Tuesday, September 20, 2011

And More Again . . .

Looking at the common sense of William Thornton's proposal to deal with the Great Famine in Ireland from 1848 to 1852, we have a hard time trying to understand why the British government completely ignored it. The only thing we can figure out is that, as with many otherwise feasible plans, it came to grief over the financing.

The fact is that if private individuals or, especially, the government have inadequate or flawed ideas about money, credit, banking and finance, serious economic problems are going to crop up, just as they have in our day. Money, like the State itself, is a very powerful social tool. A well-regulated and sound financial system is invaluable for a just social order.

Unfortunately, when the financial system is not well-regulated, or the principles on which the system is based are not sound, then disaster is never but a short step away. Fortunately, getting a grasp of sound principle isn't too difficult, if we don't allow ourselves to be blinded by the mistakes and preconceptions of the past.

Even more fortunately, anyone who can understand the convolutions of 19th century Irish politics that provided the context of Thornton's proposal should have little or no trouble with the theory of "pure credit." This is not surprising. The modern struggle between economic development based on what Louis Kelso and Mortimer Adler called the slavery of past savings, and that based on pure credit and "future savings," is the direct result of something related to the event that set the tone for relations between Great Britain and Ireland for the whole of the 19th century.

The story is almost comic in an ironic fashion. In 1797 the news that the French had landed an invasion force in Wales swept through England. This was an event that came to be known as "the last invasion of England."

As invasions go, it wasn't much. Four French warships carrying 1,400 men landed at Carregwastad Head near Fishguard on February 22. This was supposed to be coordinated with Theobald Wolfe Tone's planned rising in Ireland.

Originally intended as a diversion, on February 23 the French force got drunk on some looted casks of wine, fought a few engagements with local militia and one of the local housewives — no, really! — got drunker, and surrendered on February 24. The British captured two of the French vessels, a frigate and a corvette (a vessel smaller than a frigate), and the other two French warships returned home. After waiting for additional French aid, the Irish rose in 1798, the "Wexford Rebellion."

Word of the "invasion" spread through Wales and England, panic hard on its heels. People rushed to their banks to withdraw all their funds in gold. Reserves got so low that Sir William Pitt's government permitted (or ordered, depending on your source) the Bank of England temporarily to suspend convertibility of its banknotes into gold. This temporary measure lasted for more than two decades. Convertibility of the paper pound into gold was not restored until 1821.

Trying to figure out why England didn't immediately go into a financial meltdown when the paper currency wasn't convertible into gold was productive of a knockdown, drag-out political and economic fight for the next half century. This was between people who thought that money consists of coin and State-issued banknotes, and people who thought that money is anything that you can use to settle a debt. What we need to understand the situation — and William Thornton's financing proposal — is the theory of pure credit, and some economic history.

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