This year, for the first time in seven years, China reported a quarterly trade deficit. Imports in China are surging. The emergence of China as a global trading power is having a profound effect on global trade, exchange rate policy, and geopolitics.
There is nothing here, however. Looking back across the centuries, and we can see the same problems of currency pricing, trade, development, and politics, playing out in worlds made of wooden ships, monarchies, and gold and silver coins.
In his later years, Sir Isaac Newton began to search the Holy Bible for clues and pointers towards the true ‘system of the world’. Before he turned 35, Newton had revolutionized natural philosophy, the study of physics, optics, developed the calculus, and of course the theory of gravity. Newton’s life after these discoveries is not well known, but he ended life very rich, very well thought of, and with a sinecure as Warden, and then Master, of the Royal Mint from 1696 to his death in 1727. In fairness, when you have changed the course of human history, your later work as a mid level civil servant does seem a little dull to most observers.
Not to an economist, however.
In his later years Newton was responsible for the money supply, and the exchange rate policy, of the largest economy in the world. In practice and in theory, he worked to create the system of the world’s trade. Newton was, in some respects, the world’s first modern central banker.
Newton’s main job was ensuring the quality of the gold and silver coinage in the realm, stopping counterfeiters, and setting the exchange rate of gold and silver coin. As Master of the Royal Mint, Newton got himself into hot water a few times, mainly because he treated coined gold as the sole real money of the realm: this meant silver and copper coins were relegated to second and third place. As we will see, events in Asia forced him to change his stance.
As an aside, one glorious row Newton had was with Sir Johnathan Swift, on the issuance of copper coinage in Ireland. Swift’s anonymously written Drapier Letters—the seventeenth century equivalent of a blog—stirred a fervent anti-British sentiment amongst the Irish who were being deprived of silver coins, and hence credit for their businesses. Much of Ireland’s land at that time was owned by absentee landlords, Englishmen who collected their rents in copper and silver coin, shipped that coin to England, and exchanged the coin for gold coinage at a favourable rate, sucking all the coinage out of Ireland. Newton never forgot Swifts ‘nefarious rancour’.
By 1701, Newton’s imagination had conceived a theory of a managed currency. Newton wrote that he didn’t much care whether the money of a country was backed by gold, silver, paper, or wood, provided that there was enough coin to produce “market money and workman’s wages” (Newton, MSS. II, p. 631). In fact, he wrote that
“…tis mere opinion that sets a value upon money; we value it because with it we can purchase all sorts of commodities, and the same opinion sets a like value upon paper security….All the difference is that value of gold and silver is set upon their internal substance or matter and therefore is called intrinsic, and the value of paper security upon the apparent form of the writing and therefore called extrinsic, and the value of the former is more universal than that of the latter”.
“So much [paper credit] is best for us as suffices to lower interest, make dispatch in business, set the people on work and inspire life in the bust part of the nation”.
Newton’s counterparts across the world had other ideas, and he was forced in the end to accommodate the monetary policy of England to Asian interests. At that time, the East India Company traded regionally in China in Amoy, Chusan and Canton. Their expanding trade forced Newton’s hand:
“Our silver must go to China till gold is dearer there or cheaper with us. And it is in our interest to let it go thither. For China is inclined to take off our manufactures which India is not, and therefore fit to be traded with and the trade for their gold must greatly increase out coin, being a profit to the nation as to the merchant himself.”
Newton in the 1700s, like our central bankers today, had learned a crucial lesson: one cannot ignore the currency of a trading partner when that partner is growing faster than you are. They will win, and you will lose, whether or not you have invented the theory of gravity.
Further Reading, if you're so inclined:
J. H. Craig, Newton at the Mint, Cambridge University Press, 1946.
Papers relating to the Mint by Sir Isaac Newton, held in the National Library at Kew Gardens.