Forex Blog | Gold & Economic Theory

Forex Blog | Gold & Economic Theory

In our Forex Blog, we have only briefly touched upon gold, and the role in the forex market today. Now we will look at what famous economists thought of gold or “specie”. Ever wonder how gold was looked at from a historical economic perspective? This would be another forex blog post that helps users understand the history of the forex market.

I’m going to preface this article with a warning that this article might be a bit hard to read. It will contain many economic definitions, however I am going to post this regardless. Usually our forex blog will NOT look like this, but I believe this post has validity.

Throughout history, different camps of economic thinkers have had their ideas of “specie”, or more commonly known as gold. Although specie is not talked about as widely in forex blog articles now, during the time of the mercantilists, it was a widely discussed topic.

One of the mercantilists’ thoughts about specie was that gold accumulation meant wealth and national power. They believed very highly to have a trade surplus. They even implemented policies to prevent specie outflow. They also believed that money supply (in the form of specie) was key to national growth and power. This idea will go hand and hand with other forex blog posts.

However, the physiocrats had a different view. The physiocrats were considered the first school of thought as a reaction to the French mercantalists. Contrary to the mercantalists, the physiocrats thought that wealth is not the measure of gold, but instead it is measured by the total stock of consumable goods produced by labor.

Petty, a pre-Smithian thinker believed that specie was only a very small percentage of wealth. It was so small that he considered it to be less than 1%.

Richard Cantillion, was a successful banker and speculator in commodities while living in France. Cantillion has been praised as being one of the first economists and his views are considered to be a building block for classical and neoclassical thoughts. Cantillion, probably one of the most cited economists when talking about specie was the one that first coined an early version of the specie flow mechanism. Cantillon wrote his Essai, during the 1730s in which there was a setup for the thoughts that Hume later elaborated on when talking about specie flow mechanism. In his book, Cantillion wrote: The goods and manufactures will in the long run cost so much that Foreigner will gradually cease to buy them, and will accustom himself to get them cheaper elsewhere, and this will by imperceptible degrees ruin the work and manufactures of the State.

The same cause which will raise the rents of Landlords (which is the abundance of money) will draw them into the habit of importing many articles from foreign countries where they can be had cheap”(The Labour theory of value, Peter C. Dooey p.69). Cantillon’s piece was published three years before Hume’s essay came out talking about the specie flow mechanism. Although Hume’s essay came out first, it was said that Cantillon started writing his Essai before Hume started writing. Thus there is some speculation that Hume had stolen some of Cantillon’s thoughts.

Even with this speculation Cantillon and Hume are not completely similar. “Hume demonstrated that policies which produce a favorable balance of trade and increase the stock of gold in which a country would be self-defeating, because the resulting inflation would generate an unfavourable balance of trade and gold outflow; whereas Cantillon advocated restriction on trade to build up the monetary gold stock, because ‘it is always true that when the State is in actual possession of a Balance of Trade and abundant money seems powerful, and it is so in reality so long as this abundance continues’”(The labor value theory of money p.70).

Understand? Yes I know, that was probably like reading a different language. However, our forex blog tries to cover every detail about the forex market.

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