A reader has written to me today asking me to explain what I meant by personal cheques being “non-currency money” in my gold standard posting of yesterday. When bank-printed personal chequebooks first began to be used in the 1870s each cheque could, instead of being paid into someone’s bank account, be used again. All that a recipient had to do was to countersign the cheque on the back and use it again when paying someone else. Thus, although the cheque wasn’t currency it was, if counter-signed, acting as additional money in the system.
From the amount of space available on the back of a cheque it could be used at least twenty times. Thus a personal cheque for £10 could be successively used. taking the place of £200 of banknotes that would otherwise have been needed. However, a little reflection will inform you that the personal cheque system could have been used for a ‘black economy’. In due course, large numbers of transactions could be carried out between thousands of people without the knowledge of the bank or — much more importantly — the government’s tax system. This is why, about 50 years ago, countersigning was stopped and personal cheques became one-stop conveniences.
Thus, from the 1870s, although a gold standard was supposed to be in existence, personal cheques meant that considerable inflation was actually going on. It didn’t so much reveal itself as higher prices of goods in the shops — as it would today — but as much higher wages in the factories and fully absorbed in spending. For the first time in a hundred years, workers were able to start spending on the increasing variety of consumer goods appearing the shops as well as being able to enjoy themselves on holidays or paying to to watch soccer matches
During the First Great Depression (1873 to 1896), when much new industrial investment was failing due to lack of sound money, there was hardly any subsequent unemployment and the working classes in the textile, coalmining, shipbuilding and railway industries hardly noticed
If, however, someone with banknotes wanted to cash them at the bank for gold coins, the banks could usually do so quite comfortably because a good bank during that period would have least 20% of gold reserves. In Germany and America at that time — our main competitors — there were many times more banknotes than coins, far more than there were gold reserves in their banks. The so-called ‘gold standard’ was never strictly so, only partially effective.
Thus although we’ve had a currency standard ever since 1717 when Sir Isaac Newton fixed it, and a gold standard legally defined in the 1844 Banking Act, it has never come about that every single English banknote was fully covered by 1/3.83rd of an ounce of gold either in a high street bank or at the Bank of England. The Gold Standard was never fully brought into existence, only an approximation to it.
If the Chinese ever bring about a free digital yuan for use as a world trading currency, then they will certainly make sure that every single one will be covered permanently by a definite fraction of a gold yuan coin or of an ingot in the vault of its central bank. This is what the Americans were not able to do in 1972, thus allowing the dollar to inflate out of all sense and causing massive lop-sidedness between surplus countries and deficit countries. This is now producing an impasse which seems insoluble.