Tuesday, November 15, 2011

The Elixir of Commerce

McCulloch, J. R. (John Ramsay). Outlines of political economy : being a republication of the article upon that subject contained in the Edinburgh Supplement to the Encyclopedia Britannica : together with notes explanatory and critical, and a summary of the science / by John M'Vickar. New-York, 1825. The Making Of The Modern World. Web. 15 Nov. 2011.

Rasbotham, Dorning. Thoughts on the Use of Machines in the Cotton Manufacture. Addressed to the working people in that manufacture, and to the poor in general. Manchester. 1780. The Making Of The Modern World. Web. 15 Nov. 2011.

Wennerlind, Carl. "Credit-Money as the Philosopher's Stone: Alchemy and the Coinage Problem in Seventeenth-Century England." History of Political Economy, Volume 35, Annual Supplement, 2003, pp. 234-261.

Dorning Rasbotham's pamphlet evoked the image of alchemical transmutation. That was the inspiration for the working title for this serial posting, The Moral Philosophers' Stone. That notion of alchemy has led me to two additional sources ; a footnote by the American editor of M'Culloch's Outlines of Political Economy, John M'Vickar and the article by Wennerlind. M'Vickar's footnote shares Rasbotham's unrestrained enthusiasm for commerce but makes explicit the allusion to alchemy:

Commerce appears under a new character, it becomes a species of manufacture, which consuming reproductively the surplus of the annual yield of the country, reproduces it under a new and more valuable form, -- by a new kind of alchemy it converts wheat into gold and cotton into silk, or into whatsoever other metal or material, or form, the dealers at this new manufacturing mill may choose to require.
Wennerlind's article brings it all together. The impression given by Rasbotham's pamphlet and the analogy evoked by M'Vickar are not mere figures of speech. They are embedded in a relatively recent historical transition from attempts by rulers to expand the supply of money through alchemy to success in expanding the money supply by issuing credit money.
The alchemical understanding of the nature-universe relationship and man’s role therein was an important stage in the development of the modern scientific tradition. Charles Webster (1982, 58) points out that the neo-Platonists played an important role in transcending fatalism and investing humans with the capacity to alter and manipulate the nature universe relationship for their own benefit. Within this framework, the understanding of the natural and cosmic forces “could be turned to operative effect, opening up for man the possibility of achieving by natural means what had hitherto been regarded as miraculous. . . .All of this was to be attained by the skillful assistance, imitation, or direction of nature.”
In addition to its important contribution as a catalyst to scientific discovery and experimentation, the aid of alchemy was sought by statesmen to address deflationary economic problems caused by a shortage of money. Although alchemy itself disappointed those hopes, the ends alchemists and their patrons sought, if not their means, were embedded in the eventual solution of credit money. Thus alchemy was more than just some occult superstition, it was also a spur to action that proved effectual. Wennerlind's account of the abrupt transition from efforts to create gold through alchemy to the use of credit-money is eye-opening and his speculation about the way "the alchemical tradition conditioned the way early credit-money proposals were viewed and discussed" is provocative. I am presenting a long excerpt here to emphasize both the extent of alchemical efforts and the abruptness of abandonment of the efforts. Also of interest is the concise technical discussion of the economic role of monetary expansion.
While serious financial strains affected most emerging nation-states in seventeenth-century Europe, England was particularly hard hit. In the 1620s an outflow of money and a rapid decline in England’s traditional export trades exacerbated an already precarious fiscal situation. Numerous attempts were made to ameliorate the fiscal and economic problems, but all measures proved inadequate. Reduced flows of gold and silver from the Americas, coupled with the rapid falloff in output from central European silver mines kept coin scarce, while debasements, though sporadically used on the Continent, had been effectively eliminated as an option in England by the failure of the Great Tudor Debasement of 1544–51.

Desperate for a solution to the economic and fiscal crisis, European rulers looked to alchemy as an alternative to debasement; in fact, most of the European courts patronized alchemists throughout the seventeenth century. While the reasons for coveting the magic tincture were many— agricultural improvements, medicines, perfumes, and so forth—the idea of turning base metals into gold and thus gaining the ability to relieve the pressure on the state’s finances and revive commerce was a strong incentive. … In Britain, the support of alchemists dates back at least to the reign of Edward IV (1461–83), who was the dedicatee of one of the period’s most famous alchemical tracts by George Ripley. Edward VI (1547–53) and Elizabeth I (1558– 1603) continued the support of alchemists, the latter by patronizing John Dee, who contributed greatly to the spread of alchemical studies in England. Dee’s successor, Kenelm Digby, gained the support of James I (1603–25) and Charles I (1625–49). James II (1685–88) and Charles II (1660–85) not only patronized alchemists, but were also known to have personally pursued alchemical experiments, the latter building a clandestine alchemical lab under his bedroom with exclusive access via a private staircase.

Although the efforts to find the philosopher’s stone were mostly unsuccessful [the "mostly" is deadpan, in a footnote Wennerlind cites claims of witnessing transmutation by otherwise credible sources], regents continued to patronize alchemists until the end of the seventeenth century and, in France, even beyond that time. Royal support thereafter declined, even though some leading scientists such as Isaac Newton and Robert Boyle continued to believe in the possibility of transmutation. I will argue that the loss of interest by crowned heads was due in part to the emergence of plausible credit-money schemes. Credit-money is paper secured by an asset such as land or, as in the case of the Bank of England, designated tax and customs receipts. Previous credit instruments, such as bills of exchange and promissory notes, had served as means of exchange, which meant that they mediated transactions, but a subsequent transaction was required to clear the credit extended. These instruments required a great deal of trust and confidence to be functional, and therefore they could only circulate within close-knit groups, such as a merchant community. Credit-money, on the other hand, served as means of payment and had the capacity to circulate widely. These paper notes were wholly or partially convertible into assets or income streams designated as security. As such, they could fully complete a transaction and serve as a store of value, and not just as a temporary credit. Nevertheless, even though credit-money was backed by a security, uncertainties remained. For example, promised tax streams might be diverted, or, as in John Law’s scheme, the public’s notion of the value of the security might become unrealistically high (or low). Although suggestions for a public bank and credit-money began circulating in England as early as the 1650s, it was not until the 1690s, during the financial revolution, that the first developed system of credit-money became operational. This system was based on the idea that the newly formed Bank of England would take over state debt on advantageous terms and issue new notes against promised interest payments from parliament. The scheme was limited but worked well—a success, I suggest, that may go far toward accounting for the rapid decline in the support for alchemy in European courts. This transition from alchemy to credit was swift and complete, perhaps nowhere more dramatically evidenced than in the Duke of Orleans’s dismissal of his court alchemists in favor of John Law’s land-backed paper currency.

What we observe here might be interpreted as a temporal displacement: paper money superseded the search for alchemical gold. Whether this was a necessary switch is not my concern here. What I do wish to explore is whether the alchemical tradition conditioned the way early credit-money proposals were viewed and discussed.
In his conclusion, Wennerlind writes,
The promise of alchemy appealed to many of the period’s political economists, who theorized that an increase in the money stock would translate into expanded commerce and thus provide a solution to the underemployment problem. On direct or indirect advice from these political economists, most European regents continued their patronage of alchemists. However, as the practice of transmutation proved insurmountably difficult, an interest developed in credit-money as an alternative method of expanding the money stock.... In the 1690s, the Bank of England finally engineered a system of credit-money. The success of this system coincided with (or caused) a rapid decline in royal support for alchemy, elevating credit-money to the status of sole tried and reasonably successful mechanism for the expansion of the money stock. Hence, while the prospect of expanding the money stock at will might have been conceived initially in alchemical terms, it only materialized in the form of credit-money.
The analogy of alchemy that M'Vickar presented over a century later, "by a new kind of alchemy it [commerce] converts wheat into gold and cotton into silk, or into whatsoever other metal or material, or form..." is thus not an innocent one, although M'Vickar was most likely unaware of how invested the system of commerce and credit-money was in the conceptual framework left behind by the arcane and archaic tradition. If he had been aware, he probably would have avoided the analogy!

to be continued...

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