Basically, instead of paying the Chinese in bullion, the British East India Company (and Queen Victoria, who was accessory to that niggling fact) paid the Chinese in Opium grown in South Asia.

The whole post needs to re-evaluate whether bullion like gold and silver is relevant. It has been relevant as a medium of exchange for many thousands of years.

And as someone said, would it not be better to take care of domestic reforms first, stabilize and strengthen things here a little and then take a step forward. You said that England benefited because it did not hoard but invested. The question is that was at that time England wanting that money to be invested in its homeland? Was the bullion purely excessive or was the investment done at the cost of curbing the internal development? I think we need to look at that too because as someone mentioned England was fairly developed at that time. So, I am thinking that at this point, home improvement comes first before looking out so vigorously.

Gold cannot be used as a store of value, because what value can be realised depends on what others are ready to exchange it for, for eg. during a famine the guy holding gold will starve to death, while a guy holding food grains can eat it and exchange it for other goods and services. This means Amartya Sen theory that Bengal famine happened due to lack of money supply is pure bunkum, it happened due to lack of food.

What you say still doesn’t answer my first question about the blog’s claim that the English traders ‘correctly understood that gold must be allowed to find its own natural price level’.

A simpler and more reasonable explanation is that the traders were powerful enough to influence the political class. I am not aware if the ‘rule of law’ in honoring contracts was any stronger in pre-industrial England as compared to its peer countries like contemporary France, the Dutch republic or the Russian empire.

Regarding the economic history you have said is good, the maritime nations of Europe, Britain, Portugal and Spain were very adventurous and particularly had traders bent of mind.
They were restricted up to Aden where they sold their products to the Moorish (Arab) traders, the Arab used to come to Indian subcontinent and Far Eastern countries.
They had a an advantage, particularly Britain had a very good educational setup, even Sir Thomas Row who came in court of Jahangir was an Oxford graduate. Cambridge and Oxford are considered to be one of the oldest universities of the world still maintaining world-class standards. British diplomats are of world-class standards, which in turn helped the business and trading community.
They had democracy, Labor party, Conservative party, choosing governments in spite of Monarchy and a very feudalistic society. The Houses of Commons and Houses of Lords were there.
The Joint stock companies started in England, the limited liability concepts; the double entry system of book keeping was there 200 years before. The Scott man James Watt and Englishman Matthew Boulton started Watt & Boulton a partnership co, the first Engineering solution selling firm in the world. The technological evangelisms along with business acumen are unique combinations that the British business class had.

After WW-II it was no more Britain, it became Anglo American power with commercial and business interest, the communist block broke down into pieces 1991.
The golden rule of” divide and rule” is unique in nature with Brits (Anglo Americans).
They used it in India, Pakistan, North Korea, South Korea, Mainland China, Taiwan, Shia, Sunnis in Iraq and still practicing accurately which is giving them immense benefit in business terms.
As of now it is the Anglo American political hegemony and defense technological supremacy that is helping them to have a global business edge. You cannot be successful in global business, if you don’t have political supremacy and smart diplomatic ties for better business interest.
Now the world is standing in the cross road of capitalism, the epicenter of capitalism is shifting from North America to Asia. The Economic Block like BRIC cannot be ignored any more, especially RIC are on the same global axis.

I would argue that the only instrument which has been considered as neither risky nor illiquid is US Treasuries. But there is only so many Treasuries that can be bought. Already, foreign central banks account for about 40% of Treasury demand..and I am sure now they desperately need to diversify.

Where do they go now? If they continue to invest in US assets, they will have to get into the business of propping up distressed companies by infusing capital, buying CMOs and buying property. Yes, all this is already being done by other countries.. We have already seen how risky these investments turned out to be (all those Norwegian investments in mortgage backed securities? Wiped out). All bad investments even in the US context, despite very liquid capital markets and a highly developed economy. I don’t even need to talk about how investing in other countries is even more risky and illiquid.

P.S. Why do I keep getting this “WP Hashcash Check Failed” message when I comment on your blog :(

The RBI wants to invest in SWFs to earn “higher returns”. Higher, presumably, than what they can earn in India. I’d love to hear which countries would offer such returns, and what the risk-adjusted return in this case would really be.

Here is a great article arguing why such SWFs are a bad idea for the investing country.

http://www.foreignpolicy.com/story/cms.php?story_id=4056

Your argument is correct - trade is good. I am not sure how it leads to your conclusion - lock up trade gains in illiquid assets.