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Foreign trade ends up being cleared through international money – a currency that the world accepts as final payment, even in places where it is not legal tender. Using its own domestic money allows a country to expand domestic credit even as, at the same time, it clears accounts with foreign counter-parties using international money. The pre-revolutionary colonies and then the United States of America found that they could build a domestic credit system if they were able to have the international money needed for foreign trade held offshore. When the U.S. attempted to incorporate the use of the international money from trade into its domestic finance, the result was default and severe devaluation.
In the 18th century Anglo-Dutch world, no one with international money – gold and silver coin – in hand world doubted that the Indies and the Americas offered wonderful possibilities for gain. When he died in 1754 in Philadelphia, Charles Willing left a fortune made from speculations in land and trade in the New World. With the help of his cousin and their investments in shipping and property development, Willing turned 1,000 pounds into an estate of 20,000. They had even established a town in their own name that survives to this day – Wilmington, Delaware.
Neither Charles nor his cousin thought the 20-fold increase in wealth over 26 years was miraculous, not when the Dutch East India Company’s dividends were averaging 18% a year. What was extraordinary was the Willing family’s farsighted determination to solve the problem they called “the exchange”. The real estate lots in what became Wilmington might be sold at handsome profits; but the payments received would be in colonial notes and bills. Those could rarely, if ever, be exchanged for coin and only at punishingly steep discounts; but for their shipping business, the Willing firm needed international money. They could pay for export goods in Philadelphia using domestic credit and paper currency; they needed coin to buy foreign cargos. Without purses that had gold and silver, their ship captains were entirely dependent on barter arrangements in overseas ports. To sell the cargos outbound from Philadelphia, they had to find those foreign merchants who would do swaps.
English merchants had accepted these same terms of trade in their dealings with the American colonists. American planters would finance their imports from England by pledging their annual crop production. Individual shipments of tobacco and other crops would be consigned to London merchants for sale, and the proceeds would discharge the planters’ debts. (Thomas Jefferson never quite accepted the practical necessity of American banks, even after he joined Madison and others in supporting the second Bank of the United States. Why did Americans need them? Through his factor in London, he sold his tobacco and secured his purchases and did not “have dealings in finance more than once a year”.)
English merchants had advantages in their colonial trade that the Americans could not hope to share. The courts, bailiffs and militias all obeyed the Crown, and the navy protected English ships. England, under the Navigation Acts, actively punished any merchant ships that attempted to ship goods to foreign ports without first sending them to London. Merchants in Philadelphia who engaged in finance had to limit themselves to money changing the paper currencies of the various colonies, mortgage lending to landowners who wanted more credit than their London factors allowed and specie pooling – consolidating the gold and silver coin in a common fund to be shared among the ship-owners in Philadelphia who were smugglers.
The Willings chose a different path. They would make their profits by financing the imports Americans needed to produce their own finished goods. In 1749, Thomas Willing, the son of Charles, returned to Philadelphia after spending a decade living in London with his grandfather and studying law. He was then one of the first Americans to become a member of the Inns of Court. Even more important, he had served an apprenticeship learning the ways of the City of London and establishing a connection with a man named David Barclay. The Willing firm would accept, at suitable discounts, the trade bills of the Philadelphia merchants who importing copper, glass and other materials. These loans to tradesmen, unlike the paper London held as the factor for the plantation owners, could be used as domestic currency by the Willings to purchase export cargos. The short-term bills could, in turn, be used by both the American and foreign customers of the Philadelphia merchants. For American counter-parties the Willings would guarantee the merchants’ bills and make good any that were refused; for the bills used by London firms the Barclay firm would stand good. It also helped that Willing family’s counterparties on both sides of the Atlantic were Quakers. Theft and outright fraud would not be part of their exchange risk. Over time, the Willing paper backed by Barclays gained sufficient credit to be exchangeable in London without any of the usual extreme discounts applied to American promises to pay. The Willings chose to leave their profits in the City; like George Washington they invested their gains in Bank of England stock. The profits from the New World would be added to the balance sheet of the Old World.
There are no surviving accounts that show exactly what the spreads earned by the Willing firm from the discounts taken in Philadelphia and those accepted by them and Barclays in London. All we know is that Thomas Willing became, in succession, mayor of Philadelphia (1763), justice on the Pennsylvania supreme court (1767), president of the Bank of North America (1782-1791) and president of the first Bank of the United States (1791-1807). When he retired, at age 76, he was the wealthiest man in the United States.
Thomas Willing is also remarkable for having pledged his fortune in support of the revolt of the American colonies, even as he refused to sign the Declaration of Independence. In 1774, as president of the first Provincial Congress of Pennsylvania, Willing had signed the petitions sent to parliament and the crown seeking the restoration of constitutional liberties to the colonies. However, as the Philadelphia representative to the second continental congress, he voted against the Declaration of Independence. Willing told the delegates that his constituents had not authorized him to vote on such a resolution and that, in his opinion, the colonies were not prepared for costs of a war.
Until French coin arrived in 1780, Willing and Robert Morris, who had been a member of the Willing firm before the war, would be the main commercial suppliers to the American Army. When Congress and Washington’s troops had to abandon Philadelphia to the British in September 1778, Thomas Willing remained in Philadelphia and continued to conduct business. During the British occupation, General William Howe’s staff presented Willing with a formal oath of allegiance to George III for him to sign. He refused. The only indictment that could be made against his patriotism was that, unlike Robert Morris, he would not accept either land grants or Continental currency in payment for supplies but required Congress’ direct endorsement of its credit paper.
Thomas Willing did not share what was and still is the common belief on both sides of the Atlantic – the presumption that the legislature has absolute financial sovereignty. In voting against the Declaration of Independence, Willing refused to accept Thomas Jefferson’s accusation that Britain’s “direct object (was) the establishment of an absolute tyranny”. No financial tyrant would have made the offer to the United Colonies to grant them a prerogative that parliament itself did not claim – the right to issue paper legal tender. As became obvious to everyone in the war that followed, Congress’ asserting for itself the authority to print money proved an utter disaster.
In Willing’s view, it was both possible and desirable for the new United States to develop an active internal commerce using its own internal credit. After the war both the private Bank of North America and the public first Bank of the United States were able support the government’s international borrowing through their domestic dealings in bills of exchange. But, Willing refused to support the establishment of any national bank of issue. The country still lacked the means of reliably converting its promises to pay into the gold and silver coin that the world accepted as money. The United States and its depository institutions could deal successfully deal in paper promises to pay; but they could not sustain the pretense that even well-managed domestic credit was interchangeable with international money. The more that the Congress and the States tried, through reserve requirements and redemption guarantees, to guarantee the dollar, the more it invited a run on domestic deposits. The Treasury’s IOUs could not and should not claim to be as good as gold for claims that demanded settlement in coin. Even Great Britain had to accept the fact that its Bank notes were not yet international money. Its Navy could rule the waves but the subsidies paid to Russian and Austria and Prussia had to be in guineas and the purchases of tea from Asia in silver coin, not notes of the Bank of England.
Thomas Willing lived long enough (he died in 1820 at the age of 90) to see his contemporaries lose their bets on the wonderful possibilities of gain. In their speculations in land titles, Robert Morris, Henry Knox, and James Wilson had all gotten the trend right and the financing wrong. Each had chosen to extend their leverage by promising future payment in specie rather than bills of exchange. The returns from owning American property would match and exceed those Thomas and his father and cousin achieved, but the rewards from the accumulations of domestic assets would go to the men who avoided the problems of “the exchange”. The fortunes would go to the buyers at liquidation auctions like Stephen Girard and John Jacob Astor, both of whom would succeed Thomas Willing as the richest Americans of their time.
Thomas Willing would not have been surprised to see gold and silver lose their standing as the direct final payments in international trade. In a world where settlements were made not by shipments of metal but by electronic communications between central banks of issue, coin would be obsolete as a means of physically clearing accounts. The consistent rule of Willing’s political economy was that commercial exchanges of goods, promises and financial credit between people in different countries could not avoid being settled in a money that went beyond domestic legal tender. Keynes’ idea of a permanent reserve that was itself an amalgam of individual countries’ legislated paper monies simply would not work; like bimetallism it presumed that legislatures could set the relative prices for monies independent of actual supply and demand. “The market” would demand settlement in international money that no legislature controlled.
Does the general acceptance of the digital U.S. dollar make it the 21st century’s international money? Willing’s answer would have been a qualified “yes”. The U.S. central bank and its Treasury could regulate the literal printing of dollar bills and control the funding and costs of domestic bank reserves, but even they could not set the prices for FX trading. In a world of derivatives the Fed had no more final control over the world’s supply of digital dollars than the Royal Mint had had over the supply of gold and silver coin available to the firms of Willing and Barclay in the City of London at the turn of the 19th century.
Until the world chooses different international money, final payments between currency blocs will continue to be scored and cleared in electronic 0s and 1s that are denominated as U.S. dollars. The great advantage the United States had in its founding was that, because the country first went bankrupt, it discovered the paradox of foreign exchange. A country could grow and prosper domestically even as it was perpetually in need of “hard money” for foreign trade. As long as the country’s laws and customs allowed the prices for domestic trade to be discounted against pricing by international money, IOUs would continue to be sufficient as the medium of exchange. The difficulty would come when people had reason to fear that claims for payment would be resolved not by discounting but by the government and not the market deciding what money would be worth, both at home and abroad.
Stefan Jovanovich manages the portfolio for The NJT Company, Inc., a family office based in Nevada.
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