May

17

 Friedrich Hayek always said that he was a "Burkean Whig". Since England was always the place where he felt most at home, it is not surprising that he would have looked to late 18th century English politics for his model of liberty. But, he might have had greater success in finding successful advocates for his ideas about money and commerce if he had looked across the pond.

When the Constitutional Convention took up the question of legal tender, the initial draft carried over the language from the Articles of Confederation: "the legislature of the United States shall have the power to borrow money and emit bills of credit." Hayek's intellectual forefathers would have none of it. They gave the Congress the Power to "borrow Money on the Credit of the United States" and "To coin Money, regulate the Value thereof, and of foreign Coin" and "To Provide for the Punishment of counterfeiting the Securities and current coin of the United States".

This was a political argument that Hamilton had no trouble winning. The delegates took it as self-evident that "to emit an unfunded paper as the sign of value ought not to continue a formal part of the Constitution, nor ever hereafter to be employed; being, in its nature, repugnant with abuses and liable to be made the engine of imposition and fraud." (Alexander Hamilton)

Washington, as always, had the final word on the subject: "We may become a great commercial and flourishing nation. But, if in the pursuit of the means we should unfortunately stumble again on unfunded paper money or any similar species of fraud, we shall assuredly give a fatal stab to our national credit in its infancy.

Easan Katir writes:

This past month I studied "Capital & Finance in the Age of the Renaissance" [translated] in 1928, to understand how the end game might work when governments spend beyond their means. In the 1500s kings and princes overspent to fight wars, and borrowed from the wealthy to pay the soldiers, who otherwise survived through loot and pillage. In the 2000s the governments overspent to fight wars (including war on terror, war on drugs, war on poverty) and borrowed from wealthy nations. During the Renaissance, the wiser creditors insisted on collateral for their loans governments, and thus eventually foreclosed on pledged Spanish copper and Tyrolean silver mines. Even with collateral, they had trouble collecting, and would frequently advance new loans in return for receiving partial payment on previous notes.Executive Summary: back then, in the short-term, the creditors did well (for about 50 years ), in the long term (200 yrs), it ended badly for the creditors when they slipped up and lent money to governments without collateral, which of course, defaulted.

Alex Castaldo comments:

Ehrenberg's book Capital and Finance in the Age of the Renaissance: A Study of the Fuggers and their Connections  was a favorite reading assignment from the late economic historian Ch. Kindleberger.  He even provided a capsule summary:

"This classic study of the Fugger bank in Augsburg in the 16th century focuses on war and money. Money is needed to buy soldiers, but with soldiers one can acquire money. The Fuggers were involved with Venice, Austria, the Holy Roman Empire, the financial markets of Lyons, Bruges and Antwerp, and through them, with the Spanish crown, which proved their undoing. The financial center of Europe was moving northward from Lucca, Florence and Venice (Genoa, a rival of the Fuggers for the Spanish treasure that was overdue in payment for loans when it reached Seville, hung on longer). The period was one of struggling capital markets. The mistake that brought down the Fuggers, and many a bank before and since, was lending too much to kings on inadequate security".

Stephen Jovanovich adds:

As much as I appreciate the patron saint of those of us in the finance bleachers for having the wit to say he studied economic history because he could not "hack the math" of plain economics, Professor Kindleberger did have his blind spots. He was, inevitably, a devoted member of the "where have all the flowers gone" Pete Seeger school of military history. The Fuggers were "involved in Venice" because they, like everyone else in Germany, went there to learn the new Italian science of double-entry bookkeeping. The soldiery that needed money - and ultimately bankrupted Philip II - were not the ones who discovered, collected and shipped the treasure of the Indies and the Americas to Spain; they paid for themselves a hundred times over. The military extravagances that doomed Philip II were the ones made not for profit but for faith - against the Dutch for their stubborn Protestantism and against the bastard Queen Elizabeth for her persistence in the Anglican heresy. The bit about "inadequate security" is actually funny; as Hayek kept reminding the members of the German history school and their Keynesian and Marxist successors, the state NEVER keeps its promises. It is the monopoly that is above all law and, as Philip II devoutly reminded all his petitioners, the sovereign's pledges can only be made good by God. 


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