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A Few Lessons from the Dawning of the Modern Age

Published by Tavex in category Financial news on 15.05.2017
Gold price (XAU-EUR)
1703,00 EUR/oz
  
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Silver price (XAG-EUR)
21,39 EUR/oz
  
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Yavor Aleksiev, Institute for Market Economics | Gold Newspaper No. 6 | 2017

The Industrial Revolution was a pronouncedly Eurocentric period of world history, yet it laid the foundations for the entire modern world. The raging social, economic, and financial revolutions in European countries had worldwide repercussions and offer important lessons about the contemporary European Union, the mechanization and digitalization of production, and last but not least, financial speculation. It is on these three aspects that we will focus here.

Banking began to proliferate at the end of the 18th century, which fact some commentators even consider to be at the foundation of the Industrial Revolution. Still, social and economic progress was accompanied by a series of economic and financial cataclysms. These include, for instance, the Panic of 1819 in the USA and the post-Napoleonic depression following the Napoleonic Wars. The dynamics of these crises demonstrate the growing global interconnection between economics and finance, as well as the rise in the importance of financial markets.

Newly-conceived “machine-made products” cast doubt upon the continued well-being of certain professions and were thus in many places met with fierce opposition, eventually resulting in the establishment of labor unions. Here, we encounter the British Luddite movement, whose followers — craftsmen, laborers (primarily in the textile industry), and farmers — fought against the mechanization of labor via sabotage: breaking and destroying machinery. The movement gradually waned in the 1820s after Parliament adopted a series of measures against it, including executions and forced emigration to Australia.

Frederic Bastiat remains to this day probably the most fervent critic of these social sentiments. In 1844, he published Economic Sophisms, a book containing his famous satirical essay, ”Candlemakers’ Petition.” In the form of an open letter to the French Parliament and as ”representative” of all candlestick makers, Bastiat pleads for the support of the legislators against a ruthless and unfair competitor — the Sun. Among other regulations (including market restrictions on the import of oranges from sunny Portugal), Bastiat calls for legislation that would require people to shut up all their windows and skylights in their homes to ensure the use of the candlestick makers’ products during the day. This law would help support the suffering industry and create more jobs.

In spite of the above-mentioned islands of resistance, this period of industrialization and innovations in production in world history is characterized by increased economic freedom, both within individual states and on an international level.

Similar negative sentiments can also be encountered nowadays, whether opposition to introducing new services (such as ȔBER) or ideas for further taxation on capital with the purpose of slowing down the modernization of existing production. The result is always a halt or a delay in the natural process of deflation due to increased productivity. This anti-deflationary process ultimately leads to more expensive services for consumers for the sake of saving jobs and/or maintaining certain interest groups’ pay levels.

In the 1860s, a series of trade agreements between the leading industrial nations were concluded, leading to considerable liberalization in international trade. This development was further enhanced by the establishment of monetary unions, such as the Latin Monetary Union (LMU) between France, Belgium, Switzerland, and Italy, which somewhat facilitated the exchange of currencies and goods. In 1868, Greece was also admitted to the Union, while counties such as Bulgaria, Romania, and Serbia were never formally admitted, though they had applied for membership before its collapse. The LMU also happens to be the precise prototype of the E.U. institutional order that we observe today. It is the first time that we have encountered notions such as ”the European Union,” ”the European Commission,” and ”the European Parliament,” as well as an attempt to introduce a common currency — ”the Euro.”

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The main reason for the LMU’s decline lies in its very inception, namely the adoption of a common and, crucially, fixed exchange rate between gold and silver. The decrease in the international value of silver (resulting from the discovery of new deposits and the improvement of extraction techniques) led to the overvaluing of silver coins within the Union and, eventually, caused the de facto transition to a purely gold standard in 1878.

Another reason for the decline of the Latin Monetary Union was the failure to completely abolish banknote printing, as well as the attempts of certain countries (especially Greece) to reduce the gold content in gold coins. Due to this practice of gold coin devaluation, implemented as a response to its failing economy, Greece was temporarily expelled from the Union in 1908, but was later re-admitted. Despite their institutional differences, the Latin Monetary Union and the Eurozone actually share many similarities, such as the reluctance of governments to abide by the common rules and the lack of sufficient instruments to prevent such practices.

We cannot discuss the 19th century without mentioning Gregor MacGregor, a Scottish soldier who (however) did not go down in history for his military achievements, but for being one of the greatest tricksters of all time. His case is part of a larger trend — namely, the growing appetite for financial speculation resulting from the growth of the finance industry and the increasing ease of access to relatively cheap credit (at the time) in England at the beginning of the century. Many analysts attribute this development to the suspension of the gold standard in England in 1797 in order to finance the country’s military campaigns more easily.

In 1821 and throughout the following years, Gregor MacGregor launched a massive campaign which involved press releases, the publishing of a book, and even the composition and performing of songs, all related to and about “Poyais” — a fictional state under his rule. This trickster managed to persuade hundreds of investors to purchase government bonds and land from this non-existent state, thus accumulating a great fortune. However, the story does not end here. On the 10th of September, 1822, a ship of ”settlers” launched from London and was soon followed by others, all of which were personally seen off at the docks by MacGregor. After reaching the “promised land” and spending considerable time waiting to be welcomed and accommodated by the Poyais authorities, the settlers soon realized they had been abandoned in Honduran jungles, impenetrable even to this day. Although nearly half of them eventually died and despite the testimonies of those who managed to return, MacGregor managed to evade the long arm of the law. Thus, MacGregor continued to pull his scams throughout the following decade (including in France) and, at the end of his life, settled in Venezuela, where he was given a military funeral in 1848, due to his participation in the country’s war of independence at the beginning of the century.

The temptation to make easy money continues to take its toll today. Apt examples include the so-called “pyramid schemes,” which rely upon the involvement of increasing numbers of people. In most cases, the delusion of fast, easy, and secure enrichment is a result of information asymmetry — the main tool used by MacGregor in his scams. In the age of the Internet, a similar role is played by the glut of information, which puts to question the ability of users to ”separate the wheat from the chaff.”

Many of the valuable lessons of the 19th century remain to be learned today. Although proven futile time and time again, the struggle against new technologies continues to trip up social and economic development. Protectionism is becoming a more appetizing platform for power-hungry populists, and Greece continues to “poison” the dream of a common European currency. In spite of the digital revolution (or just possibly because of it), information asymmetry continues to take its toll, while the dream of easy money is now more alive than ever before.

Gold price (XAU-EUR)
1703,00 EUR/oz
  
+ 8,65 EUR
Silver price (XAG-EUR)
21,39 EUR/oz
  
+ 0,82 EUR

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