Money (19 page)

Lowndes estimated that a one-off, 20 per cent reduction in the silver content of the coinage would do the job.
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The Mint price of silver was 62d. per ounce, but by the time of Lowndes’ report, the market price was 77d.
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As a result, the silver crown piece, containing just under an ounce of silver at its full, official weight, had a tariffed, nominal value of 60d. but a market value as bullion of 77d. It was hardly surprising that the coin was disappearing from circulation. Following the proposed recoinage, a full-weight English crown would contain only about four-fifths of an ounce of silver—worth around 60d. as bullion, in line with the crown’s tariffed, nominal value and hence presenting no incentive for clipping or export. Barring any unexpected further increase in the market price of silver, the reset Mint price would remain attractive enough that silver bullion would start to be brought in for coining again, and the coin supply would recover. All in all, it was an eminently sensible and realistic solution, based on sound historical precedent. Unfortunately, it encountered an implacable opponent in the person of the most highly respected public intellectual of the age: the philosopher John Locke.

As the leading theorist of the new system of constitutional government, and the chief intellectual guardian of its principles, Locke was invited by Parliament to comment on Lowndes’ report. He responded, in December 1695, with a scathing polemic against the proposal and the ideas underpinning it. In Locke’s view, Lowndes’ argument depended upon a fundamentally incorrect understanding of money and the monetary standard. Lowndes talked about money as if it were different from the coinage itself. This was, Locke warned, at best a confusion, and at worst a typical City smokescreen designed to conceal some no-good trickery. The reality was that money was nothing more nor less than silver itself. “Silver,” Locke
began his response unequivocally, “is the Instrument and Measure of Commerce in all the Civilised and Trading Parts of the World” and “the Measure of Commerce by its quantity, which is the Measure also of its intrinsick value.”
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As for the monetary standard, that was therefore much less mysterious than Lowndes was making out. A “pound” was simply an objective reference to a definite weight of silver. The fact of the matter was that “[m]en 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.”
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Lowndes’ fanciful justification that there was some metaphysical plane on which a coin would retain its “value” despite losing 20 per cent of its silver was therefore as bare-faced and ridiculous a deceit as claiming “to lengthen a foot by dividing it into Fifteen parts, instead of Twelve” while still “calling them Inches.”
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John Locke: physician, philosopher, and, fatefully, monetary theorist.

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illustration credit 8.1
)

Lowndes’ conceptual errors meant that his policy recommendation was dangerously deluded, if not positively treasonous. His account had everything exactly the wrong way round. The idea that the pound could somehow simply lose or gain value, independently of the silver content of the coinage, was sheer nonsense. The monetary standard did not float around like an insubstantial ghost; it was a natural fact. A pound sterling was no more nor less than 3 ounces, 17 pennyweight, and 10 grains of sterling silver, and never could be.
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It was categorically not the case that the pound had mysteriously lost 20 per cent of its so-called “value,” and that the solution was to reduce the silver content of the coinage. What had really happened was that there had been an outbreak of mass criminal deviance unparalleled in English history. The coinage had been clipped, sheared, and melted down on a previously undreamt-of scale. Since money was just worth the silver it was made of, this amounted to nothing other than the robbing of unfortunate coin-users in broad daylight. The pound had lost its value because it had lost its silver content—not the other way round—and Lowndes’ proposal actually to sanction this disaster by reducing the official silver content of the pound sterling was therefore nothing short of conniving with the coin-clippers. The only thing that Lowndes had got right, Locke concluded, was that a recoinage was in order. But it should not be one that meekly acquiesced in a criminal debasement of the national currency. It should be one that restored to the current, mutilated coin issues their full, official weight of silver.

To the horror of Lowndes and most of the financial establishment, Locke’s prestige and political influence won the day. In January 1696 Parliament ordered that, from June, clipped and worn coins would no longer be legal tender. Holders were invited to use them before that date to pay their taxes or purchase government bonds. Clipped coin collected in this way would be re-minted at the official weight, with the Exchequer liable for any silver top-up that was required. Light coin not collected by June would be demonetised and accepted from July onwards only at the market value of its actual silver content. If one had taxes to pay, or could otherwise get one’s
light coins to the Mint in time, in other words, one’s wealth would be safe. If one did not or could not, one would take a loss equal to the shortfall between the coins’ bullion value and their now obsolete nominal value.
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The whole exercise was a debacle from start to finish. Before the deadline, shrewd profiteers toured the country buying up clipped coins from befuddled shopkeepers terrified that they would be marooned with devalued coins because they had no taxes due, and then bribed corrupt Revenue officials to pass the light coins through their accounts and pay out full-weight ones in return. When the deadline passed, those left holding light coin suffered a swingeing loss. £4.7 million worth of coin, for example, was collected by the Exchequer. This was found to contain sufficient silver for only £2.5 million when re-minted at the full, official weight. Galling as this was for Lowndes at the Treasury, at least he had understood these mechanics—and Parliament had assented to them, albeit against his advice. That could hardly be said of the thousands amongst the poorer and worse-informed classes who had failed to exchange their coins in time. There were riots in Yorkshire, Staffordshire, and Derbyshire, and in July the government was even forced into a partial concession, offering to exchange the silver in light coins for a special government bond issue at sixpence per ounce more than the Mint would pay.
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These abrupt redistributions of wealth between the well-informed and those left carrying the can were only the start of the mess. The operation took much of the existing coinage out of circulation. Fewer coins were then returned to circulation upon re-minting. And since the new, full-weight coins were still worth more as bullion abroad than as coins in England, many were immediately exported. There was an immediate and asphyxiating coin shortage. Deflation set in: prices fell, business confidence collapsed, and trade contracted. The growth and stability of the English economy was added to the litany of under-appreciated benefits sacrificed on the altar of Locke’s monetary philosophy. The Tory pamphleteer Edmund Bohun hinted at the human cost of this self-inflicted economic trauma when he reported from Norwich in July 1696 that:

John Maynard Keynes once remarked of a book by his intellectual nemesis Friedrich von Hayek that it was “an extraordinary example of how, starting with a mistake, a remorseless logician can end in Bedlam.”
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Lowndes and other practical men of business had similar feelings about Locke’s disastrous recoinage policy. They were baffled by the great philosopher’s argument, which seemed to them to fly in the face of acknowledged facts—starting with the self-evident truth that there was no intrinsic link between the silver content of coins and their nominal value, nor had there ever been. The monetary standard had always been flexible: indeed, that was precisely what the perennial struggle between the sovereign and his mercantile subjects had always been about. The value of money depended not on the stuff that the coinage was made of but on the creditworthiness and authority of the sovereign who stood behind the tariff that specified the nominal value of the coin. “[M]oney has its
Value
from the authority of the government, which makes it currant, and fixes the price of each piece of Metal,” explained the contemporary financier Nicholas Barbon; as a result “money will be of as good
Value
, to all intents and purposes, when it is coined lighter … [f]or the authority being the same, the value will be the same.”
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This understanding of the nature of money was derived not from any complicated philosophy or abstract economic theory, but from the plain fact that even much worn and clipped coins still circulated at their tariffed, nominal value. To Lowndes and his City colleagues such an understanding of money was as uncontroversial as it seemed innocuous.

Locke’s ideas did, after all, depart substantially from the mainstream
of ancient and medieval monetary thought. Amongst the ancients, the general understanding was that economic value was quite obviously a property of the social world, and that money was an archetypal social phenomenon. The very term that the Greeks used for money was
nomisma
, “something sanctioned by current or established usage or custom.”
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In the
Republic
, Plato called it “a symbol that exists for the sake of exchange.”
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His pupil Aristotle held the same view, arguing that “it exists not by nature but by convention, and it is in our power to change it and make it useless.”
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This understanding of money as a social institution, and of coins as symbols of social relations, had its roots in a Greek culture renowned in the ancient world for its “distinctive inclination … to symbolic substitution.”
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Herodotus reports that the Persians could scarcely believe their ears when they discovered that the prize for which the athletes at the Olympic Games competed was nothing but a crown of palm leaves.
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Money was a technology built on the basis of the revolutionary notion of economic value—an invisible substance that was both everywhere and nowhere, and which had a presence in the physical world only via the symbolism of coinage. As such, the “nominalist” view that money has value only by convention came naturally to the Greeks.

In the hands of the medieval schoolmen, there even developed a more extreme position—the idea that the convention in question is a deliberate artefact of the sovereign. Monetary exchange, Aquinas said, “was invented by reason, not by nature.”
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It was the “one thing by which everything should be measured … not by its nature, but because it has been made a measure by men.”
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As such, it served at the pleasure of the relevant authorities, and “if the king or the community so decides, it loses its value.”
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This was an idea one step further on from the broad understanding of the ancients that value was a property of the social, rather than the physical, reality. It argued in addition that this social property was a creature of the sovereign political authority. It represented the origins of “chartalist” thought.
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Locke’s conception of money was therefore unorthodox—all the more so, given that he was living in the middle of the financial revolution.
Coinage, despite its continuing importance, was fast losing its franchise on the representation of monetary credit. The new financial technologies of banks and banking were taking over. The past two years had even witnessed the foundation of the Bank of England itself and the first emission of its paper currency. And this of course was what made Lowndes and the City men—the doyens of this new world—so incredulous of Locke’s argument, and of its success.

But these worldly men were missing the point. The truth was that Locke was only too well aware of the political importance of the monetary standard. Indeed, the origins of Locke’s monetary theory resided precisely in his political thought. For three decades, through all the turmoil of the Restoration, the Exclusion crisis, and the Glorious Revolution, Locke had laboured incessantly to demolish the intellectual credentials of absolute monarchy and secure the claims of political Liberalism and constitutional government. At the centre of his philosophical system was the axiom that the property rights of the individual exist by nature—not by dint of sovereign approval. This principle was the foundation on which Locke’s defence of civil liberties against the infringement of absolute power had been constructed and the ideological basis of the new regime of constitutional government. There was no question that money—self-evidently one of the most important of all classes of property—could be exempted from this reasoning.