The Politics of Liberal Financial Governance and the Gold Standard

Abstract

This article challenges the way liberal economic governance has come to be theorised as a passive and depoliticised form of governance. Using the classic case of the gold standard, it shows how state intervention came to be shaped by considerations of state power and diverged considerably from the traditional emphasis on free markets and stable conditions of investments. As I argue, the gold standard was constructed through political struggles over monetary governance which involved significant constraints for capitalist investors. Its institutions helped establish a new structure for exerting control over finance. By resituating the gold standard in a broader historical perspective, I show how nineteenth-century monetary governance, far from leading to a retreat of the state, established in fact the foundations of a new form of state intervention: modern central banking.

Keywords:

• monetary governance
• Britain
• gold standard
• finance
• liberal state

Notes

For some authors, this shift to monometallism had inherent advantages (Redish 1990). When only one metal is used as a standard, there is less scope for arbitrage between the different metals. The monetary standard can then be more easily secured. However, such a view illustrates the problem of a conception of governance understood in terms of regulation. For state officials, the issue was not the abstract considerations of ensuring the ‘best conditions’ for the economy, but the more pragmatic one of exerting influence upon it. From this perspective, bimetallism was a relatively useful framework, despite its instability, precisely because of the leverage it provided for states to influence the movement of currency by playing on the ratio of gold to silver.

Similar assumptions can be found in the work of more critical institutionalists such as Karl Polanyi or Peter Cain and John Hopkins who accept the idea that the gold standard was intended as a means to commodify money and stabilise its value in the interest of finance (Polanyi 1957, 132; Cain and Hopkins 2001, 142).

Another form in which this argument has been made is the idea that the gold standard was a means to deal with the problem of time inconsistency by setting up credible institution to reassure market actors that the state would not deviate from its policy commitments to monetary stability (see Bordo and Rockoff 1996, 389). This idea has also been developed from a constructivists perspective by Rodney Bruce Hall (see Hall 2008).

The notion of credibility is even evoked, at times, in order to explain state strategies which should in fact scare capitalists away and undermine credibility. For example, the unprecedented credibility enjoyed by the Bank of England has been used as an argument to explain the successful suspension of the gold standard between 1797 and 1821 (Bordo and White 1993). But why, one might ask, did this long suspension not undermine the very credibility that is invoked here to explain this feat?

Many authors have used this paradox to develop original and thought provoking arguments about liberal financial governance. Steven Vogel, for example, shows that market regulation was necessary for the development of market competition, rather than liberalisation per se (1997). These arguments have been important in showing the role of the state, but have generally failed to challenge what we assume to be at stake in the construction of liberal financial governance. Vogel, for example, continues to see competition as the main objective of reregulation under neoliberalism.

This technique consisted in issuing banknotes through the practice of discounting bills of exchange. Hence instead of handing out coins to discount bills, goldsmiths discounted them by handing out their own banknotes, which could be redeemed back into gold after a certain amount of time. This allowed goldsmiths to cash in their discounted bills before they had to redeem their own banknotes.

The date used for the adoption of the gold standard varies depending on whether people emphasise the demonetisation of silver (1816), the adoption of the plan for the resumption of the gold standard (1819) or the actual implementation of the gold standard (1821).

It is important to highlight that their competitive relationship with the Bank of England distinguished them from the majority of financiers who generally resisted the return to the gold standard. Country bankers, for example, also issued banknotes, being outside of the privileged area of the Bank of England, and predictably fought against the gold standard. See Moss 1981. Similarly, Lancashire bankers also mostly opposed a return to convertibility, although for a different reason. They did not issue banknotes and thus were not directly affected by convertibility. However, by contrast to London bankers, they did not compete directly with the Bank of England, which did not operate in Lancashire at the time. Rather, they benefited from competition in the London discounting market where they rediscounted bills of exchange. Hence, they also opposed a return to the gold standard. Finally, many merchant bankers from the City were close to the Bank of England and thus also ambivalent towards the gold standard. Often involved in international trade and monetary arbitrage, rather than discounting, they did business with the Bank without competing with it.

This position was articulated by the currency school which emerged in the late 1830s and whose proponents were closely tied to parliament and public service.