Money (20 page)

The theory of money had to be retrofitted to this, the new philosophy of politics. Lowndes’ premise—and the teachings of the schoolmen—that the value of an Englishman’s money was nothing but an artefact of the sovereign’s authority implied that the private individual “lives merely at the Mercy of the Prince, is Rich or Poor, has a Competency, or is a Beggar, is a Free-man, or in Fetters at his Pleasure.”
²⁶
Locke’s entire philosophical system had been devised to prove that the existence of such absolute and arbitrary power of the sovereign over his people was not just unjust, but unnatural. The power of his arguments had convinced the age, and with the Glorious Revolution and the Bill of Rights they had transformed the English constitution. Lowndes’ proposal to debase the coinage
was a Trojan Horse that could not on any account be allowed to enter the ideal city of political Liberalism.

The foundation of the Bank of England only made it all the more urgent that these potentially seditious monetary doctrines be stamped out. The financial revolution had already demonstrated as never before that the bankers’ mysterious art of credit creation was a source of great political power. The Great Monetary Settlement which the Bank represented was poised to deliver to that power the Holy Grail of the sovereign’s approval. It was a moment at once of great promise and high danger. With the correct understanding of money, the Bank might be the dream instrument for co-ordinating the balance of power between the sovereign and his subjects—a financial counterpart to the ingenious political concept of King-in-Parliament. If, however, the delusions of men like Lowndes and Barbon were allowed to convince people that the value of money was nothing but what the sovereign—and now his bankers—said it was, financial and political tyranny surely lay in wait. The only way to make the Great Monetary Settlement safe for constitutional government was by committing unswervingly to a fixed monetary standard, impervious to interference from the sovereign, the bankers, or anybody else. The possibility of a free monetary order had to be sacrificed to ensure that a free political order could be guaranteed victory.

As we saw earlier, the practical results of the new policy of a fixed monetary standard were not immediately encouraging. And within a generation, rigid adherence to the silver standard even resulted in its euthanasia: so much silver disappeared from circulation that gold came to displace it in practice as the precious-metal standard. Yet the tight connection established by Locke between his monetary doctrines and the fundamental principles of political Liberalism meant that despite these initial hiccups they not only survived, but prospered. That the pound sterling simply was a definite weight of gold became the conventional view of money: thus it was by nature, and thus it was Parliament’s duty to confirm it to be. “Largely as a result of Locke’s influence,” as the great historian of the English currency, Sir Albert Feavearyear, put it, “£3 17
s
10½
d
an ounce came to
be regarded as a magic price for gold from which we ought never to stray and to which, if we did, we must always return.”
²⁷

The question of how the Great Monetary Settlement would adjudicate the ancient dilemma of how to manage the standard was closed. Since money was just precious metal, nature demanded that its standard be fixed—just like the standard for length, or weight, or time. The monetary policies of the medieval sovereigns had been exercises in daylight robbery whereby they had stolen their subjects’ property by abusing their uncivil authority. Money was precious metal: the standard simply a shorthand for weight. On these solid intellectual foundations, the Bank of England could be allowed to mint its new public–private money without danger of infringing the new constitution. Meanwhile, the new school of political economists could finally deliver what money’s inventors, the ancient Greeks, had never managed: an intellectual framework that could explain and justify monetary society.

Eleven years after the foundation of the Bank of England and a year after Locke’s death, Bernard Mandeville—a Dutch physician who had moved to London in 1699—published a satirical poem entitled
The Grumbling Hive, or, Knaves turn’d Honest
.
²⁸
It described a “Spacious Hive well stock’d with Bees, That lived in Luxury and Ease” and explained that the root of its prosperity was nothing other than the venal appetites of its inhabitants. The lawyers drum up disputes in order to generate work; government officials take bribes; doctors look for fees rather than their patients’ well-being; and soldiers fight for money and titles rather than love of King and Country; but the result is a vigorous and prosperous community. Then disaster strikes: the bees get it into their heads that they should convert to the path of virtue. Greed, ambition, and dishonesty are denounced. The politicians and generals are upbraided for being slaves to self-interest rather than servants of patriotism. And the ironic result of this conversion
is that everything stops working: the economy deflates, the population shrinks, and the bees are reduced to the primitive condition of living in a hollow tree. The moral of the poem is that “Fools only Strive, To Make a Great an Honest Hive. To Enjoy the World’s Conveniencies … Fraud, Luxury, and Pride must live, Whilst we the Benefits receive.”

Mandeville’s doggerel was intended to rebut Tory criticism of the ongoing military campaigns on the Continent, and in particular of its chief protagonist, John Churchill, the Duke of Marlborough. The Tories disliked the fact that Marlborough and his Whig supporters had grown rich and powerful as a result of the long war. They had long suspected that the new system of public finance—and especially its most prominent innovation, the Bank of England—was little more than a corrupt machine concocted by the Whig money interest and its cronies like Marlborough for personal gain. With his parable of the libidinous bees, Mandeville sought to show that venality in politics, business, and war were the price of an economy wealthy enough and a polity powerful enough to confront its enemies. The age of chivalry, he warned, was long gone. Men like Marlborough would not fight for glory alone—and it was important to have men like Marlborough on your side rather than the other. The puritanical alternative for which the Duke’s critics argued would leave England enfeebled, poor, and vulnerable to attack.

Mandeville quickly realised, however, that his throwaway polemic contained the seed of a more profound and timeless idea. The particular case of the rapacious Marlborough could be generalised. Not just some, but all actions which are superficially wicked are, perversely, actually for the best. Mandeville republished his poem in 1714 in an expanded edition. The title of this new version—
The Fable of the Bees, or, Private Vices, Publick Benefits
—went straight to the paradoxical point. The very existence of human community relies on “neither the Friendly Qualities and kind Affections that are natural to Man, nor the real Virtues he is capable of acquiring by Reason and Self-Denial.” Instead, it depends upon “what we call Evil in this World, Moral as well as Natural.” It is to the encouragement of Evil that we
owe “the true Origin of all Arts and Sciences, and … the Moment Evil ceases, the Society must be spoiled, if not totally dissolved.”
²⁹
The best—indeed, the only—way of achieving an optimal outcome at the level of the community as a whole is by encouraging the pursuit of ambition, avarice, and raw self-interest at the level of the individual. The satirical poet and partisan had become a serious political economist.

Mandeville’s thesis provoked outrage: philosophers and divines rushed to refute his abominable proposition and his poems and essays were proscribed. But as the financial revolution given wing by the foundation of the Bank gained momentum, it became clear that Mandeville’s paradoxical argument had captured the spirit of the age. Money was everywhere. Every year, new companies were founded. Even country ladies talked about nothing but stock-jobbing. The new world being forged by this corporate and financial revolution clamoured to be explained and justified—and Mandeville’s outrageous hypothesis appeared to do both at once. When it was taken up by one of the Enlightenment’s morning stars, the Scotsman Adam Smith, it became the basis of a fully fledged theory of monetary society that has survived to this day.

In his
Inquiry into the Nature and Causes of the Wealth of Nations
, Adam Smith formulated the first systematic theory linking individual behaviour with the organisation of the economy, and presented the first cogent synthesis of earlier thinkers’ ideas of how the financial revolution had transformed traditional society. The growth of commerce and money, he argued, had “generally introduced order and good government, and with them, the liberty and security of individuals.”
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It was Smith who recognised the historical irony in the accumulation and paying-out of this political dividend. The feudal lords who had been the prime beneficiaries of traditional society had been bewitched by the magic of money. Their love of luxury had made them encourage the monetisation of their feudal rents: “thus, for the gratification of the most childish, the meanest and the most sordid of all vanities, they gradually bartered their whole power and authority.”
³¹

Smith’s metaphor for Mandeville’s paradoxical process—the
“invisible hand” which ensures that “by pursuing his own interest [the individual] frequently promotes that of the society more effectually than when he really intends to promote it”—is so famous that it has long ago taken on a life of its own.
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Smith also emphasised that this pleasing outcome is a feature not so much of the individual’s decisions, as of the system itself: the individual “generally, indeed, neither intends to promote the publick interest, nor knows how much he is promoting it.”
³³
Smith articulated a vision of society in which economic value had become the measure of all things, and static traditional social relations were being replaced by dynamic monetary ones. It was a vision of monetary society as an objective system which would tend towards an equilibrium that was both economic and political. For once traditional society had been thrown over, once “the tenants in this manner [were] independent, and the retainers dismissed … a regular government was established in the country as well as the city, nobody having sufficient power to disturb its operations in the one any more than in the other.”
³⁴
Smith had achieved something unprecedented in the history of monetary thought: a thoroughgoing justification of monetary society in both economic and political terms.

It was an historic accommodation on the intellectual and moral planes to match the Great Monetary Settlement on the practical level. The founders of the Bank of England believed that their marriage of private banking and sovereign money had unleashed the greatest force for economic and social progress in history. The economists had now proved that they were right. And the father of political Liberalism himself had decreed that—so long as one kept to the correct understanding of money, and did not stray from the immutable, natural standard of economic value that it entailed—it was all perfectly consistent with the new gospel of constitutional government. Money had achieved its apotheosis.

There was, however, a problem.

That problem was debt—and specifically, its tendency to accumulate to unsustainable levels. Today, we are only too aware of the vulnerability of monetary society to what is euphemistically known as “financial instability.” But the global financial crisis that began in 2007 is just the last of a long list within recent memory—from international sovereign debt crises like the Argentinian default of 2002 and the Russian default of 1998, to domestic financial crises such as the collapse of the boom in U.S. technology stocks in March 2000, the U.S. Savings and Loans crisis of the early 1990s, or the October 1987 stock-market crash in the U.K. But the unusual persistence of the current crisis has provoked a deeper interest amongst economists in the longer-term incidence of debt crises. Readers rushed to consult the great financial historian, Charles Kindleberger.
¹
To learn of his discovery that “financial crises have tended to appear at roughly ten-year intervals for the last 400 years or so” was either disturbing or comforting, depending on one’s perspective.
²
Within a couple of years, however, the economists Carmen Reinhart and Kenneth Rogoff had published an even more comprehensive investigation into the history of financial crises. Its ominous subtitle warned the reader to expect not just four but “Eight Centuries of
Financial Folly.”
³
And as Tactitus’ account of the credit crunch under the Emperor Tiberius shows, monetary society has been prone to the problem of growing indebtedness ending in a crisis of solvency for much longer even than that.