapid rates of growth in foreign trade which saw world trade grow at a far faster rate than global output, racing ahead at rates of 29 to 64 per cent for certain decades, translating into per capita growth rates of 23 and 53 per cent, even though global output is estimated to have grown at only 7.3 per cent a decade during this period2. (It should be remarked that the growth in trade did not really ‘take-off’ until the 1850s). By 1913 the per capita volume of foreign trade was estimated to be 25 times greater than its 1800 level while per capita output was only 2.5 times as great, meaning that in 1913 the ratio of foreign trade to global output was more than 11 times its 1800 rate. Estimates put the proportion of foreign trade to total output in 1913 at 33 per cent and about 3 per cent for 1800. This is a colossal increase by any measure.

There is no doubt that the nineteenth century rise in international trade and the specialisation of labour and capital upon which it was based could not have taken place without the free movement of large-scale capital flows — the very thing that is subject to so much harsh and ill-informed criticism today. Some idea of the scale of these flows can be gained from Britain’s experience. Between 1870 and 1914 her capital exports averaged 4 per cent of GDP; they averaged 7 per cent from 1905 to 1913, reaching 9 per cent the following year3. By 1914 her total foreign investments came to 4 billion pounds, more than double her  national income.

During this period Britain became the world’s largest creditor nation with London becoming the financial capital of the world. The size of her capital flows are particularly remarkable once we adjust them for purchasing power and relate them to the size of global income. What is also of interest is the direction of these capital flows. In the case of Britain over 50 per cent of her investments in 1914 were concentrated in Europe, the US and the dominions, with the US enjoying about 22 per cent of the total.

It is important to note that this achievement was accomplished in the absence of complex international trade agreements. Yet Sir Evelyn Rothschild, one of the world’s leading globalists considers that this to be impossible. According to the brilliant Sir Evelyn free trade agreements “are the most complicated things in the world and they take years”4 to negotiate. Really? The1860 Anglo-French trade treaty was successfully negotiated in a matter of weeks and consisted of six pages regarding tariff reductions. Moreover, when Great Britain embraced free trade in 1846 she did not have to sign any trade agreements, especially any consisting of more than 1,700 pages as is the case with NAFTA (the North American Free Trade Agreement). And Sir Evelyn has the gall to call President Trump a “lunatic”5.

Reading the likes of the Economist6 would lead one to conclude that the 1870-1914 period was a free trade paradise. In fact, Great Britain was one of the few countries, if not the only one, that was free trade, the rest were significant protectionists to varying degrees. In 1904 it was calculated

that the average ad valorem equivalent of the import duties levied by Germany, on the principal manufactures exported from the United Kingdom, was 25 per cent. The corresponding figure for Italy was 27; for France 34; for Austria 35; for the United States 73; and for Russia 131. The figures are rough; but they illustrate tolerably well the relative intensity of protective tariffs7.

We now see that “the first great era of globalisation” occurred  when high tariff regimes governed international trade, notwithstanding Great Britain’s adherence to the principle of free trade.  Therefore the globalists’ argument that international trade and economic growth cannot rapidly expand in the presence of heavy tariffs — assuming the tariffs are not prohibitive — is nonsense.  

Apologists for globalism frequently refer to David Ricardo’s theory of comparative advantage8 to justify their destructive policy, which certainly led me to believe that none of them had read a classical economist, including Ricardo’s Principles. Every classical economist knew that economic growth meant capital accumulation9 expanding faster than the population  (the reverse situation filled them with dread) and that this was the only way to raise the standard of living of the masses. The theory of comparative advantage had nothing to do with this process. It was used to explain why free trade would increase total output by bringing about a more efficient allocation of existing resources in a way that would benefit all the participants, and that is all. However, there is a vital caveat that virtually all proponents of free trade are unaware of: The fact that the classical economists always discussed international trade within the framework of a gold standard and it is the gold standard that makes for the fundamental difference between free trade as it was in “the first great era of globalisation” and free trade as it is today10 As Joseph Schumpeter observed:

In the first place, the ‘classical’ writers, without neglecting other cases, reasoned primarily in terms of an unfettered international gold standard. There were several reasons for this but one of them merits our attention in particular. An unfettered international gold standard will keep (normally) foreign exchange rates within specie points [emphasis added] and impose an ‘automatic’ link between national price levels and interest rates11.

Therefore, the classical economists were reasoning that without a self-regulating specie standard purchasing power parity11 would not correspond to the exchange rate. This is crucial because without a gold standard keeping the exchange rate within the specie points the law of comparative advantage could not function effectively. What Schumpeter missed is that the classical economists did not think in terms of price levels. They understood that domestic prices did not matter with respect to exchange rates. David Ricardo noted that

each country has precisely the quantity of money [gold] which it ought to have, money will not indeed be of the same value in each, for with respect to many commodities it may differ 5, 10, or even 20 per cent… In speaking of the exchange and the comparative value of money in different countries, we must not in the least refer to the value of money estimated in commodities, in either country. The exchange is never ascertained by estimating the comparative value of money in… or any commodity whatever, but by estimating the value of the currency of one country, in the currency of another12.

Ricardo was adamant that with respect to trade a fixed exchange rate fixed on a given quantity of gold was absolutely essential

If a country used paper money not exchangeable for specie, and therefore not regulated by any fixed standard, the exchanges in that country might deviate as much from par13*, as its money might be multiplied beyond that quantity which would have been allotted to it by general commerce, if the trade in money had been free, and the precious metals had been used, either for money, or for the standard of money14.

Malthus was more precise, explaining that the

 precious metals are always tending to a state of rest…. But when this state of rest has been nearly attained, and the exchanges of all countries are nearly at par, the value of the precious metals in different countries estimated in corn and labour, or in the mass of commodities, is far indeed from being the same…. In reality, the quantity of money in each country is determined by the quantity wanted to maintain its general exchanges at par15.

And this could only be done by a self-regulating specie standard, something that Ricardo made clear in 1822 when lamented

that from 1797 to 1819 we had no standard whatever by which to regulate the quantity or value of our money16.

When in 1840 Samuel Jones-Loyd (later Lord Overstone and a noted hard money man) was questioned by a Select Committee of the House of Commons with respect to the note issue he stated:

I conceive, by virtue of its own intrinsic value, [that gold] will regulate itself; but a paper currency, having no intrinsic value, requires to be subjected to some artificial regulation respecting its amount17.

The following year George Warde Norman wrote a lengthy letter to Charles Wood, who was presiding over the aforementioned Select Committee, in which he strongly emphasised that for the

regulation of a paper-currency, a self-acting test is indispensably requisite… in the exchange of notes for gold and gold for notes, under the influence of the foreign exchanges18.

Three things are abundantly clear. Firstly, the classical economists believed that currencies required a common monetary standard without which the rate of foreign exchange would be in a continual state of flux, being temporarily set by the supply and demand for what would be pure paper currencies. Therefore, only a specie standard was capable of maintaining a stable exchange rate. Secondly, a stable exchange rate was vital if the pattern of trade was to be consistent with the law of comparative advantage. Thirdly, purchasing power parity was not a ratio of international price levels, it was the price of transportable goods19.

Ricardo’s 1822 pamphlet is of particular interest because he made it clear that under a paper currency exchange rates will always be unstable and that this would have a detrimental effect on the pattern of trade that changes in money flows affect relative prices20. Haberler stressed the generally overlooked and extremely important fact that

… the process of inflation always leaves behind it permanent or at least comparatively long-run changes in the volume of trade and in the structure of industry. The impact effect is a change in the direction of demand. At he points where the extra money first comes into circulation purchasing-power expands; elsewhere it remains for a time unchanged21.

This is a situation that Ricardo evidently feared.


1 The Economist 14 June 2017.

2A. G. Kenwood and A. L Lougheed, Growth of the International Economy 1820-1980, Unwin Hymen, p. 90ff.

3Ibid. 40

4Sir Evelyn has the gall to call President Trump a “lunatic”

5Trump the ‘lunatic

6The benighted influence of Lady Rothschild and her husband badly damaged the reputation of the Economist. Its atrocious attack on Donald Trump only served to further tarnish the magazine’s already battered character.

7Sir John Clapham, The economic development of France and Germany, 1815-1914, Cambridge at the University Press, 1966,  p. 322

8Although Ricardo is credited with discovering the principle of comparative advantage Robert Torrens actually explained the principle  in 1815 when he explained why  it would be better to buy wheat from Poland even if British wheat farmers were more efficient than their Polish counterparts.

Today’s proponents of free trade need to explain why the same thing would happen under a gold standard given that the classical economists argued that a stable exchange regulated by a gold standard was necessary if trade was to be consistent with the principle of comparative advantage.

 Robert Torrens, An Essay on the External Corn Trade, J. Hatcher, 1815, pp.  222-230.

 9Although classical economists tended to have an untenably broad definition of capital they all recognised machinery and plant as a key role in raising real wages and therefore the standard of living.

10Pointing out the fact that the gold standard makes for a fundamental difference between the nature of ‘free trade’ today and free trade as it was in the nineteenth century does not mean that one believes, as some economists foolishly think, that the theory of comparative advantage was based on gold or silver.  When Steven Kates, had the temerity to make a similar point Professor Sinclair Davidson immediately accused him of suggesting that the “theory of comparative advantage is wrong because the world no longer holds to the gold standard.” This comment revealed a stunning ignorance of how the gold standard functioned. Professor Judith Sloan was no better, dismissing the gold standard as a “dud”.

Senior Fellow, Centre for Labour Market Research, University of Canberra, Australia

11Joseph Schumpeter, The History of Economic Analysis, Oxford University Press, 1994, p. 732.

12David Ricardo, The Principles of Political Economy and Taxation, Pelican Books, 1971, p. 165

13For the classical school the currency was at par when it was at the official exchange rate, though being within the gold points was sufficient.  Hence, if the value of the currency fell or gold tended to leave the country the exchange rate was said to be unfavourable.

14Ricardo p. 239

15Thomas Malthus, Principles of Political Economy, Augustus M. Kelley 1974, p. 130. (From the 2nd edition 1836.)

16David Ricardo, On Protection to Agriculture, John Murray, fourth edition, 1822, p. 22.

17Lord Overstone, Tracts and Other Publications on Metallic and Paper Currency, London, 1857, p. 341.

18George Wade Norman, Letter to Charles M.P. on the Bank Issue, 1841 p. 105.

19They Understood that domestic goods could be export goods because they knew that these goods had their  own export and import points: The distance between the points is set by the cost of shipping. If a commodity’s price drops below its export point it will be exported. If it exceeds its import price then imports will rise.  

 20In this pamphlet Ricardo also explained why under certain circumstances a tariff is justified.

21Gottfried Haberler, The Theory of Free Trade, William Hodge and Company LTD, 1950, p. 54.

4 thoughts on “The Rothschild’s Gold and exchange rates”

  1. This must be the only site in Aussie land where you get a history lesson along with an economics lesson. This is deep stuff. You get nothing like it in any of our rags and its better than the IPA.

  2. Gerry should write a book on the gold standard. I am only now beginning to see some of the ramifications of what you have been writing. I have come to realise that everything I thought I knew about the gold standard is absolutely wrong. The section that explained why the Dutch disease was impossible on the gold standard was concise and illuminating. The articles on gold and depressions were completely new to me.

  3. Gerry, it seems to me that you are indirectly arguing that under a gold stand the present international monetary disorder could not happen. Have I misunderstood you?

  4. Luther, I am trying to explain how the gold standard actually worked. Although there are numerous negative comments in the media about the gold standard very few attempts are made to justify them.

    Your conclusion that the current monetary disorder could not occur under a gold standard is correct. That also goes for the inter-war period. The problem was that few, if any, countries adhered to the rules of the gold standard at that time. If you are not acting according to the rules then you are on the gold standard in name only.

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