England Stumbles toward the Solution
This chapter and the next describe the mixture of experience and theorizing that eventually led England to adopt the standard formula. Experience held the upper hand. During the seventeenth and eighteenth centuries, England used privately issued tokens and counterfeits for much of its small denomination coins. In 1661, Sir Henry Slingsby propounded the standard formula. The government did not implement it, even after 1787, when Boulton’s steam press made Slingsby’s proposal practical. But private firms quickly exploited Boulton’s technology to make redeemable tokens that were difficult to counterfeit. For a generation after 1787, these private tokens supplied small change for England. The government effectively nationalized the issuing of tokens after 1817. Later in the nineteenth century, the British government explicitly stated the operating rules needed to affirm the standard formula.
Thus, England’s path from the medieval cycle of shortages and debasements to implementing the standard formula and the gold standard was circuitous. The period that extends from 1560 to the nineteenth century contains several interesting episodes that exemplify the slow process of learning about the standard formula.
Britain’s Great Debasement and the abhorent reaction to it set the stage. Unlike England’s medieval debasements,1 the Great Debasement of Henry VIII and Edward VI from 1550 to 1560 reduced fineness rather than weight. Intended to raise revenues, it was the kind of debasement that jurists and philosophers had condemned. In 1560, Elizabeth I repaired the Great Debasement by restoring a strong standard for the silver coins: 60d. per troy ounce of sterling silver. The standard was slightly modified in 1601, to 62d., and thereafter it remained unchanged until 1816. The Great Debasement cast a long shadow. It inspired the British government’s subsequent reluctance to issue anything but sterling coinage, effectively precluding government issues of small denomination silver coins. It also gave the English an enduring aversion to debasements that played a decisive role in policy debates.
To supply the smaller denominations that the royal mint would not produce, England experimented with various methods of issuing copper coinage: private monopoly, government monopoly, and laissez-faire. We examine these regimes in the first part of this chapter and see them as implementing tentative and partial versions of the standard formula. In chapter 14, we saw how Castilians tried the “token” part of the standard formula without the “convertibility” part. In their experiments, the English actually implemented convertibility, more or less completely, as part of the private monopoly and laissez-faire regimes, although not with the government monopoly regime. But their attempts at making the coins overvalued ran into predictable problems, in spite of intense efforts to improve the existing technology and defeat counterfeiters. In the midst of one of these experiences, Sir Henry Slingsby proposed the standard formula in 1661.
In the late seventeenth century, the problem of small change emerged higher in the denomination structure, among the silver coins. By 1695, a preponderance of markedly underweight silver coins caused the gold coin, the guinea, to appreciate abruptly in terms of the silver coins, which were still the unit of account. The appreciation of the guinea precipitated two important events: the Great Recoinage of 1696, which was preceded by a fascinating debate over the proper remedy; and the eventual emergence of gold coins as the unit of account and a de facto gold standard in the eighteenth century.2 The second part of this chapter uses our model to illuminate these events and debates, which engaged some of the brightest men in England including John Locke, William Lowndes, and Isaac Newton.
The government’s decision to resolve the Locke-Lowndes debate largely in Locke’s favor retarded progress toward the standard formula. Britain’s monetary experiments before 1690 had inched toward the standard formula with privately issued tokens that were sometimes convertible. Despite theoretical insights from the Renaissance that had made price level stability, not the weight of coins in silver, the criterion of good monetary policy, Locke reverted to the medieval “communis opinio” when he insisted that a government’s coin represented a claim on a set amount of silver. Locke’s authority as forbearer of the gold standard rests mostly on that.3
Locke’s writings about the recoinage belie his reputation as an empiricist philosopher. Against Lowndes’s carefully documented account of historical facts about British coinage and his rich model designed to account for them, Locke stubbornly held to a simplified model despite its inconsistency with some salient facts. But politically Locke triumphed over Lowndes the empiricist. Sir Henry Slingsby’s standard formula would have to wait.
Free-token and other regimes
Monetary theory is silent about the physical object on which a promise to pay is recorded, so that, except maybe for their denominations, theory treats token coins and banknotes in the same way. In 1776, Adam Smith proposed that banks be allowed to issue paper notes if they would promise to convert them into specie on demand (see page 101). We believe that Smith did not create that idea out of thin air. Smith lived in a country that for nearly two centuries had allowed private firms to issue redeemable subsidiary token coins. If the costs of manufacturing tokens were sufficiently low, firms could profit from issuing convertible tokens because people who held them in effect supplied interest-free loans. It is a small leap of the imagination from such a “free token” regime to the “free banking” regime advocated in Smith’s “real bills doctrine.” 4
Laissez-faire or monopoly: England’s hesitations
From 1560 to 1817, England alternated between three regimes for supplying small change: private monopoly of partially convertible token coinage, government monopoly of full-bodied coinage, and free private competition in supplying convertible token coinage.
English coins had always been made of sterling silver, except during the Great Debasement of 1540–60. The smaller denomination coins, from the farthing to the penny, had become too small to be made of silver and by the mid-sixteenth century, royal coinage of these smaller sorts had ceased altogether. In the following century and a half, small change in England took the form of unalloyed base metals issued by various private parties. There were two periods of laissez-faire. Both were terminated by the government after it had adopted a new minting technology: mechanization in the 1670s and the steam engine in the 1820s. The latter episode ended when the government implemented the standard formula after the private sector had profited for a generation from using a technology for producing high-quality coins that were difficult to counterfeit.
Private monopoly (1613–44)
A private monopoly prevailed from 1613 to 1644. By a proclamation of May 19, 1613, the king reclaimed his prerogative to issue currency and outlawed private moneys. He also granted to an individual the exclusive right to manufacture copper farthings. The coins were to be made “artificially by engines and instruments.” The patent set a minimum weight for the coins, but that minimum was low: 1 pound of copper, costing 1s., was turned into 25s. in tokens (Ruding 1849, 1:381, and Beveridge et al. 1965, 677, for the price of copper).
The coins were thus issued at a high rate of profit, to be shared with the king.5 The coins were not made legal tender: the king’s proclamation of 1613 said that the coins were “to pass for the value of farthings … with the liking and consent of his loving subjects.” The patent further required the manufacturer to sell the tokens at a rate of 21s. in tokens for 20s. in silver; it also imposed the obligation to repurchase them at the same rate, but only for one year “until the said tokens should have grown into more general use and were well dispersed.” The arrangement therefore consisted of a highly overvalued but only partially convertible token. Both aspects of the arrangement ran into trouble and had to be refined.
Some difficulties came from the overvaluation. Complaints had arisen that the tokens were inconvertible and that their selling price was below par. Their circulation remained limited, and unlicensed private issues continued in spite of their prohibition. So “that everie person may be left without all excuse, if againe they should presume to infringe Our Royall commandment,” the king in 1617 changed the selling price to 20s. in tokens per £ silver (it was changed back to 21s. in 1625). The buying price remained at 21s. in tokens per £ silver, but the king ordered that a “continuall rechange for them” be established in London only, to buy and sell tokens.
Another problem was counterfeiting. Counterfeiting either the tokens or the engines was prohibited again in 1615 and 1618. In 1625, the importation of counterfeits was also prohibited. By 1631 the counterfeiters were so busy that they were underselling the king’s monopolists by offering tokens at 24 to 26s. for 20s. silver.
The first problem fed on the second, as counterfeiting hindered convertibility. Complaints grew that the monopolists were not maintaining convertibility, to which the monopolists responded that they were refusing only counterfeits. An indication that excessive quantities could not be redeemed came in a prohibition against tendering more than 2d. in tokens in 1634, and a renewed statement that they were not legal tender in 1636.
To combat counterfeiting, the tokens were redesigned in 1636 and a brass insert added. Impressing a plug of a different metal required a sufficiently powerful mechanical press, which made counterfeiting a more costly and more detectable activity. The patentees were instructed to exchange both old and new tokens for sterling, but only “from time to time,” and the old ones were in effect repudiated, creating much resentment against the tokens.
After the Civil War began, the monopoly soon ended. Parliament investigated it in 1642, confiscated its assets in 1643, and seized £5000 from the estates of the patentees to redeem outstanding tokens.6
Laissez-faire
Alaissez-faire regime prevailed intermittently, from the mid-sixteenth century to 1613, from 1644 to 1672, and from the 1740s to 1817. During each episode, the government desisted from making its own coins and encouraged, or at least did not discourage, private suppliers of coins.
We have seen that private tokens were widespread in the early sixteenth century (see page 217). After restoring the English coinage, Elizabeth I considered issuing copper coinage. Citing complaints “against the tokens of lead and tin, generally coined and uttered… by grocers, vintners, chandlers and alehouse-keepers,” a proposed proclamation of 1576 was to announce the issue of royal copper farthings and halfpennies, providing that “such cost and charge should be employed thereon as that any, so evil-disposed, should hardly attain to counterfeit the same”; the coins were to have limited legal tender, and privately issued tokens were to be forbidden. But the proclamation was never issued, nor did the government issue any coinage of its own.7 Instead, the government tolerated private coinage, and in the case of the city of Bristol granted official permission to issue square lead tokens in 1577. The proclamation of May 19, 1613 that established the private monopoly (see page 264) describes in detail the situation prevailing at the time (Ruding 1840, 1:369): farthing tokens, made of lead, passed between vintners, tapsters, chandlers, bakers, and other tradesmen and their customers.
Over 12,700 different types of tokens have been cataloged for the period from 1644 to 1672, issued in 1,700 different English towns. An estimated 3,000 were issued in London alone. Suppliers were city councils, owners of firms, and local retailers. Tokens usually bore the name and location of the issuer. The circulation of each token was limited geographically to a few streets, but there existed in London at least one “changer of farthings” in Drury Lane, who issued his own farthings (Berry 1988, 5).
One of the better documented issuers was the city of Bristol, which had issued tokens in the sixteenth century. Then the second or third largest city in England, Bristol obtained permission to issue copper farthings in 1652, and made further issues in 1660 and 1669 (Thompson 1988, vii–xxxiii). As to convertibility, we know of a city ordinance of June 1652 by which the mayor and magistrates “to the end also that no person or persons shall or may suffer any loss or prejudice by them, have published and declared that they will from time to time receive and take them in and allow them after the rate of penny for 4 of them.”
The Bristol farthings are the most common of surviving tokens, and almost no other tokens are known from the city of Bristol. They circulated regionally, examples having been found in various places around Bristol; they were successful enough that they were counterfeited. Furthermore, they set a standard, since Gloucester in 1669 decided to issue farthings of the “full weight of a Bristol farthing” (Thompson 1975). We do not know that weight, but surviving tokens suggest that they were made at 32d. to 40d. per pound of copper. This compares with the standard of 22d. to the pound adopted for the royal coinage in 1672, which was as close to intrinsic value as possible, based on a price of copper of 14d. per pound. Thus, the Bristol farthings were somewhat overvalued, but probably not excessively, considering the likely returns to scale enjoyed by the royal mint.
The Slingsby doctrine
During the Commonwealth, from 1649 to 1660, proposals were put forward to replace these private tokens with government issues. Shortly afterwards, Sir Henry Slingsby (1621–90) stated the standard formula. Slingsby (fig. 16.1) was master of the London Mint from 1662 to 1680 and supervised the mechanization of coin production by Blondeau (Challis 1992b, 343). In a memorandum to King Charles II, dated June 5, 1661, Slingsby proposed to mint farthings of ¼d, the smallest existing silver coin being 1d. He made what may be the earliest statement of Cipolla’s standard formula, when he wrote (Peck 1960, 601):
Copper is the fittest metal; a contract should be made with Sweden for the supply thereof, and it should be coined at so little increase of price as to make counterfeiting disadvantageous. To avoid a danger of glut, the Mint should be always ready to exchange farthings for silver money, if requested, and should forbear to make more than demanded.
Slingsby’s proposal was not implemented until more than one hundred years later. Perhaps, in spite of the new minting process, the government’s cost advantage over its competitors remained insufficient. Or perhaps the lesson Slingsby taught was not widely learned.
Government monopoly
Instead, soon after implementing mechanization in 1660, the royal government decided to mint its own copper farthings and halfpennies for the first time. The proclamation of August 1672 asserted that “our subjects would not easily be wrought upon to accept the farthings and half-pence of these private stampers, if there were not some kind of necessity for such small coins to be made for public use, which cannot well be done in silver, nor safely in any other metal, unless the intrinsic value of the coin be equal, or near to that value for which it is made current.” The mint was ordered to make halfpennies and farthings “to contain as much copper in weight as shall be of the true intrinsic value and worth of a half-penny and a farthing respectively, the charges of coining and uttering being only deducted.” The new coins were made legal tender for payments up to 6d. Privately issued tokens were outlawed. Slingsby was put in charge of the copper coinage, and contracted with a Swedish merchant to purchase copper. The face value of a pound of copper was 22d., the cost of the copper was 14½. and expenses were 4d. (Craig 1953, 175); net seigniorage was thus 16%. The coins were widely counterfeited. Minting stopped in 1676, after about £40,000 had been minted.
Figure 16.1 Portrait of Sir Henry Slingsby (Hailstone 1869). Courtesy of the Yale University Library.
The English government sought ways to deter counterfeiting by adding milled edges to coins or by using plugs of a different metal inside the coin, or by looking for better alloys. Tin was tried between 1684 and 1694, although more as a means of subsidizing Cornish producers at a time of a low price of tin. The net seigniorage rate was high, at 40%. To defeat counterfeiters, the coins not only had a copper plug as the tokens of 1636 did, but their edge was inscribed with Castaing’s machine (Peck 1960, 107–8, 151–52). In spite of those measures, the House of Commons found those coins wanting in value and too easily counterfeited, and ended their production in 1694, over the protests of the Cornish mine owners.
While Philip II of Spain could be led to believe that the technological superiority of his mechanical press was secure, a century later English officials could not be put under such an illusion. Small-scale screw presses had been used during the “free token” era of the Commonwealth; one such press used by an apothecary in Derbyshire was described in an eighteenth-century magazine (Peck 1960, 579–80). The government admitted defeat in the Plate Act of 1696 by offering to buy any press capable of making coinage from individuals (Challis 1992b, 391).
The failure of measures against counterfeiting moved English monetary officials to endorse a full-bodied copper coinage. The copper coinage of 1694–96 was issued at 21d. per pound, even closer to intrinsic value than in 1672. When the government decided to resume copper coinage in 1718, Sir Isaac Newton, the mintmaster, insisted that it be minted at intrinsic value plus costs,8 and small quantities of copper coins were issued in the eighteenth century (1717–24, 1729–55, 1770–75).
Another “free token” era then followed. “By the 1740s competition had driven the copper in private coins of mixed metal down to one-eighth of that in legal coin” (Craig 1953, 253). In 1754, official coinage was stopped on a petition from London retailers complaining that copper had overtaken gold and silver in retail coinage. Counterfeits, which had appeared after 1725, became numerous after 1740. In 1751, the first “evasions” appeared: coins that imitated the general appearance of the official coinage, but were clearly differentiated in the details, such as the legend “Britannia” altered to read “British girl,” or the king’s name replaced by Shakespeare’s. The government and the courts construed the laws on counterfeiting not to apply to these imitations. Counterfeiters sold them at half-price to wholesalers, who resold them at 28s. to 30s. for a gold guinea of 21s. By 1753, 40 to 50% of the stock of copper in circulation was counterfeit, and by 1787, the mint estimated that only 8% of copper coins in circulation “had some tolerable resemblance to the king’s coin.” To remedy the situation, the mint recommended issuing royal copper coins twice as heavy as before.9
After James Watt first harnessed the steam engine to a minting press in 1787, trade tokens issued by firms and employers became extremely common: convertible tokens once again emerged as the predominant form of small change in England. Most of the trade tokens were made by Birmingham firms. They were of the same weight as the official coinage and carried the issuer’s name in promise of redemption. This system of reliable convertible token coins was the market’s way of supplying small change. The market thus prepared the way for the government to implement the standard formula. The government had only to nationalize and administer this system, which it began to do in 1816.
The Great Recoinage of 1696
By 1690, Slingsby’s theorizing and numerous experiments with convertible private tokens and government tokens had taken Britain far toward the standard formula. However, in 1695 Parliament resolved a public debate about the shortage of small coins in a way that arrested progress toward the standard formula. By accepting John Locke’s view that a government coin represented a set amount of silver, Parliament reverted to the “communis opinio” of medieval monetary theory, and did so at great public expense.
The theme of this book is that implementing the standard formula required several things: a good technology to make coins, an understanding of the relevant monetary theory, and a government wanting to convert token coins into full-bodied coins on demand.10 The Great Recoinage of 1696 showed some of these prerequisites to be present but others still lacking.11 Thus, after 1661, a well-informed monetary theorist should have known about the standard formula from Sir Henry Slingsby, not an obscure scholarly writer but an important British public official from a recent time. Not only was the relevant monetary theory available, but a new technology for producing milled coins had been introduced in 1662 that might have allowed the government to solve the problem of small change. But two problems remained. One was that the minting technology still might not have offered enough of a cost advantage, as recurring problems with counterfeiters were to show. The other was that the reigning Stuart dynasty could not be trusted to honor its financial commitments.12 So under the Stuarts, England continued to mint full-bodied silver coins and full-bodied copper coins without convertibility. The silver coinage was of poor quality. The newly minted coins were often melted down immediately, and the state of the coinage seemed to be slowly deteriorating.
The underweight state of the silver coinage attracted more attention after the Glorious Revolution of 1688. The revolution brought a regime that demonstrated its attachment to making and keeping commitments by engineering a costly recoinage at government expense in the midst of an expensive war. Though it completely followed the recommendations of no single advisor, Parliament heard sophisticated analysts, including Lowndes and Locke. The advice of each of these opposing figures can be interpreted as reflecting alternative versions of our model. We think that Lowndes’s analysis was more consistent with the evidence. But Locke’s argument that the state’s coins committed it to deliver a particular amount of silver, not a particular value in exchange for goods, nevertheless carried the day.13
The monetary system under the Restoration (1660–88)
England used both gold and silver coins. It did not issue coins at a standard less than sterling (92.5%). The silver coinage in circulation ranged mostly from the sixpence (6d.) to the half-crown (30d.). The gold coinage consisted mainly of guineas.
Chapter 4 described how England used the screw press to produce new silver coins in 1662. The technology let the government produce coins that were distinctly sharp and regular, with milled edges. After 1662, these milled coins coexisted with the hammered coins that had been minted with the older technology.14 The new milled money inhibited clipping and so gave the government a technological advantage over counterfeiters. The government began in a limited way to address the problem of low denominations (1d. and below).
The large denomination silver and gold coinage then moved center stage. In 1666, gross seigniorage was set to 0 by the Free Coinage Act (18 Car. II. c. 5), and a specific tax was levied on alcohol to finance minting expenses (Feavearyear 1963, 95). The recommendation of the Romanists was finally implemented.15
Figure 16.2 Minting volumes in England, 1660–1718. Source: Challis 1992a.
Figure 16.2 shows the minting volumes in the years that followed. For a while, there was substantial minting. The market price of silver remained at or slightly above the mint price (now equal to the mint equivalent) of 62s. per pound troy. But by 1690, gold minting had displaced silver minting, which practically ceased.
The cumulative output of milled money after 1662 was £4.3 million. Most of it was hoarded, melted, or exported (Feavearyear 1963, 122–23; Craig 1953, 167: “the new machine-struck coins were reserved for illegal export or the melting-pot”). In 1694, the silver circulation was estimated to consist of £13.5 million: £2.5 million in milled money (minted since 1662), £10 million in hammered money (minted before 1662), and £1 million in counterfeits (Horsefield 1960, 258). Thus, most of the silver currency consisted of hammered money, by nature more susceptible to clipping. The silver currency, however, seemed not to have deteriorated much before 1672. Deterioration was widely noted only after 1686. Government treasurers, who accepted all silver coins by tale regardless of their condition,16 found them to be increasingly underweight, from 11.4% in 1686 to almost 50% in 1695 (Challis 1992b, 380–82). By the mid-1690s, complaints about the underweight state of the coins and the export of bullion had increased.
Of this period of deteriorating silver coins, Macaulay ([1855] 1967, 4:187) tells us:
Meanwhile the shears of the clippers were constantly at work. The coiners too multiplied and prospered: for the worse the current money became the more easily it was imitated.… It was to no purpose that the rigorous laws against coining and clipping were rigorously executed. At every session that was held at the Old Bailey, terrible examples were made. Hurdles, with four, five, six wretches convicted of counterfeiting or mutilating the money of the realm, were dragged month after month up Holborn Hill. One morning seven men were hanged and a woman burned for clipping. But all was vain. The gains were such as to lawless spirits seemed more than proportional to the risks. Some clippers were said to have made great fortunes. One in particular offered six thousand pounds for a pardon. His bribe was indeed rejected: but the fame of his riches did much to counteract the effect which the spectacle of his death was designed to produce.
Of the consequences of the underweight currency, Macaulay ([1855] 1967,4:188–90) says:
The evil proceeded with constantly accelerating velocity. At length, in the autumn of 1695 it could hardly be said that the country possessed, for practical purposes, any measure of the value of commodities. It was mere chance whether what was called a shilling was really a tenpence, sixpence, or a groat.… The evils produced by this state of the currency were not such as have generally been thought worthy to occupy a prominent place in history. Yet it may well be doubted whether all the misery which had been inflicted on the English nation in a quarter of a century by bad Kings, bad Ministers, bad Parliaments, and bad Judges, was equal to the misery caused in a single year by bad crowns and bad shillings…. When the great instrument of exchange became thoroughly deranged, all trade, all industry were smitten as with a palsy. The evil was felt daily and hourly in almost every place and by almost every class, in the dairy and on the threshing floor, by the anvil and by the loom, on the billows of the ocean and in the depths of the mine. Nothing could be purchased without a dispute. Over every counter there was wrangling from morning to night…. The ignorant and helpless peasant was cruelly ground between one class which would give money only by tale and another which would take it only by weight.
The deteriorated state of the silver coinage attracted the attention of Parliament. In 1690, 1691, and 1692, bills were introduced in Parliament to devalue the currency from 62s. an ounce to 64s. or 65s., then the market price of bullion. Before 1695, every such measure was defeated. Pamphlets were published, debating the issue. Although Locke’s first intervention occurred in 1691, until late 1694 there was still a limited sense of urgency and Parliament did not act. In 1695, a rise in the price of the guinea ignited a crisis.
The crisis
Figure 16.3 shows the price of the gold guinea in terms of the silver coins in the late seventeenth century. When the guinea was first issued in 1663, it was intended to circulate at 20s.,17 but over the following twenty years its value varied between 21s. 2d. and 21s. 8d. (Feavearyear 1963, 120–21, Li 1963, 51). Suddenly, in late November 1694, the guinea’s price moved above 22s. and climbing to 30s. by June 1695.
Horsefield (1960, 26–28) noted that the guinea rose relative to silver because “it was in demand as a substitute for silver coins.” We read Horsefield’s phrase as alluding to a “within the interval” penny shortage in our model, when a binding penny-in-advance constraint makes large coins appreciate in terms of small ones. However, Horsefield did not isolate a cause for the depreciation of small coins, although he too cited fears of devaluation of the silver coinage. He noted that the nominal value of the money supply m1 + em2 had increased, largely because e increased, and said that “which was cause and which effect in all this remains obscure.”
But the period from 1694 to 1696 also witnessed broader inflation. Figure 16.4 shows the movements in the prices of bullion, expressed in units of account per unit of weight of metal. To render the series for gold and silver comparable, we show them as percentage deviations from “par,” where par is defined on the basis of the face value assigned to the gold and silver coinage as a result of the recoinage in 1696. Silver bullion appreciated, but less than gold. Gold’s price relative to silver, which had been between 15 and 15.5, remained at 17 in late 1695. Horsefield (1960, 252) reported an index of non-agricultural commodities that rose by 18% from March 1695 to a peak in March 1696.
Feavearyear attributed the rise in prices to the expansion of credit that the Bank of England began in August 1694 with the its first loans to the government (Feavearyear 1963, 128–30).18 He noted that the prevalence of underweight silver coins raised the melting point of silver coinage and therefore the upper bound on the price level given by the commodity money. The widened band made room for an expansion of circulating paper IOUs to raise the price level by expanding m2. Had the silver coinage been full-weight, the notes would have displaced coins and the price level would have remained constant (Feavearyear 1963, 135).19
Figure 16.3 Market price and legal limits on the guinea, 1692–96. Dashed line: rate at which the Treasury accepted guineas (see text). Solid line: maximum rate set by Parliament (Horsefield 1960, 81). Prices: weekly series from Houghton (1692–1702).
A model with underweight coins
We now describe and analyze the debate about how to reform the coinage. To understand the debates and evidence, we have modified our basic model to include underweight coins in the way of Sargent and Smith (1997). We will describe the modifications carefully later (in a passage in chapter 22 that begins on page 361); here we briefly summarize that modified version and some of its implications. To interpret events in Britain in the 1690s, we think of silver as playing the role of the small denomination coins and gold as playing the role of the large coins in the model.
Figure 16.4 Market price of gold and silver bars in London, 1693–99, shown as deviation from par. Par is 5s. 2d. per troy oz of sterling (92.5%) silver (see text for gold par). Sources: Houghton (1692–1702), Proctor (1696–98), Whiston (1696–98), Castaing (1698–99).
At time t = 0, we assume that part of the stock of small coins is underweight. In the model, the mint does not make underweight coins. They just spontaneously emerge, for example, through exogenous depreciation. The price level that inspires melting of underweight coins exceeds that which would prompt melting of full-weight coins. For example, let an underweight coin weigh a fraction δ of a full weight coin. Assume zero seigniorage, which was true in England at that time. Then the melting point for underweight small coins will be γ1/δ, while the minting and melting points for full-weight coins will both be γ1 (see fig. 16.5). This situation implies that full-weight coins will be melted or exported before underweight ones. We let both full and underweight small coins satisfy the cash-in-advance and the penny-in-advance constraints. Start from a steady state with the intervals (now points) aligned for large and small full weight coins. Suppose that a shortage of small coins develops, say because income has grown. Then the model in chapter 22 yields the outcomes that the large coin appreciates, the price level rises proportionately, full-weight small coins are melted, and the value of additional large coins that are newly minted exceeds the value of small coins that are melted. What allows the price level to rise is that the melting point for underweight small coins is higher than the “official” melting point. Then not only does the exchange rate rise, but m2 rises while m1 falls, so that in the model of chapter 22, the ray e(m2)/m1 has risen.
Figure 16.5 Intervals with full-weight and underweight silver coins.
Thus, the modified model seems to fit many of the facts, including the appreciation of the guinea, the rise in the price level, and the melting of full-weight silver coins. We will use features of this model again in chapter 17 to explain the apparent widening over the eighteenth century of the ranges within which prices of gold and silver fluctuated even while the exchange rate between gold and silver coins had stabilized.
The Locke-Lowndes debate
The recoinage episode sheds special light on the social learning process. In addition to Parliament’s involvement, hundreds of pamphlets were published in the space of a few years by many writers. We also have reports from within the government, as well as opinions that the government solicited from outside experts (see Horsefield 1960 for a survey).
In 1695, it was recognized that the deteriorated state of the silver coinage was the source of the rising price level and price of gold guineas shown in figures 16.3 and 16.4. By rendering much of the silver currency underweight, wear, tear, and clipping had effectively widened the intervals, which were supposed to have been reduced to points by the Free Coinage Act of 1666. That allowed movements in exchange rates between large and small coins, increases in prices, and shortages of denominations. Instead of a uniform coinage with a distribution of coin weights for a particular type of coin massed at one point, there prevailed a nondegenerate distribution, with individual coins widely ranging in weights. To repair the coinage, policy makers sought to reduce the distributions of coin weights to point masses. To do so, they would replace the old hammered coins with coins from the new milling technology.
What should be the weight and fineness of the new coins? Debate crystallized around two positions. One was presented by the Secretary of the Treasury Lowndes in a report of September 1695 written at the request of the Keeper of the Seals Sir John Somers and the Chancellor of the Exchequer Charles Montagu. Another position was advocated by John Locke in his comment published within weeks of Lowndes’s report.
Lowndes’s solution was to debase the silver coinage by exactly the amount needed to make the 1695 price level become the new minting point for silver. He calculated that a 20% debasement was required. He justified his proposal with the observation that the market price of bullion was about 77d., while the current standard (represented as 1/b in our model) was 62d. He predicted that the debasement would not increase prices, and so would minimize redistributive consequences. It would trigger minting activity and thereby implement the desired recoinage and end the inflows of gold. By relieving the shortage of coins, it would “thereby hinder the increase of hazardous Paper-credit, and the inconveniency of Bartering.”20
Lowndes also justified his proposal by an appeal to historical practice. He drew a table of the content of the pound sterling since 1300. These are the data plotted in figure 2.1 on page 16. Although he could not prove that the past debasements were indeed responses to the same problem of shortages of small change that now prevailed in 1695 (as both Lowndes and we suspect they were), he could at least make the case that debasements to cure those shortages formed a time-honored practice.
Lowndes’s report apparently did not satisfy Montagu and Somers, who solicited opinions from other experts, including Charles Davenant, a high official in the customs and a writer on economics; Sir Josiah Child, governor of the East India Company and also a writer; John Houblon, governor of the newly created Bank of England; the architect Sir Christopher Wren; the physicist Isaac Newton; and a medical doctor John Locke. Their reports survive.21 Locke’s comments especially influenced the public debate.
John Locke had published his views earlier, when debasement was proposed in Parliament in 1691. The bad state of the silver currency had been known then, but prices had not yet risen (see fig. 16.3 and 16.4). Although the events in 1695 could be seen as falsifying Locke’s views, he did not modify them, and maintained his opposition to debasement. We first examine his 1691 views.
In important parts of his reasoning, although not in all of it, Locke argued as though the intervals were always reduced to points, that variations in the exchange rate e between large (gold) and small (silver) coins were due to uncontrollable variations in the relative price φg/φs, and that minting and melting flows resulted solely from the need to settle an exogenously determined trade balance.
To Locke, “it is evident, that an equal quantity of Silver is always of equal value to an equal quantity of Silver” (1695). Therefore, “Silver, i.e., the quantity of pure Silver separable from the Alloy, makes the real value of Money. If it does not, Coin Copper with the same Stamp and denomination, and see whether it will be of the same value.” (1691, 145). Expressed in terms of our model, Locke said that because the intervals are points, the inverse of the price level coincides at all times with the legally defined intrinsic content γ. It followed that a devaluation has only nominal effects—it increases prices by the extent of the debasement—and redistributive effects—it hurts creditors. Locke said that the melting and exporting of full-weight coins that were observed in 1691 could only be due to the balance of trade, which is determined by real factors. Hence, devaluation can have no effect on this: as long as gratuitous coinage is in place, such melting will take place when silver needs to be exported (1691, 154). As for multiple metals, his view was that silver is the standard, and gold coins should be produced for convenience but left to be priced like a commodity. He said that legal tender laws could not be continuously adjusted to match the exogenous relative prices of silver and gold, and would either be ignored or be damaging (1691, 169).
The coexistence of underweight and full-weight coins creates an anomaly within Locke’s pt = γ1 model. Locke tried to deal with this problem by acknowledging that in 1691 clipped money passed by tale as equal in value to full-weight money. He said that this did not reject his view that prices were always set in terms of the full-weight coins: as long as the two coins traded one for one, no one cared if they were paid in light coins, since they were able to exchange them for heavy coins. And he predicted that if the full-weight coins disappeared, then prices would have to rise and “here you see you have your Money without this new trick of Coinage, raised 5 per Cent” (1691, 161).
This last passage shows that Locke seemed to admit equilibria only at either end of the interval: at the lower end, where full-weight and underweight coins coexist and the price level is determined by the full-weight of coins (pt = γ1), and at the upper end, where only underweight coins remain, and pt = γ1/δ. The latter equilibrium would be inconsistent with his assertion that only the legal value of γ mattered. That is, after full-weight coins disappear, the price level jumps from γ1 to γ1/δ, where δ is the ratio of an underweight to a full-weight coin.22
By 1695, the full-weight coins had evidently disappeared, and prices had indeed risen. Yet, when the equilibrium materialized, Locke did not acknowledge the incoherence, and saw instead the correctness of his “out-of-model” prediction as a validation of his model.
Indeed, his opposition to debasement strengthened. Whereas in 1691 he saw the mooted 5% debasement as mostly pointless, Lowndes’s 20% debasement was more dangerous. “Men in their bargains contract not for denominations or sounds, but for the intrinsick value; which is the quantity of Silver by publick Authority warranted to be in pieces of such denominations,” namely 62d. per ounce. A debasement would thus subvert contracts.
Lowndes had started from the observation that the price of silver was 77d. per ounce. Such a price made no sense if it were based on full-weight pennies, as Locke tiresomely demonstrated. Did it not follow that men, in their bargains, contracted for something else than the legal content of coins, contradicting Locke’s basic tenet? To this, Locke merely replied: “If the Author means here, that an Ounce of Standard Silver is risen to 6s. 5d. of our clip’d Money, I grant it him, and higher too. But then that has nothing to do with the raising our Lawful Coin, which remains unclip’d; unless he will say too, that Standard Bullion is so risen, as to be worth, and actually to sell for 6s. 5d. the Ounce of our weighty mill’d Money. This I not only deny, but farther add, that it is impossible to be so” (1695).
Locke dismissed the historical precedents of repeated debasements that Lowndes had cited because “we are not from matter of Fact informed, what were the true Motives that caused those several changes in the Coin” (1695). As for solving the shortage of money, he said that a debasement would not help any more than changing the definition of the yard could provide more cloth for the army (cited in Li 1963, 233).23 That purely deductive argument ignored historical evidence, some of which Lowndes had cataloged, more of which is contained in previous chapters, that time and again monetary authorities had used debasements to cure shortages of small change.24
Clipping was the problem: to remove the consequences of clipping, and also limit the incentive for clipping, Locke recommended that the government order that underweight coins circulate by weight. He particularly criticized the government’s accepting coins by tale.25 But he did not favor demonetizing clipped money, and he advised against a general recoinage on practical grounds. Instead, he recommended waiting for clipped money to be recoined over the course of time.
The Great Recoinage
Lowndes had recommended a recoinage at a debased standard, while Locke had recommended no recoinage and no debasement. Parliament enacted a recoinage with no debasement and undertook measures to induce people to bring coins to the mint.
When the new Parliamentmet on November 23, the king’s speech drew attention to the monetary situation. On December 10, the Commons resolved to recoin clipped money at the old standard at public expense. Montagu introduced a bill a few days later, which was blocked by the Lords; another bill introduced on January 13 received royal assent on January 21.
First, no matter what their condition, the government accepted coins at tale in payment of taxes and dues until May 24, 1696 and in purchases of bonds until June 24, 1696. The silver thus collected was sent to the mint for recoinage. During that time £4.7 million was received at face value, at a cost to the government of £2.2 million. For those coins, the loss was wholly on the government.
This was far short of the estimated outstanding stock of hammered money (about £10 million, excluding counterfeits), so further measures were taken in July 1696: for another year, hammered money was accepted by weight (62d. per ounce) plus a slight premium at the mint (2d. premium) or in payment of taxes (6d. premium). Between July 1696 and July 1697 £4.9 million, was received by weight. The silver content was recoined into £3.3million, resulting in a gross loss of £1.6 million. But the government conceded a small premium to coin-holders, taking on about £0.25 million of that loss.
Hammered money was fully demonetized in December 1697. After that date, the remaining hammered money, some £0.5 million, found its way to the mint as bullion. This brought the total collection to £10 million.
The total silver output of the recoinage (including £0.4 million in silver purchased as plate at prices slightly above market) was £6.8 million, at a cost of £2.7 million to the government (Craig 1953, 193–94; Challis 1992b, 388). For comparison, we may note that, in 1696–97, tax revenue was £3.4 million and government spending was £8 million, of which £6 million was for war. The cost of the recoinage was thus very large.
The recoinage was chaotic. The mint did not have the capacity to process the mass of silver, and a long delay followed the removal of currency from the public’s hands before new coins could be brought out. The year 1696 saw an intensification of the public debate, with increasing sentiment in favor of a debasement.26 But Parliament resolved in October 1696 to keep its course, and the debate died down.
Locke: genius or idiot?
Locke stands tall in political theory and political history. His Essays on Government made him “interpreter of the Revolution,” the theorist of the events of 1688. Politicians long regarded him as defender of sound money and forbearer of the gold standard. In the nineteenth century, Lord Liverpool, whose Act founded the gold standard, cited Locke for authority. Macaulay, who was not aware that Newton’s 1695 report had survived,27 believed that Newton agreed with Locke and wrote ([1855] 1967, 4:192–93):
Never had there been an occasion which more urgently required both practical and speculative abilities united in an alliance so close, so harmonious, and so honorable as that which bound Somers and Montague to Locke and Newton. It is much to be lamented that we have not a minute history of the conferences of the men to whom England owed the restoration of her currency and the long series of prosperous years which dates from that restoration. It would be interesting to see how the pure gold of scientific truth found by the two philosophers was mingled by the two statesmen with just that quantity of alloy which was necessary for the working. It would be curious to study the many plans which were propounded, discussed, and rejected, some as inefficacious, some as unjust, some as too costly, some as too hazardous, till at length a plan was devised of which the wisdom was proved by the best evidence, complete success.
But Macaulay had mistakenly assigned Newton to Locke’s side of the debate. In fact, Newton agreed with Lowndes and directly disputed Locke’s main arguments. Newton (Li 1963, 217) said that “it seems more reasonable to Alter the extrinsick than the Intrinsick Value of Milled Money, that is, to raise a Crown Piece to the Value of an Ounce of Bullion, wch. at present is at least 6s. 3d. than to Depress Bullion to the present Value of Mill’d Money.” About the redistributional consequences of “raising,” Newton said (Li 1963, 218):
If it be said that by raising the Extrinsick Value of Milled Money, the King in receiving Excise, Custom and Taxes, and all Persons in receiving Annuitys Rents and other debts must be content with a Crown-Piece instead of 6s. 3d. & so lose 1s. 3d. wch. is ⅕ of his Money: I answer, that if the Loss be computed in the Extrinsick value of Money, it will be none at all, because a Crown-Piece after it is raised, will be of the same Extrinsick Value with 6s. 3d. at present, and go as far in a Market or in buying Land. But if it be Computed in the Intrinsick Value, it will be no New Loss, because Taxes, Rents, Annuitys & all other Debts are Payable by Law in Unmill’d Money which has already lost at least ⅖ parts of it’s Intrinsick Value by Clipping and Adulteration.
Although Locke’s writings on the recoinage were praised by Macaulay and Whig politicians, to monetary historians, Locke’s venture into economics has been an embarrassment. On Locke’s assertion that “an equal quantity of silver is always of equal value to an equal quantity of silver,” the nineteenth-century historian Ruding remarked: “this is undeniably true in every instance except that to which the author applied it, namely, to the coinage” (Ruding 1840, 2:42). William Shaw was no kinder when he commented: “The interference of the philosopher Locke in the monetary debates which centred round the great recoinage of 1696, affords one of the most conspicuous instances of the weakness of even piercing intellects before a purely practical and technical question, and of the danger at such junctures of preferring broad generalisations before expert sense” (Shaw [1896] 1967, 103).
We see Locke as doggedly defending a simple version of our model that set seigniorage to zero and usually abstracted from the existence of underweight coins.28 Lowndes was using a modified version (see chapter 22, page 361) that allows for coexistence of full-weight and lightweight coins. Both models are coherent, Locke’s model being simpler and easier to present. Lowndes’s version fits the facts better.29 In particular, it permits the coexistence of full-weight and lightweight coins at a price level consistent with the old standard (pt = γ), but leaves room for preference or income shocks to induce a spontaneous debasement, sudden increases in the value of the guinea and in the price level, minting of gold, melting of silver, and a coincident shortage of small currency. Locke could only ignore these facts or treat them as exogenous. But accounting for these facts was central to the problem at hand.30
Each man’s policy prescription made sense within the context of his model. Lowndes also relied on the medieval experience of debasements as a response to shortages. Locke saw the same history, and noted that it stopped with the Great Debasement of Henry VIII. That led him to think that the motive of all earlier debasementsmight have been to raise seigniorage revenue rather than to repair a shortage of small change, as is possible both in our model and Lowndes’s.
Locke’s recommendation in 1695 reflected his concern about the redistributional consequences of a debasement and for what he saw as its adverse effects on the government’s credibility as administrator of the unit of account. He deplored debasements because they subverted private contracts, whose protection was the government’s duty. Locke was the interpreter of the Revolution.31 A debasement seemed to be the wrong way to build trust at the beginning of a new regime with a Parliament that was supposed to monitor the king for abuses of his prerogative. As Locke wrote: “It will weaken, if not totally destroy the public faith, when all that have trusted the public, and assisted our present necessities, upon acts of parliament in the million lottery, bank act, and other loans, shall be defrauded of twenty per cent of what these acts of parliament were security for” (cited in Li 1963, 90).
Moved by the politicians Montagu and Somers, Parliament rejected debasement, but recoined despite Locke’s advice. For insisting that the state should preserve the sanctity of contracts, Locke would long be remembered among the fathers of the gold standard.
1 We interpret many of these debasements as having been designed to cure shortages of small change, not primarily to gather seigniorage. Angela Redish (2000, 9) remarks that the motive for most debasements was to maintain adequate supplies of coins, not to raise government revenues.
2 Adopting the gold coin as the unit of account would set the stage for Britain’s eventual adoption of the standard formula, with subsidiary silver coins becoming convertible tokens for gold coins.
3 See Bernstein (2000, 180–88) for another account of the debate between Locke and Lowndes.
4 See Sargent and Wallace (1982) for an analysis of Smith’s real bills regime.
5 A disappointed competitor attempted to discredit the patent holder by spreading the rumor that the profits would be higher than initially disclosed, prompting the king to renegotiate with the incumbent a higher share for himself.
6 Ruding (1840, 1:369, 371–72, 378, 381, 386, 388, 389, 399–402); see also Peck (1960, 19–49); Larkin and Hughes (1973–83, 1:287–90, 308–10, 350–51, 363–65, 2:39–41, 500–503).
7 Peck (1960, 9–10, 581–82).
8 “Halfpence and farthings (like other money) should be made of a metal whose price among Merchants is known, and should be coined as near as can be to that price, including the charge of coinage.… All which reasons incline us to prefer a coinage of good copper according to the intrinsic value of the metal” (in Shaw [1896] 1967, 164–65).
9 Peck (1960, 205–15).
10 Here “wanting” is taken to mean “credibly committed.” See French finance minister JacquesNecker’s remarks on credibility cited by Sargent and Velde (1995).
11 We have substantial documentation about the Great Recoinage: Feavearyear (1963, ch. 6–7), Craig (1953, ch. 11), Horsefield (1960), Li (1963), and Challis (1992a).
12 See North and Weingast (1989) for amodern “Whig view” of the opportunistic behavior of the Stuarts, including defaults on a variety of commitments.
13 The personal motto of William Camden (see page 17) still carried much force in British public policy.
14 Since the coins were produced by a mill, coins with engraved edges came to be known as “milled money.”
15 The policy was briefly imitated in France in 1679.
16 Gold coins could be refused if more than 2% underweight, by a proclamation of Elizabeth I of 1587 renewed by James I in 1611 (Ruding 1840, 1:351, 366); silver coins could be refused if clipped, by an act of 1503 (Horsefield 1960, 59).
17 The proclamation of December 24, 1663 indicates that this rate is a target rather than a mandate: “That our Twenty shilling piece of Crown [i.e., 22 carat] gold to be coyned by the Mill and Presse may be even Twenty shillings in value … or as neere as conveniently may bee” (Li 1963, 38). No law made the guinea legal tender at any particular rate.
18 Feavearyear (1963, 131) ascribed the sudden rise in the guinea to fears of an impending debasement of silver (also cited by Craig 1953, 184), increased demand for gold as reserve currency, and speculation.
19 Thus, we read Feavearyear too as using elements of our model. Note that the Bank’s notes became inconvertible in May 1696 and went at a discount, as low as 22% in February 1697; they became convertible again in December 1697 (Feavearyear 1963, 143; Rogers 1887, 170 for the time series on the discount).
20 See Sargent and Smith (1997) for a theoretical analysis of a noninflationary debasement or “raising” along the lines that Lowndes proposed.
21 Those of Wren, Davenant, Newton, and Locke are in Li (1963).
22 Note that his analysis did not allow for pt < γ1/δ when only underweight coins circulated. See our analysis of the modified model below.
23 But Locke proposed to alleviate the absence of denominations smaller than 6d. by making coins of 4d., 4½d., and 5d., which, combined with the 6d. coin, could produce any multiple of ½d. For the literature on optimal denomination structure, see Van Hove (2001) and the references there.
24 Also see Redish (2000, 9).
25 That underweight coins circulated by tale and not weight should have pushed Locke towards Lowndes’s richer model of a widened interval [γ, γ/δ] for the price level. See the modified model below.
26 Macaulay ([1855] 1967, ch. 21) reported considerable commercial distress in 1696 and associated it with temporary shortage of coins accompanying the recoinage. He alluded to the service done by temporary expedients such as bank note and circulating credit issued by opulent men to relieve the shortage of coins.
27 Neither was Feavearyear (1963).
28 Locke conveyed important insights. For example, he crisply expressed the idea that clipping was a spontaneous debasement: “Clipping of Money is raising it without publick Authority; the same denomination remaining to the piece, that hath now less Silver in it, than it had before.” (1695).
29 We don’t know how much Lowndes actually understood, but his views were at least consistent with the observations.
30 Macaulay ([1855] 1967, 4:194–95) was a strong proponent of Locke and an unjust critic of Lowndes. He wrote: “[William Lowndes] was not in the least aware that a piece of metal with the King’s head on it was a commodity of which the price was governed by the same laws which govern the price of a piece of metal fashioned into a spoon or a buckle, and that it was no more in the power of Parliament to make the kingdom richer by calling a crown a pound than to make the kingdom larger by calling a furlong a mile…. Had [Lowndes’s] arguments prevailed, the evils of a vast confiscation would have been added to all the other evils which afflicted the nation: public credit, still in its tender and sickly infancy, would have been destroyed; and there would have been much risk of a general mutiny of the fleet and army.” Macaulay had not learned Slingsby’s lesson.
31 The financial aspects have been studied by North and Weingast (1989).
