Why so many banknotes?

In his book, The End of Alchemy, Mervyn King, the ex-Governor of the Bank of England, wrote:

“For centuries, alchemy has been the basis of our system of money and banking. Governments pretended that paper money could be turned into gold even when there was more of the former than the latter.”

Unfortunately, in his otherwise excellent book, even the ex-Governor can’t tell the gold story entirely correctly. There was only supposedly more paper money than gold because the value of the gold was held down rigidly during the latter half of the 19th century when the gold standard operated. There was no conspiracy to hold the price of gold down. England simply kept to the value of gold as originally laid down in 1717 by Sir Isaac Newton during his time as Warden of the Royal Mint (as a reward for what he’d done for science). There was, in fact, no world gold-pound exchange — as there is now — by which the value could be changed.

If there had been, then, despite large new gold discoveries in California (1840s), South Africa (1850s) and Australia (1860s) gold would have been valued several times higher than it was (almost £4 an ounce), such were the stupendous profits being made all through the 19th century — and thus stupendous quantities of paper money needing to be circulated as cash by a rapidly prospering population.

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