Speaking of the British luminary Newton, he is universally recognized and acknowledged. He stands as one of the most eminent physicists in the annals of human history. His three fundamental laws of motion and the law of universal gravitation laid the bedrock of classical mechanics. In the realm of optics, he devised the reflecting telescope and proposed a theory of color based on his observation that a prism disperses white light into the visible spectrum. Additionally, he systematically expounded the principles of cooling and conducted inquiries into the velocity of sound. As an exceptional mathematician, he pioneered the field of calculus, demonstrated the generalized binomial theorem, and ushered in a new epoch in the progression of mathematics. However, it remains obscure to many that Newton also possessed an almost divine acumen for economics.
In 1696, the seasoned Newton, then 53 years of age, acceded to the recommendation of the British Chancellor of the Exchequer and assumed the directorship of the mint, a position he held until his demise in 1727. During Newton’s tenure as the mint’s director, the Age of Discovery was waning, the enigmatic oceans had been demystified, and European trade routes to all continents had reached maturity. Britain stood at the vanguard of the world in scientific, technological, and economic prowess. The nation was fervently preparing to expand its global reach and augment its colonies. However, a predicament emerged that hindered the pace of British expansion: currency.
At that juncture, the world still abided by the era of precious metal currency, wherein currency was minted from metals such as gold and silver. Two contentious issues regarding the determination of the “face value” of precious metal currencies prevailed. Firstly, there arose the question of whether the “face value” inscribed on the precious metal currency represented a monetary unit or a unit of precious metal mass. For instance, a gold coin could bear the currency unit “5 pounds,” or it could denote the precious metal mass unit “5 grams.” Secondly, if the currency unit were to be indicated on the precious metal currency, ought the quality of the precious metal therein be commensurate? In other words, must a gold coin marked £5 necessarily contain gold equivalent to the value of £5? Newton, the incumbent director of the British Mint, keenly discerned the obstacles that currency quandaries posed to Britain’s “globalization.” He staunchly advocated for the inscription of monetary units on precious metal currencies and vigorously upheld that the quality of the precious metals must not be compromised.
In 1717, under Newton’s resolute insistence, the British government officially committed to establishing and determining the exchange ratio between precious metal currency and gold: 3 pounds, 17 shillings, and 10 pence for every ounce of gold. This marked the first instance in human history in which a government formally pledged to the reciprocal relationship between currency value and gold weight. Consequently, a precious metal currency with a face value of £5 could contain merely £3 worth of gold (or even less). The British government’s commitment to exchange endowed this undervalued gold coin with sufficient credibility to circulate in the market as if it were worth 5 pounds. This monetary system came to be known as the “gold standard.”
The gold standard proved to be an immense boon for Britain’s global expansion. It mandated that the value of each currency unit equated to a specific weight of gold (i.e., the gold content of the currency). When different nations adopted the gold standard, the exchange rates between countries were determined by the ratio of the gold content in their respective currencies, facilitating unrestricted currency conversion across borders. This momentous development greatly propelled the growth of British commodity production and the expansion of international trade. Simultaneously, the British government, with the assurance of full exchange, minted sizable gold coins using a limited amount of gold. Individuals worldwide who possessed British gold coins actively safeguarded the interests of the British government to ensure the purchasing power of their gold coins. Consequently, Britain garnered increasing support from across the globe and, four decades later, emerged triumphant over Spain and France, asserting itself as the unrivaled maritime hegemon. Furthermore, Britain replicated the issuance mechanism of gold coins in its various colonies, promising that banknotes could be exchanged for gold coins of different denominations. This, in turn, fostered the prosperity and advancement of the global economy during the ascendant stage of capitalism.
Government credit became the bedrock of currency issuance, and Newton’s groundbreaking contribution in the realm of economics lay in amalgamating government credit with currency creation. The significance of the gold standard to human society and its ramifications for future economic systems are no less profound than Newton’s three laws of motion.