Hostile Money E-Book

Paul Wilson

• Herausgeber: The History Press
• Kategorie: Fachliteratur
• Sprache: Englisch

Seitenzahl: 508

Veröffentlichungsjahr: 2019

Beschreibung

Money has the power to make nations and fuel wars. It is both the subject of diplomacy and the tool of those seeking to overthrow hostile regimes at home and abroad. Germany's hyperinflation following the First World War has entered the public consciousness as an extreme example of what can happen to a currency in conflict. What is not widely known is that it is by no means the worst case of war-induced hyperinflation. Hostile Money looks at the impact of war and revolution on national currencies – from Rome's civil war in the first century BC to the twenty-first-century invasions of Afghanistan and Iraq by American-led forces and the economic sanctions and cyberwarfare of today.

Leseprobe

The author wishes to thank Professor Paola Subacchi (now of Queen Mary’s University, London) and John Plender for their encouragement. Special thanks also to Forrest Capie, Professor Emeritus of Economic History, Cass Business School, City University for his constant support and advice.

First published 2019

The History Press

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© Paul Wilson, 2019

The right of Paul Wilson to be identified as the Author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988.

All rights reserved. No part of this book may be reprinted or reproduced or utilised in any form or by any electronic, mechanical or other means, now known or hereafter invented, including photocopying and recording, or in any information storage or retrieval system, without the permission in writing from the Publishers.

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CONTENTS

Introduction

1 Rebellion, Riot and Military Coups

2 Revolution

3 Civil War

4 Money Supply and the First World War

5 The New World Monetary Disorder

6 Political Counterfeiting

7 Currency and the Second World War

8 Currency and Conflict since 1945

9 Monetary Sanctions

10 The Monetary Machiavelli

Notes

Bibliography

INTRODUCTION

Money or currency – for the purposes of this book the two terms will be interchangeable – is generally accepted as having three functions: it is a store of value, a medium of exchange and an accounting unit. It is a medium of exchange designed to make transactions easier than they were in the simplest societies where only barter functioned (although at times of direst necessity, people in the most sophisticated societies will revert to barter when monetary systems break down through war or economic mismanagement). As a store of value, money is a relatively reliable means of preserving our wealth beyond the short term. Not as good perhaps as land, but certainly better than foodstuffs, which are a necessity but which lose their value fairly rapidly as they degenerate. As well as these two very material attributes, money also performs a rather more abstract function as an accounting unit, a standardised way of measuring the value of our transactions or stores of value. This aspect of the nature of money is preserved in certain cases by the name of the currency we use. The pound sterling derives its name from the pound of silver used in the minting of a very fixed number of silver pennies. And the lira, the former – and perhaps future – currency of Italy, comes from the Roman term for a pound of pure silver. Similarly, the livre – a pound weight in French, and therefore originally a measure of weight – was used to determine how many coins could be produced from a pound of silver. The dirham of Middle Eastern currency systems and the Greek drachma from which dirham originated were likewise units of weight.

In the beginning, however, long before even the simplest form of currency emerged, transactions between people were carried out by means of barter: the direct exchange of one or more goods or services in return for other goods or services.

But the particular ingenuity of some ancient societies gave rise to new means of recording transactions and these new methods performed some of the functions of money – particularly those of the unit of exchange. In this way, clay tablets from Mesopotamia dating back to the period of 1600 BC act as promissory notes, setting out exactly what goods may be claimed in return for the tablet. These tablets assign no abstract, monetary value to the transaction but occupy the midpoint between simple barter and money.1

In China, a form of currency in the shape of spades and knife blades began to appear as early as about 1000 BC, followed by the introduction of coinage in about 229 BC, attributed to the first Chinese Emperor Qin Shi Huang.2

From an early point, the imperial authorities in China were at pains to ensure that the public should accept the ‘nominal’ value of coins, rather than weigh the coins as a means of valuing them on the basis of their metal content.3 They promoted the so-called cartalist view – the view that the value of money is determined by government – as an expression of imperial power, but also because it offered the opportunity to manipulate the value of those coins. Attempts by the government to increase the nominal value of coinage over and above its intrinsic metal value prompted counterfeiting, inflation and currency collapse.

The valuable commodities that were eventually to become money – gold in ingot form, for example, in Egypt and Mesopotamia – may have started out as stores of value rather than media of exchange and, submitted as tribute to the rulers of those lands, remained locked away in treasuries rather than permitted to circulate.4 At some point someone in authority decided that the precious metals silver and gold might perform a useful function in mediating between the participants in barter transactions, setting an objective measure of value acceptable to both parties. It is generally believed that Lydia in western Asia, a region possessed of quantities of easily mined gold ore usually found in the natural alloy with silver called electrum, was the first to introduce gold coinage as a unit of exchange and as a store of value at some point around 700 BC. Local rulers adopted the measure of stamping the coins as a way of reassuring the populace that the quality of the precious metals used was of a reliable standard of fineness. The impress of the ruler’s symbols was therefore a guarantee of value offered by the central authority in the land.

If the silver content of coins was reduced, but the ‘nominal’ value remained the same, the coin would be said to be debased and its value consequently depreciated by the population. When the precious metal content of the currency in circulation was known to be debased, traders might start to demand more coins for their products and services than they had previously demanded when the currency was known to be of a better quality. Prices expressed in the unit of exchange, therefore, went up. The ruler’s guarantee as expressed by the face value was not worth what it once was. The market preferred to apply the ‘metallist’ view of currency.

However, some alternatives to coins and banknotes persisted in certain societies, long after those societies had had the opportunity to monetise transactions. Ingots and bars of gold and silver might be used for high-value international settlements or for preserving large amounts as a store of value. In an interesting but unsurprising parallel with the social behaviours and monetary policies of the late Roman Empire, gold was held in Han China (206 BC–AD 220) in ingot form and tended to be mostly in the possession of the wealthier aristocratic classes. A thousand years later, during the Sung dynasty (AD 960–1279), silver ingots were still used as stores of value and held in treasuries as tax receipts; when bronze coinage was in short supply, they also counted as the ‘backing’ for paper currency in circulation.5

A complete breakdown in the national monetary system of a country might lead the population to adopt the currencies of another country, or resort to barter, or counterfeit the currency that until recently had been circulating efficiently in that country. By 1294 – the final year of the reign of Kublai Khan – the paper notes issued by his government in Yuan dynasty China had so depreciated that the population not only reverted to barter, but also resorted to trade tokens such as ‘tea tickets’ and ‘flour tickets’ and ‘bamboo and wine tokens’, facilitating trade in certain commodities.6 The authorities perceived these initiatives as a threat to the official currency and attempts were made to ban them.

Production of small denomination coins in Britain had waned in the late eighteenth century when the Royal Mint’s production was focused very much on gold coins. The situation was aggravated by decree of George III in 1775, who commanded that the Mint should cease production of copper coins. Those copper (and silver) coins that were circulating were being melted down and the metal recycled as lighter counterfeits. Large numbers of agricultural labourers had moved to towns to find work in the factories created during the Industrial Revolution. Unfortunately, factory owners were unable to secure access to sufficient volumes of smaller denominations and resorted once again to privately produced copper tokens. As the British government had neglected the demand for smaller denominations, the private sector was forced to meet the challenge. As an exigency of war, officially produced copper coins were sanctioned by a proclamation of George III in 1797. In 1816, the government at last took on responsibility for production of smaller denominations in copper and private coinage was rendered illegal by the 1817 Act of Suppression.7

Thus, the story of token production in Britain in the second half of the eighteenth century represents a case study in the competition between government and market in the supply of money and the effect of major social movements of monetary systems. But it also demonstrates the impact of war on established monetary systems. Economic and social conditions drove up a demand for money that the government not only ignored, but wilfully resisted. Private enterprise filled the gap with an unofficial money in the form of tokens whose production was facilitated by the combination of an easy supply of raw materials and the arrival of ground-breaking technology in the form of steam presses. This failure to provide sufficient currency for the purposes of trade also became a problem for Britain’s fledgling colonies.

Together with debasement and failures in the usual sources of supply, other threats to monetary systems emerged: counterfeiting, coin smuggling, and competitive attempts by neighbouring states to draw large volumes of precious metals in the form of coins to their own mints away from those of the country of origin. Every so often in these circumstances, monetary systems based on commodities such as gold and silver would fall into such disrepair that a major operation to renovate the system would become necessary.

The next stage in the development of money after the replacement of ingots by coins was the introduction of paper money, which had long circulated in China and in Iran before its accidental emergence in Western Europe in the seventeenth century. It began as a certificate of deposit for copper coins in China in the ninth century and in Sweden eight centuries later, by coincidence, the prototype banknote was nothing more than a certificate of deposit for copper coins – of a sort. But, in the case of Sung China when the government over-issued paper currency, it resulted in depreciation and inflation to the point where that currency became worthless. Instead, unminted silver and silk were adopted as substitutes by the population.8

The money that we now handle every day in our minor transactions takes the form of banknotes and coinage (as well as the now rare cheque); but in our age, banknotes and coins make up only a very small part of the overall ‘money’ circulating within and between countries. And, increasingly in our times, more transactions – even minor ones – are carried out electronically, using a smart card or a mobile telephone. The quantitative easing that in recent years has often been described in journalistic shorthand as ‘money printing’ involves electronic transfers rather than paper and ink. From a pound weight of silver to a string of digits, money evolves, while its three purposes remain constant.

Increases or decreases in population, agricultural and industrial activity and innovation in new forms of money would all have a major effect on a country’s monetary supply. And then there were other factors that could have a dramatic effect on a nation’s currency system. Among these are wars, revolutions, diplomatic alliances and the secession or independence of one state from another. There is also the effect that the policies of one country can have on the monetary system of another country through political counterfeiting, sanctions and monetary operations short of outright hostility.

Wise monetary policies are vital to the economic well-being of any country. But the application of wise policies presupposes not only the technical capacity to apply them, but also the power to govern the system. When power is seized or empires extended over some otherwise independent country, the ascendant power usually take control of the issue of money as a matter of some priority. Whoever controls the supply of money commands the army, the civil service and other public services. The stability of the money system and of prices in the market place reflects not only good economic and monetary policy, but also confidence in the political stability of the regime.

Threats to monetary systems can also be internal in origin. When Germany was beset by civil disorder in the aftermath of the First World War, strikes developed into armed revolt involving the Communist Party of Germany and the radical revolutionary Spartacist League. When these armed insurrectionists seized the means of banknote production in 1919, the leaders of the western Allies, Presidents Wilson and Clemenceau for the US and France, and Prime Ministers Lloyd George and Orlando for Britain and Italy, secretly debated how best to restore control of banknote production to the legitimate authorities. As the four powers planned the settlement of Europe and the dissolution of empires in the aftermath of that war, security of the means of production of Germany’s money was a factor in their calculations.

To maintain control over the monetary system as well as over the other instruments of public policy, autocrats had to maintain the loyalty of their armies. And in order to maintain that loyalty the pay that troops received had to be ‘good’ money, that is, not debased. Armies can march without pay for some time, but there is a limit and even if troops are content in some exceptional cases to perform their duties without payment so long as they are fed and clothed, the supplies themselves must be financed. History records instances of armies rebelling or simply melting away when their pay was cut or debased or ceased altogether.

The very basis of a monetary system may turn out to be its weakness, exploitable by hostile forces. When coins of precious metal are replaced by paper notes of little or no intrinsic value, a monetary system based on cheap tokens presents a vulnerability to be exploited by hostile powers. Paper money, unbacked by gold and issued by American and French revolutionary authorities in the late eighteenth century, was easily and cheaply counterfeited by Britain in an attempt to undermine her opponents’ finances. ‘The surest way to destroy the capitalist system is to debauch its currency’, a maxim that J.M. Keynes attributed to Lenin in the early twentieth century,9 had in practical terms been tested more than a hundred years earlier, although the observable results do not necessarily prove the maxim to be true. Even without such deliberate acts of hostile attack directed towards a foe’s monetary system, national currency systems are weakened, undermined, overturned or totally destroyed as a result of war or civil war; an incidental consequence of the turmoil, uncertainty and breakdown in confidence of the markets and of the civil population in their own money.

Money gets swept up in the storms of history and either floats or founders. Carthage’s currency went the same way as that state: ultimately overcome by Rome, the majority of Carthage’s coins were melted down for use in the victor’s own currency. Carthage’s currency was deleted. Britain’s wars against France in the late seventeenth and early eighteenth century marked the first steps of sterling’s emergence as the leading international currency, a position it was to hold unrivalled from the end of the Napoleonic wars to the First World War. Sterling’s reputation was the monetary endorsement of Britain’s power in the same way that the international credibility of the US dollar is as much based on Washington’s military and diplomatic power as it is on the real productivity of the American economy. Empires of currency rise and fall.

While the purposes of money may be constant and its forms evolving, conflict, diplomacy and politics apply a seemingly infinite variety of factors to the way in which it operates. Attempts to overthrow a regime or undermine another country in war or peace have often consciously involved a policy of attacking its currency or replacing the existing, authorised currency with an alternative, or indeed resulted in the collapse of the currency as a by-product of war or revolution. This is true whether the currency concerned is based on metal, paper or digital systems.

And in the era of the internet, when it is easier than ever to make transactions across borders, the vulnerability of national monetary systems to hostile attack, now by hackers, especially of the state-sponsored type, is greater than ever.

1

REBELLION, RIOT AND MILITARY COUPS

‘A disordered Currency is one of the greatest political evils.’

Daniel Webster, Secretary of State of the United States

When civil war broke out among rival emperors of Rome in AD 192, the winner, Septimius Severus, granted the troops a pay increase and paid for it by increasing the number of silver denarii in circulation. This increase in money supply could only be achieved by means of a debasement of the silver content to 48 per cent. An old denarius thus had only the same nominal value as Septimius Severus’ new denarius but had a much better silver bullion content. Inevitably, the older, finer coins began to disappear – to be melted down for their higher bullion value. So, a vicious circle would have been created: the emperor minted more coins to pay the army; in order to do so, he debased the silver content of the coin; that in turn caused the older, finer coins to disappear out of circulation, being melted down for their finer silver content. This in turn created a demand for more money – of poorer quality – to be minted and issued to replace those that had disappeared from circulation. Unless the state was able to access entirely new stocks of silver – usually by conquest – the only way to issue new coins was by taking in older ones with good silver content, melting those down for their silver bullion and reducing the amount of silver added to the newest issue of coins. The effect may have been a net transfer of wealth from some sections of society to the army and perhaps an increase in the speed with which money changed hands. The discovery of new mines and their exploitation in conquered countries might to a certain extent hold off debasement. But, if the economy were to expand too quickly and army pay increased too dramatically – and if supplies of new bullion could not keep pace – there were limited means of coping with the problem: debase the coinage, replace some payments with goods in kind or replace the lowest denominations with base metal.

The demand for an increased money supply to pay armies is clearly understood by figures for the average annual pay of a Roman soldier:

Reign

Average annual pay in denarii

Julius Caesar (46 BC)

225

Domitian (AD 81–96)

300

Septimius Severus (AD 193–211)

600

Caracalla (AD 211–217)

900

Maximinus (AD 235–238)

1,800

Source: Williams, Jonathan (ed.), Money: A History (British Museum Press, 1996).

The same source also reports one estimate that during the middle of the second century, 75 per cent of the Imperial budget of 225 million denarii was spent on paying the army of 400,000 troops. The cost of paying a single legion, according to one source,1 amounted to around 1,500,000 denarii a year. Tacitus relates the case brought against Publius Vitellius in AD 32, during the reign of Tiberius, who was charged with ‘offering the keys of the Treasury and the Military Treasury for seditious purposes’.2 Clearly, with such a large proportion of the budget allocated to the army, control of the Military Treasury would make the difference between a successful and an unsuccessful conspiracy or coup.

The demand for increased money supply to pay the army in turn required a substantial increase in coin production capacity. New mints had been established in Gaul, Britannia and elsewhere by rival emperors who had broken away from Rome’s central authority during the third century. The situation in the third century had been aggravated by the fact that army and civil servant salaries had not kept pace with inflation, forcing the authorities to make up the shortfall with supplies in kind. Coin production capacity increased but raw materials were not forthcoming in sufficiently large volumes to keep pace with the enhanced production capacity; the silver content of the denarius was consequently debased to eke out the available silver stocks.

The observation of Milton Friedman that periods of war increase the demand for money3 finds clear support in the record of inflating salaries for Rome’s troops; but it could equally be said that the demand for an ever-increasing issue of money to pay the armies continued during peacetime to guarantee their loyalty in societies where armed forces do not feel themselves to be subordinate to the civil government.

China

In the China of the early Sung dynasty, the army grew in size from 378,000 in AD 975 to 912,000 in AD 1017 and 1,259,000 in AD 1045 and, as it grew, so too did the troops’ demand for additional allowances and perks. The government had no choice but to increase the issue of money on a major scale to cope with these demands. Improved methods of producing silver and copper, increases in the availability of raw materials and in spending on defence led to a massive surge in money supply, the state budget expanding from 22,200,000 ‘strings’ of cash (a cash being a bronze coin and a string consisting of 1,000 coins) in AD 1000 to 150,800,000 in AD 1021. Inflation was the inevitable result.4

Primitive efforts to dupe the military with debased coinage rarely survived exposure and the hostility of the intended victims. Late in the sixteenth century, the authorities in the province of Zhejiang in Ming-era China attempted to force the circulation of state issue coinage by paying one-third of military salaries of the Hangzhou garrison in coin at the official rate of 1,000 bronze coins to a tael of silver, a tael weighing anywhere between 34g and 40g according to the region of China in which it was used. However, it soon became apparent that the market rate was 2,000 coins to a tael of silver, reducing the promised 30 per cent of salary in coin to 15 per cent in real terms, and depriving the troops of the remaining 15 per cent. The predictable result: the garrison mutinied and, without a force to impose law, the city was left in a state of disorder and exposed to rioting mobs protesting against unrelated, but punitive taxation.5

The Power of the Military in the Ottoman Empire

Authorities ignored at their peril the willingness of a military caste to revolt when its demands for payment in sound money went unfulfilled. Until the early nineteenth century, the Janissary corps of the Ottoman Empire was one of the most powerful elements in that empire. Only the elite Janissaries were up to the task of meeting the best European troops head to head and the decision to increase threefold that part of the army demanded a corresponding increase in expenditure.6 However, not only did the Empire have to increase the level of its military expenditure for an expanded Janissary corps, it also had to ensure that the quality of the money was acceptable to this powerful sector of society.

During the reign of the Ottoman Sultan, Mehmed II (1451–81), the Janissary corps revolted in response to regular debasements.7 The sultan had two periods of rule, the first standing in for his father in 1444 when Mehmed II was only 12 years old. That year the Janissaries were paid in newly issued silver akçe, which had been debased by 11 per cent in silver content and weight. Alert to a reduction in the external exchange rate against the Venetian ducat, which was the international standard of monetary reliability, and wise to the likelihood of an increase in prices, the troops gathered around a hill outside the capital city of Edirne and demanded a return to the old standards of silver content and weight or an increase in their salaries. The government buckled and increased the troops’ pay by about 16 per cent. Although this event, known as the Buçuktepe incident after the name of the hill, is viewed as only partly down to the government’s imprudent action in debasing the currency, it and other rebellions in Ottoman Turkey that involved the issue of the quality of money demonstrate the importance in certain militarised societies of maintaining military salaries at an appropriate level to offset the effects of debasement and inflation.

The pattern repeated itself in the late sixteenth century. The army had expanded as a result of lengthy wars with Persia and Austria and, to cope with vastly increased national expenditure, the sultan’s government debased the silver coinage, leading to a drop of 230 per cent in the external exchange rate. The fixed rate of pay of the Janissary corps was insufficient to cope with the inflation in prices and the problem came to a head when, in 1589, the government chose to pay them in debased coin rather than in the older, higher quality coin. Almost inevitably, the Janissaries revolted, demanding the execution of the high official deemed responsible for the debasement, a demand to which the sultan acceded. The episode became known as the Beylerbeyi incident after the unfortunate scapegoat.8 Prior to this event, the demands of the military caste for ‘sound money’ had had a curiously stabilising effect on the Akçe over a period of about a hundred years from 1481 onwards, with one single exception of debasement in 1566.

By the end of the sixteenth century, the Ottoman administration appeared to have learned the lessons of these mutinies. A very high proportion of payments from the Ottoman Treasury went towards the payment of troops. To get a measure of the importance of securing the army’s loyalty: documentary evidence of Treasury payments over two sample periods, the first over a period of nearly a year from July 1599 and a second period of two years beginning in 1602, indicate that 70 per cent of all disbursements went to the army. It is difficult to ignore the similarity with the estimation that 75 per cent of payments from Rome’s Treasury were allocated to the army. Moreover, the fact that 67 per cent of payments made to the Ottoman army were in gold, the best store of value, seems to be further evidence that the state had begun to take the army seriously.9 Even when the state resorted to military payments in the higher quality silver coin known as the shahi during wars with the Iranian Empire in the second half of the sixteenth century, it was evident that production of those coins noticeably increased at the mints in the eastern part of the Ottoman empire, the region where there were large concentrations of troops. Conversely, high-volume production slowed down and mints were closed at the end of the war and troops were dispersed.10

The power of the military in Ottoman Turkey was undisputed. When Sultan Mehmed IV was deposed in 1687 and replaced by Suleiman II, the new sultan had to pay the obligatory ‘accession gift’ to the army. Attempts to raise enough money through new taxes on the population of Istanbul backfired when the people revolted. The administration addressed the challenge by minting copper coins with an enhanced face value of one akçe (previously a denomination reserved for silver coins), using new presses that had been installed the previous year and making use of various sources of copper for the raw material. Additional rooms were added to the Istanbul mint, expanding the minting capacity simply to satisfy the military demand for a gratuity on the accession of a new sultan.11

Only the suppression of the Janissary order in 1826 by the reforming Ottoman Sultan Mahmud II, who ruled from 1808–39, removed this powerful obstacle to repeated debasements, the first serious one being implemented during the period 1828–31. The seigniorage yield (the profits a government or central bank can make from the issue of money) as a result amounted to half a year’s total revenues.12

Weight of kuruş (g)

Silver content (g)

Exchange rate to pound sterling

1808

12.8  

5.9  

19

1818

9.6  

4.42

29

1828

3.2  

1.47

59

1839

2.13

0.94

104

Source: Pamuk, Şevket, A Monetary History of the Ottoman Empire (Cambridge University Press, 2000), p. 191.

The power of the military in monetary matters in certain societies could still be seen in the twentieth century.

Chile

The First World War had changed definitively the relative economic strengths of Britain and the United States. The strength of the City of London as a centre for the financing of international business and Britain’s position as the world’s leading gold standard country prior to the war had given the country a pre-eminent position in world trade. Prior to the war, America had been heavily in debt to the banks of Britain and France, among others. During the war, however, America’s economic position was transformed from that of net debtor to net creditor. Much British gold had been shipped via Canada to America to pay for materiel and foodstuffs. As the war progressed, Britain was forced to take significant loans from America, some of which were passed on to Britain’s allies, France and Italy. Emerging from the war years as indisputably the world’s leading economy, the US expanded its commercial interests in Latin America and, as the possessor of the world’s largest gold reserves and naturally, therefore, a committed adherent of the gold standard, it wanted its trade partners in Latin America to operate on the same system. Contracts denominated in gold-backed convertible currencies where debts could be settled and profits repatriated in gold were reassuring. However, the issue of notes detached from a gold standard in Chile in the immediate post-war period, adding to the depreciation of currency that was a feature of South American economies, was not attractive to American government and business.13

On the demand side of this relationship, Latin American states were ready to believe that there were benefits to be had from their membership of the gold standard and adoption of other US requirements such as protection for foreign property. American advisers, pre-eminent among them Princeton University Professor Edwin Kemmerer, known as ‘the Money Doctor’, undertook technical missions at the invitation of various governments in South America. Kemmerer’s missions made recommendations on the reformation of local economies and monetary policies, and on fiscal and banking systems.

Different states saw the benefits in different ways, but often the fundamental attraction was that membership of the gold standard would make it easier for them to borrow on the international markets. For Colombia, adherence to the gold standard enabled the country to borrow on foreign markets to the extent that its public debt increased ten-fold between 1923 and 1930. The military junta running Ecuador in the 1920s believed that accession to the gold standard would bring with it official US recognition of their military regime and that recognition, in turn, would facilitate borrowing on international markets. Following American advice on monetary reform in 1925, Chile’s public borrowing increased three-fold. 14

From the middle of the nineteenth century when Chile’s Ministry of Finance was reorganised by a French adviser, currency issue had been based on free banking (the issue of banknotes by commercial banknotes free of central bank or government control), leaving the way open to excessive note issue by private banks apart from a short, deflationary, trial of the gold standard in 1895–98. By the end of the nineteenth century the government had taken over issue of notes, but as the country was now off the gold standard, a renewed period of excessive note issue followed. Between 1900 and 1920, currency in circulation increased six-fold and the peso lost more than 30 per cent of its value on the London exchange.15

Government expenditures increased by 90 per cent in the period 1913–27 and public sector salaries over the same period rose 132 per cent. When in 1925 the government of the day hiked government spending by increasing the size of the military and the civil service and by increasing their salaries, it was reflected in the total value of notes in circulation, which increased by 30 per cent between 1924 and 1926. But although the intention had been to secure the goodwill of the military and the public sector, the ensuing inflation simply eroded the value of their increased salaries. The rapidly rising cost of living threatened social disorder. Stabilisation of an inflating currency through adoption of the gold standard became a priority for a cross-section of society: merchants and industrialists found their interests aligned with those of middle-class and working-class workforces. The failure of the reformist government of President Alessandri to stabilise the currency and a deadlock in legislation that occurred when the congress blocked his various bills led to a military coup in 1924.16

For the military, the principal reason for action was one of self-interest. Of course, having secured salary increases, both the officer classes and the other ranks needed stable prices; instead, the benefits they had gained were being quickly eroded by inflation. On a professional level, a depreciated local currency also made procurement of foreign armaments much more expensive. But, contrary to the stereotypical portrayal of Latin American military coups as designed to repress the working classes, the coup of 1924 and a counter-coup of 1925 led by a more energetically reformist element in the army sought to defuse the prospect of civil disorder by reform of the currency and by welfare programmes. Thus, when Kemmerer the Money Doctor arrived in Chile in July 1925 to provide advice on reform of the currency, fiscal and banking systems, local political conditions were more than receptive to his proposals. Both the middle and working classes were desperate for reform and the military, which was able to force reforms through by means of its control of the machinery of state, was ready to support his programme. More widely, there was a view that Kemmerer’s programme could effectively be kick-started by the military junta, but that it was proper that it be brought to a final successful conclusion by an elected government. Ironically, it was conservative elements in society that were the leading proponents of elected government, fearing that the junta would pursue a programme of social welfare financed by higher taxes. In 1925 Kemmerer’s recommendations were passed into law, establishing a central bank and placing the country on the gold standard.17

Following the coups of 1924 and 1925 and presidential elections later in 1925 and 1927, one of the 1925 coup plotters, Colonel Ibañez del Campo, emerged as the president with powers vastly increased at the expense of the legislature. For the first two years of his tenure, Chile’s economy thrived on the back of US banking loans extended enthusiastically thanks to the country’s adherence to the gold standard, with many of the funds provided being invested in infrastructural projects. Within two years, however, the Wall Street crash caused the loans to dry up. As the Depression progressed, Chile’s economy suffered terribly. Demand for Chile’s exports faltered and then plunged. More than 50 per cent of the central bank’s gold reserves left the country in settlement of debts. Exchange controls were introduced to stem the tide, but at last, in April 1932, the gold standard was jettisoned – well after Britain had dropped it and at much greater cost.18 The gold standard policy of the military junta worked only as long as conditions in international markets facilitated Chile’s borrowing.

Ecuador’s Military Junta and the end of free banking

As Chile was abandoning its first, short-lived experiment with the gold standard in 1898, Ecuador was going in the opposite direction. In 1897, a conservative government was overthrown by Eloy Alfaro, a military man of liberal persuasion.

Alfaro’s primary economic interest was in the development of Ecuador’s national infrastructure, with special attention to the building of the trans-Andean railway. This project had for some time been seen as essential to the challenge of linking Ecuador’s interior to the coast but had always been deferred on the grounds of cost. Alfaro’s determination to drive through this and other projects once he had seized power led him to agree quickly to proposals from New York finance houses prepared to provide the necessary loans against a thirty-three-year mortgage on the country’s customs revenues. Although Alfaro’s government agreed that the repayments were to be denominated in the local currency, the sucre, the transfers were to be made in gold. Unfortunately, Ecuador was not on the gold standard in 1897 and the prospect of a depreciating sucre with correspondingly smaller payments in gold being made was of concern to the financiers in New York. Almost certainly in response to their concerns, Alfaro took Ecuador on to the gold standard in 1898. But, along with most other countries, it suspended convertibility of paper money to gold in 1914, leaving the way open for excessive note issue.

After Alfaro’s monetary discipline, the country’s money supply, now off the gold standard, was compromised by the free issue of notes permitted to commercial banks. Based in the port of Guayaquil, Alfaro’s home town and the centre of liberal business activity, the bankers and other commercial operators usually found themselves in opposition to the conservatives of the capital Quito, dominated by the Church, the military and central government. By the 1920s, long after Alfaro’s death, six commercial banks were competing to issue ever larger volumes of banknotes. The largest among these six, the Banco Comercial y Agricola, set the pace for note issue: of all notes circulating in 1925, this one bank accounted for 50 per cent of the total, in value exceeding the legal limit geared to its gold reserve. 19 There was widespread support for drastic reform of the broken monetary system.

In 1925 a military coup seized power in Ecuador as another had done in Chile in the same year. Also echoing the situation in Chile, this coup was welcomed by both working and middle classes, the latter seeing it as a means to defusing social tensions. In the following year, the junta invited the ‘money doctor’, Edwin Kemmerer, to visit Quito on a technical mission. Engaging with the Kemmerer mission and accepting its recommendations held certain attractions for various sectors of Ecuadorian society that welcomed the military coup as a route to rapid reform of the economy and its expanded monetary supply. Supporters of the junta in particular hoped that adherence to Kemmerer’s proposals would gain US and international recognition for the military government, facilitating borrowing on the international markets. Members of the junta were also hopeful that Kemmerer would be able to find an accommodation between the commercial communities of the coast and the military and conservative interests of the interior.20

Kemmerer’s proposals for the creation of a central bank as the single note-issuing authority were warmly welcomed by the junta, the leading military members of which were, in contrast to Alfaro, not well disposed to the liberal business community centred in Guayaquil. In addition to the junta’s ardent support for Kemmerer, he was welcomed by a wide section of society, which was convinced that his reform programme would be effective in turning around the ailing economy and would consequently raise the country’s credibility in the foreign capital markets. Some of the shine was, however, to be taken off Kemmerer’s credibility to some extent when it emerged that he was in favour of the junta remaining in place to implement his reforms.

Nevertheless, when the junta handed power back to civilians in April 1926, it was to a government led by the arch-conservative Isidro Ayora, who shared their antipathy towards the banking community supporting his liberal opponents. Ayora was therefore also in favour of Kemmerer’s central bank proposals, which would at a stroke dismantle the free-banking bloc. In August of the following year the central bank began operations and Ayora took Ecuador on to the gold standard. Although the junta had by this time turned over power to the civilians, the military in Guayaquil and Quito made it quite clear that they were not prepared to brook any opposition to Kemmerer’s plans.21

While Chile had at least enjoyed a couple of years of successful exports from 1927 to 1929, Ecuador was less fortunate. The country was exporting a reasonably diversified selection of raw materials, but remained dependent on cacao as its primary export, a luxury for which the demand was already stagnating. As the Depression bit from 1929, matters got worse. Although the market for cacao was clearly in free-fall, Ayora’s government refused to accept the inevitable, clinging slavishly to Kemmerer’s gold standard prescription. Instead of reducing the proportion of reserves held against currency on issue, thereby permitting more currency to enter circulation, Ayora’s government maintained reserves (in gold convertible currencies) in excess of 70 per cent of the value of currency in circulation. Ecuador’s economic situation was so parlous that in 1930, it attracted absolutely zero direct investment from the United States, which, despite the Wall Street crash and the ensuing Depression, was still investing in other Latin American countries, albeit at a much-reduced level. The situation was untenable and in 1931 Ayora resigned and Ecuador exited the gold exchange standard. The imposition of the gold standard by military juntas in Chile and Ecuador consistent with the prevailing orthodoxy was proven by market forces to be ill-timed.22

Portugal’s Banknote Crisis of 1925 and Military Coup

As events in Chile in 1924 moved the country towards military intervention and before Ecuador experienced its own coup in the following year, a major counterfeit banknote conspiracy was being devised that would help to push Portugal towards its own military coup.

In 1924, a convicted Portuguese fraudster, Artur Alves Reis, conceived a plan to persuade the British banknote printing firm of Waterlow and Sons that he was authorised to place an order for notes of various denominations on behalf of the Bank of Portugal, to be used for the financing of projects in Portugal’s colony, Angola. Waterlow and Sons were already appointed suppliers of those notes and so held the appropriate printing plates for production of the notes. Reis’ plan rested on information made public by Francisco Leal, a former Prime Minister of Portugal, that the constraints on notes issued by the Bank of Portugal were lax and that the bank was able to issue notes neither recording the volumes concerned nor informing the government of the numbers. Having studied the operational weaknesses of the Bank of Portugal, Reis concluded that an order from Waterlow and Sons for banknotes with a face value of 300 million escudos, worth more than £3 million sterling at the exchange rates of the time, would not attract attention. He made contact with the company and presented his credentials as an authorised signatory to banknote contracts.

Rather naively failing to apply stringent checks on Reis and his spurious claims, the company accepted the order and set about producing notes of the 500 escudo denomination. In one sense, this was less of a case of counterfeiting and more a case of an unauthorised production run by the otherwise contracted printer.23

Of the banknotes ordered by Reis, notes with a value of 200 million escudos were obtained and laundered by him over the period February–December 1925 in a three-step process and the proceeds then used partly to settle old debts, but also to set up the Bank of Angola and Metropole in mid-1925. Audaciously, Reis went on to use these funds to buy shares in the Bank of Portugal, at that time a private institution. Between June and November 1925, Reis acquired 10,000 shares out of a total target of 45,000 shares, which would have given him a controlling stake in Portugal’s national bank. But the establishment of the Bank of Angola and Metropole, the mystery of the origin of Reis’ funds and his growing shareholding position at the Bank of Portugal attracted press speculation. The press coverage prompted a counterfeiting expert to carry out an analysis of some of the 500-escudo notes, proving that many of the serial numbers were duplicates.

Reis had covertly increased the money supply by nearly 6 per cent, or 0.8 per cent of GDP. One analysis concludes the inflation in prices would have been directly proportionate to the increase in money supply, although based on other cases it is difficult to infer such a directly proportionate increase in prices. Other calculations suggest to the contrary that prices in 1924–26 were falling and indeed, although the escudo: sterling exchange rate had collapsed from 18:1 to 133:1 over the period 1920–24, it had improved from 133:1 to 94:1 over the period 1924–26. The budget deficit had also improved considerably in the same period. Thus, despite the increase in currency in circulation caused by Reis’ criminal activity, there was no evidence of that reflected in further price increases or a further weakening of the escudo that threatened social stability as it had done in some Latin American countries. Nevertheless, it was one of the pretexts cited in favour of action outside the usual democratic processes.24

Reis’ plot was exposed in the press in December 1925. To some powerful interests, its revelation was one more indication among others that the republican government of President Bernardino Machado was not in control of the levers of power, even if in the past two years there had been evidence of a fall in prices. Portugal’s military taken as a whole might not have had grounds for complaint on the basis of the erosion of purchasing power of all their salaries on average across the ranks, as did Chile’s military. However, there had been a deliberate policy on the part of the republican party of awarding proportionately better pay increases to lower ranks in the military and to junior civil servants than to the generals, whose relative wealth had slipped because of the longer-term drop in the value of the escudo since 1920. It is not, then, surprising that it was the senior ranks of the military that took action. Two attempted military coups had gone awry in 1925 but in January 1926 senior army officers again began plotting to overthrow the government, and in May Machado was forced to resign by the military.25

Given that the general economic conditions had improved significantly in terms of pricing levels, exchange rates and budget deficit over the previous two years, the generals’ economic grounds for a coup would seem to have been subsiding. Did they fear that they had missed an opportunity prior to 1924 when all the macroeconomic indicators were looking irredeemably bad, and did the Reis scandal offer a welcome pretext for action, the straw that broke the back of the republican government’s reputation?

In the febrile atmosphere of the 1920s, after a decade of revolutions in Turkey, Mexico and Russia, of the overthrow of imperial dynasties and economic instability released by the collapse of the gold standard and unfamiliar levels of hyperinflation, the coup had become a common enough means of securing the transfer of power. Since 1920, coups had taken place in Iran, Greece, Italy, Spain, Bulgaria, Chile and Poland before Portugal’s own 1926 coup. Perhaps if the generals in Portugal had not found a pretext in the banknote crisis for their own coup, they would have found another, equally slender pretext. Even if the banknote crisis did not represent the single most important factor in the decision to mount the military coup, monetary problems in the form of very high inflation and salaries for senior generals were clearly important elements in the mix. Machado’s policy of awarding relatively decent pay increases to the junior members of the armed forces would seem to have avoided rebellion on the part of the rank and file that had so plagued other regimes in other eras. However, he had not covered all the bases and in ignoring the position of the generals, had simply shifted the focus of resentment to a different level of the military hierarchy.

The Invergordon Mutiny and the End of Britain’s Gold Standard

Military intervention of one sort or another might have dramatic effects on a currency system and sometimes in unforeseeable ways, even in countries that might have otherwise seemed to be paragons of monetary virtue.

Depression conditions in Britain in the late 1920s and early ’30s drove a range of cuts in public spending, including a reduction of up to 25 per cent in the pay of naval ratings, who consequently mutinied. For Britain, a country whose security for 100 years had been founded on the strength and reliability of the Royal Navy, a mutiny in the fleet at Invergordon seemed to rock the country’s very foundations at a time of severe economic difficulty. The mutiny on 16 September 1931 sparked a run on the pound. British reserves of gold and foreign exchange had declined by £200 million and, taking all government and Bank of England commitments into consideration, would have left Britain with only £5 million in reserves. The severity of the situation was clear enough. Only two days later, the Bank of England reported to the government that it was no longer able to support convertibility in the face of the run. On 21 September, the Labour government took sterling off the gold exchange rate.26

That the gold standard was the wrong basis for Britain’s monetary regime during the Depression era has long been accepted – at least at the rate of exchange to the dollar at which it was pegged. If the Invergordon event had not acted as the catalyst for a withdrawal from the gold standard, some other destabilising event no doubt would have had the same effect. What Invergordon demonstrated, however, was that mutiny by military (or in this case, naval) forces could still have a dramatic effect on a country’s monetary system even in the most developed of economies, especially if that economy was already in a fragile way.

Zimbabwe

The importance of a stable currency in securing the loyalty of the armed forces remains as true in the twenty-first century as it was in previous centuries. The second worst recorded inflation level of the past 100 years is attributed to the Zimbabwean dollar during the period 2007–08. As the Zimbabwean dollar collapsed, shops and other private sector enterprises stopped accepting the local currency and insisted on payment in the US dollar or South African rand. At the peak of the currency crisis soldiers were unable to withdraw money from their bank accounts and rioted in Harare. To contain any prospect of a full-blown mutiny within military establishments, cash was supplied from banks directly to the barracks.

Morgan Tsvangirai, the new Prime Minister in a coalition government, recognised the danger and took to paying the army with US dollars in February 2009. Although senior military officers were opposed to Tsvangirai’s inclusion in the coalition government, the payment of all ranks in US dollars had done something to secure rank and file support, making it more difficult for senior ranks to act against him.27

Payment of salaries in dollars was subsequently extended to other public sectors and, the private sector having effectively already led the way, Zimbabwe’s economy was to all intents and purposes dollarised by 2010. But, having converted to a US dollar economy, Zimbabwe now had to come to terms with a number of problems. The country was unable to grow enough food for its own needs and therefore needed to import proportionately more. In May 2016, the UN’s World Food Programme reported that Zimbabwe needed to import 1.3 million tonnes of maize out of its national demand of 1.8 million tonnes – more than two-thirds of the total requirement. This, of course, meant paying in dollars, which consequently left the country. Moreover, the access to dollars declined as the country’s GDP had declined since 2012; in one calculation the country’s economy halved between 2000 and 2016. Furthermore, as a dollar economy, Zimbabwe was always going to attract many more imports than it could export. Traders in the region wanted to sell things into Zimbabwe in return for dollar payments going in the opposite direction. World Bank figures published in 2017 covering all exports and imports indeed indicated that imports amounted to twice as much in value as exports. This trend would, of course, deplete the country’s dollar earnings.28

By the middle of 2016, the seriousness of the situation had become apparent. There were simply not enough dollars coming in and too many going out. Troops were subject to limits on the amount of cash they could withdraw from banks and paydays were deferred. Senior officers became sufficiently concerned to request banks supply cash to barracks directly to guarantee payment as they had done in 2008–09. The government was careful to ensure that troops and other security services were the first to be paid among other public sector staff. The government had no alternative but to announce the decision to issue a new form of currency, the bond note, which would, according to the plan, be exchangeable 1:1 with the US dollar. As with all such planned rescue currencies, the issuing authority promised to restrict the numbers of notes to be issued and explained that the issue would be backed by a $200 million loan facility from the Afreximbank, which is owned by the African Development Bank.

The population’s experience in 2008 of terminal inflation – inflation at such rates that the currency system is unsustainable – was so shocking and so recent that public confidence in the new bond notes started from a low point. Money changers quickly opted not to accept bond notes at the official 1:1 exchange rate with the US dollar. Digital cash payments – an alternative to physical cash – were also rejected in favour of US dollars. US $100 bills issued in 2009 and in good condition appreciated to be valued at $115. Leaked reports from the Central Intelligence Organisation warned the government that the army was as unhappy with the new currency plan as the wider population.29

It is as true in the twenty-first century as it was 2,000 years ago that governments vulnerable to direct pressure from their own armed forces will have to ensure that the money supplied to those troops is not only adequate in quantity, but also holds its value.

2

REVOLUTION

‘The surest way to destroy the capitalist system is to debauch its currency.’

Lenin (attributed to him by J.M. Keynes)

Control of the money supply in political terms was often, but not always, a part of the process of exerting authority over a state and its population. Notable exceptions include the Ottoman administration, which, over lengthy periods, permitted a very open market for foreign currency, allowing the coinage of foreign states, both good and bad in quality, to circulate in Ottoman lands. Similarly free circulation of foreign coinage could be seen in countries where the internal stability and authority of the state was under extreme duress, France during the Hundred Years War being a clear example.

Challenges to the monarch’s prerogative over the issue of money had already emerged in some northern European states during the seventeenth century. In England, the king’s authority over the national currency had been challenged since the reign of Charles I (1625–49). In the commonwealth of Poland, where a constitutional monarchy with strict checks on the power of an elected king operated, authority over currency passed during the reign of King Ladislaus IV Vasa (1632–48) to the government of the commonwealth dominated by the nobility. In Sweden, the creation of the world’s first central bank in 1668 followed the collapse of Stockholms Banco, a private bank that had performed de facto the role of national banknote issuer. The oversight of the new central bank was transferred to the Swedish parliament and away from the king, Charles XI, who was seen to have been too closely involved with the failed Stockholms Banco. Thus, in significant parts of northern Europe, royal authority over the issue of money had been challenged or curtailed in the seventeenth century. In France, royal authority over currency remained unchallenged for a further century or more until the very institution of monarchy itself was overthrown.1

And in the process of an entire system of government being overthrown and replaced by a new social order, there can be dramatic consequences for monetary stability, although, in the case of relatively peaceful, rapidly executed revolution, the damage can be contained: a good example being England’s Glorious Revolution of 1688.

The Continentals – A Revolutionary Currency

Money supply in the American colonies became one of a number of issues that drove the colonists to their ultimately successful confrontation with the British government. In the early years of their existence, the colonies had got by with a range of commodities, foreign coins and paper substitutes to supply the demand for money. At one end of the scale, commodities such as tobacco and maize were used as media of exchange – only half a step away from barter. Credit notes for tobacco stored in warehouses were adopted as legal tender by the authorities in Virginia. Coinage from the mother country, but also from Spain and Portugal and their South American colonies, and sometimes locally produced paper money, were all acceptable in one colony or another, although as media of exchange, their value would ultimately be converted into pounds, shillings and pence as units of account. No fewer than seventeen different forms of money were pronounced legal tender in the colony of North Carolina in 1715.2

Much of the coinage circulating in the English colonies originated in Mexico and South America, with which the colonies had a trade surplus. However, regulations imposed on the colonies by the mother country, England, restricted the trade with the Spanish colonies, closing off one of the few means of earning specie. Other means of improving the money supply were sought. Various states of north America had tried to produce their own currency in the early years; as early as 1650, Massachusetts had produced the pine tree shilling to supply the shortage of currency from England, even though minting in the colonies was forbidden at the time. Paper bills of credit were produced, again in Massachusetts, as early as 1690 to make up for the shortfall of coinage during preparations for a military campaign in Canada.3 Massachusetts’ repeated use of bills of credit – which the House of Assembly decreed would be legal tender – provoked the home government in England to introduce new regulations in 1727, requiring the governors of the colonies to reduce dramatically the amount of paper money in circulation.