The relentless revolution: a history of capitalism (18 page)

The crisis over money brought to the fore two surprising facts: The exchange value of money did not depend wholly upon its silver content, and the exchange value of silver differed according to its form—that is, whether it was coin or bullion. Discussions about the money mechanism usually lead to glazed-over eyes, so I’ll move quickly beyond mint ratios and official denominations to the political battle that the coin shortage precipitated. Noble and gentry landlords still had a big say within the ruling class of England, and they wanted to avoid a devaluation of the currency. New coins with a lower silver content would lead to some inflation, a boon to their rent-paying tenants but not to themselves. Realizing this, they sought more advice about a recoinage.

They turned to the great philosopher John Locke, who took an interest in economic subjects, especially when they touched upon political matters. Locke rejected the treasury secretary’s reasoning and insisted that silver had a natural value that lawmakers and kings were unable to change. There was only one source of value in coin, he said, and that was its silver content. Any change of denomination would be a fruitless fraud. Shillings were but silver in another guise. Coins had only their intrinsic silver value; the monarch could not create an extrinsic value by turning it into a coin. He was wrong, but confident, as only a philosopher can be.

Those familiar with Locke’s political philosophy will realize that Locke had a great deal at stake in this debate. In his explanation of how people formed governments, he had asserted that the use of money arose in the state of nature. Because people gave an imaginary value to gold and silver, it became useful as a store of value. This meant that property had been created before government, a key point in his argument for limiting its power. Money, the essential mechanism for commerce, arose naturally and was not dependent upon anyone’s authority. Silver coins couldn’t be more or less valuable than silver bullion because the ruler didn’t have the power to enhance the value of a natural thing. In creating government, people had acted to protect their life, liberty, and property, and they chose government as a convenient means to do that. Locke gave the English a naturalistic theory of political obligations wrapped around an inaccurate description of the money mechanism.

More than three hundred pamphleteers, including Isaac Newton and Daniel Defoe, entered the ensuing debate over the proposed recoinage. The issue was whether or not the clipped coins should be reminted with the official silver content or lowered to match the devaluation by chisel. Sharply divided, the antagonists carried the conceptualization of money to a new level of sophistication. Locke’s opponents—for the most part merchants and entrepreneurs—started with the facts on the ground, as it were. Coining silver added value, as was evident when people accepted clipped coins as easily as they pocketed unclipped ones. The monarch under whose authority the coins were issued
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added extrinsic value to the intrinsic value of silver by turning it into legal tender.

Practical rather than philosophical, many of these writers broke free of Locke’s dogmatic position. They accepted the definition of money as a medium of exchange, separable from precious metals. Reversing Locke’s cause and effect explanation for the rise of money, they said that the utility of having a medium of exchange prompted the use of gold and silver, not an imagined value making gold and silver useful as currency. Money was valued because it was useful, not because men in the state of nature had given it an imaginary value. One writer mocked Locke for pretending “that the Government had no more power in Politicks than they have in Naturals.”
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He hit the nail on the head; Locke was saying that government could no more affect the value of money than it could halt rainstorms. But Locke was far from the last theorist to claim that economic relations were natural rather than political.

Drawing more polemical conclusions, other critics pointed out that Locke “extends his care to creditors and landlords, not regarding the cases of tenants or debtors; men for this four or five years last past, have borrowed many thousand pounds in clipped money, but he notes no unreasonableness or injustice in compelling them to pay such debts again in heavy money, perhaps of twice the weight.”
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Such a clear statement of the interests involved in the case called attention to the differing impact of deflation upon those with money and their dependents. Expressed so publicly, this charge threatened to undermine the perception of the king’s advisers as reasoning impartially for the good of the whole.

Locke had the worst argument in this controversy but the greatest influence. When Parliament finally acted, it decided that the clipped coins would be brought in and reminted at the old standard. The disaster predicted by Locke’s opponents was fully realized. The reminted silver did not provide England with a good currency; much of it was quickly melted down and sent abroad as bullion. The halving of the number of silver coins in circulation caused a drastic deflation. Landlords and creditors reaped the benefits. The shortage of money pressed especially hard on the poor, who rioted in some towns. Even the government had difficulty paying its soldiers.

The fact that the clipped silver coins passed at face value even with a quarter to half their silver clipped away suggested the possibility that other things might be used for money. If money’s status as legal tender counted most, then it should be possible to find gold and silver substitutes. Writers began to tout various schemes to increase currency through paper issued by land banks.

Economic Development in a New English Regime

The year 1689 had brought Mary and her Dutch husband, William, to the throne of England, an event that precipitated the first of many wars with France. The animosities behind these wars had an economic impact, triggering a retreat from European trade and the raising of tariffs. The new king had to accept restrictions on his prerogative and worse—or better, from the people’s point of view—would henceforth share power with Parliament. In one stroke the English had limited and centralized national authority in the new sovereign, the king in Parliament. Both achievements boded well for enterprise. Five years later Parliament founded the Bank of England, a quasi-public institution to receive the tax revenues, lend to the government, and issue bills of exchange that could pass as currency.

Collecting taxes in most European countries was the occasion for protracted haggling between the central governments and the various local provinces, states, or counties within them. The monarchs spent their income as they saw fit. After the Glorious Revolution, uniform rates applied across the country and Parliament monitored how the king spent tax revenues. The new transparency in tax collecting and budgeting enhanced certainty and predictability, both important to enterprise. The rhetoric on free markets often stresses risk taking, which of course is imperative, but investors care about protecting capital and will do almost anything to cushion risks. England’s constitutional monarchy and national bank did both. In 1712 Parliament created a national postal service. By 1715 trade statistics were available to guide policy making.

A dashing Scottish speculator, John Law, founded the first bank in France and used that establishment to raise funds for the development of part of French Louisiana. Calling it the Mississippi Company, Law issued bank notes for the development of thousands of square acres in the New World. The government’s confidence in Law led to his gaining such privileges as those of minting coin and collecting revenue. People almost rioted in their eagerness to buy his company shares, but Law didn’t know when to stop issuing them. Their oversupply brought about a spectacular crash, and the Mississippi Company became the Mississippi Bubble, a new term to describe the sudden inflation and equally sudden deflation of an object of value, be it a certain kind of investment, tulips, or real estate.

Law knew how to dazzle people with the prospect of future riches. Successes like his in the 1720s appear repeatedly in the history of capitalism, pointing up the psychological component of the profit motive. In France what might have been a cautionary tale became a hypercautionary one. The government wouldn’t tolerate paper money for another seventy years. Even in England it soured people on paper money and its use as an economic stimulant. A new orthodoxy congealed. The supply of money, the philosopher David Hume maintained, had nothing to do with prosperity, which depended upon real things in the economy, like shops, stores, and factories. Any increase in money would only produce inflation. This became the classic, academic position throughout the nineteenth century, articulated by David Ricardo and enshrined in the elegant writings of John Stuart Mill.
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The Dutch had actually created the first modern banking system, one that pioneered bills of exchange backed by gold in the bank vault. They also started the first stock exchange and worked out a way to lend money on the collateral of real estate, a forerunner of our mortgages. But it was not until the early nineteenth century, when the Netherlands acquired a king, that the Dutch developed a centralized taxing system. Even then they couldn’t audit the budget of their new king. Matters were even more byzantine in France, where the monarchy had to negotiate with powerful provinces to set tax rates. At the same time, French tax exemptions covered whole provinces as well as most of the nobility. Taxes fell on the poor, whose poverty limited revenues. Not being able to raise sufficient revenue finally stopped the government in its tracks.
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The Bank of England became the most important financial institution of the eighteenth century. Sure of its power to repay the loans because of its publicly stated taxes, British financiers willingly lent to the government. Managing the public debt meant that the directors of the Bank of England were privy to the details of the government’s borrowing and its tax stream. With that knowledge it was easy to keep interest rates low by assessing the risk. These facts, perhaps more than any others, made possible Great Britain’s triumph in most of the eighteenth-century European wars (the American Revolution was an exception). The Bank of England stabilized the capital markets, which were playing an increasingly important role as enterprises became more costly. The British government levied higher per capita taxes than any other European country, but the people got their money’s worth in services and stability. Even the Royal Navy worked hand in glove with British enterprise, convoying home both the tobacco and sugar fleets.
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From these late-century debates emerged a strong sense that the elements in any economy were negotiable and fluid, the exact opposite of the stasis so long desired. Sometimes money was better to have than goods; other times the reverse. Investments in land and trade tended toward an equilibrium, one pamphleteer explained, for “the mutation frequently happens; the money man today is a landed man tomorrow; and the landed man today becomes a moneyman tomorrow; every man according to his sentiments of things turns and winds his estate as he…fancies will be most advantageous to him.”
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Actually to be a landed man in England conveyed a social status that would never be accorded the “moneyman,” but the pamphleteer conveyed accurately the new appreciation the English had for pragmatism in commercial matters.

In England people ceased to think of the market as a place for face-to-face bargaining and commenced to speak of it as an unseen entity comprising thousands of transactions. Throughout the century, writings on prices, demand, and trade policies reached an impressive level of sophistication. Money, food, and land lost their special status, homogenized by reference to prices and rates. The uniformity attributed to human beings when they were bargaining undercut in subtle ways the widespread belief in natural inequality. It would be awhile before the guardians of morals and fixed ranks would have to yield to the most popular idea of interchangeable market participants, but writers on the economy had established a beachhead for the coming invasion of commercial logic. Nobody aimed to change social values. That happened through the process of responding to new experiences. The expertise of the English in economic analysis gave them an advantage that neither the Dutch nor the French, their closest competitors in wealth making, had. Nowhere else had the old order been rejected intellectually as thoroughly as in England. There was little abstract discussion of the market in the Netherlands, and French economic thinkers concentrated on developing government fiscal and monetary politics rather than let business interests have their own way.

Fresh Economic Thinking

Since the late seventeenth century Louis XIV’s famous controller-general Jean-Baptiste Colbert had made the French government an integral part of business planning. It actively promoted new technologies, established administrative structures to deal with industry and labor, and generally offered advice on how to enhance profits, not always with happy results. Two generations later the drastic need to improve France’s capacity to feed its people inspired a new group of economists with strong connections to the monarch. Taking the name “physiocracy,” which meant “the rule of nature,” these analysts gave to agriculture a special quality that bordered on the mystical. They asserted that all value arose from land. Hence all taxation should fall on this economic foundation.

Perhaps nothing reveals how closely theories are tied to social realities than the French case. The English had succeeded in producing abundance while actually freeing farmers from legal restraints. Saddled with an absolute monarch, the physiocrats believed that only the king’s authority could get the country to do the things necessary to match the economic development of England, their greatest rival. Unlike Colbert, the physiocrats wanted more freedom for farmers, merchants, and manufacturers, but government assistance from public officials like themselves was needed to help market participants help themselves.
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