Isaac Newton, failed central banker

This book must become a required-read for all heads of central banks, and a qualifying-read for new appointees to the job. Reason: it shows how even Isaac Newton failed to manipulate exchange rates and, in fact, went horribly wrong when he tried to do so.

It must also be a required-read for economists because it will show them""once and for all, I hope""that they are not physicists and that volatility is not a post-Bretton Woods phenomenon.

Indeed, everyone should read it because it has extraordinary nuggets for all. Gold has spawned a million stories, and about a 100th of them are told in this book. Above all, though, it should be read because it is well written. The book isn't easily available in India, which""considering how much gold this country imports, about $8 billion worth at last count""is very silly of the publishers.

Here I can only tell you about Newton the Economist or, if that sounds very disrespectful, Newton the Central Banker. The story begins in the last decade of the 17th century.

England, Bernstein says, has a cunning way of labelling its various nastinesses as "Great"""Great Remonstrance, Great Rebellion, Great Plague, Great Indian Mutiny, Great War etcetera. So when, finally, in 1694, it was forced to do something about its debased coins, it called the process, with great originality, the Great Recoinage.

The idea was to restore the weight of the coins to what had been officially announced. It took three years from 1694 to 1697. In the process, however, the economy had been laid low, the poor had become poorer, and the rich had become richer. It was par for the course.

In 1696, Sir Isaac Newton, tired of apples and calculus and itching for a government post, was offered the job of the Warden of the Mint. The salary was augmented by a small royalty on every ounce""mind, ounce""of gold and silver issued by the mint. Imagine central bank governors getting something like that on currency issued.

Newton accepted the offer but""he was human after all, remember""he chose to ignore the difference between economics and physics. Mostly, he ignored the inconvenient fact that, unlike in physics, where humans play no role other than to measure the variables, in economics humans not only create the variables, they also do things that determine their values.

It was not a particularly serious job, but Newton took it very seriously. So seriously, in fact, that he decided he would do something about the persistent import of gold into England and the equally persistent outflow of silver, which was the basic coinage of the country.

Before doing that, however, he armed himself with economics, which didn't take long. He also became an expert on currency systems. And he did what in modern parlance would be called "field work"""by frequenting brothels and gin houses, which was where currency debasers could be found. He even "carried out interrogations and attended hangings" and in a very British way "always keeping detailed accounts of everything".

Finally, after three years of preparation, he was ready. He did his calculations, painstakingly, and came out with this, says Bernstein: "The demand for silver for export 'hath raised the Price of exportable silver about 2d or 3d above that of Silver in Coin, and hath thereby created a Temptation to export of Melt down silver coin rather than give 2d or 3d more for foreign silver."

So what was to be done? "There seems nothing more requisite than to take off about 10d or 12d from the Guinea so that Gold may bear the same Proportion to the Silver Money in England..." as it did in Europe. That, eventually""very eventually, in fact, in 1717""was what was done.

"If things be let alone", wrote Newton referring to market forces, "...gold will fall of it self...And so the Question is, Whether Gold shall be lowered by the Government, or let alone 'till it falls of it self, by the Want of Silver Money'." But, alas, exactly the opposite happened. Gold did not decline. Silver went up. And thus, by remaining rock steady, gold became the standard. I rather think it might become the standard again. So does Robert Mundell, the "Nobel" laureate.

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THE POWER OF GOLD: THE HISTORY OF AN OBSESSION

Peter L Bernstein
Wiley & Sons
Pages: 432