by Felix Martin
John Locke: physician, philosopher, and, fatefully, monetary theorist.
(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.11 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.12
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.13
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:
No trade is managed but by trust. Our tenants can pay no rent. Our corn factors can pay nothing for what they have had and will trade no more, so all is at a stand. And the people are discontented to the utmost; many self-murders happen in small families for want, and all things look very black …14
FROM THE PALM OF OLYMPIA TO THE GOLD STANDARD
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.”15 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.”16 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.”17 In the Republic, Plato called it “a symbol that exists for the sake of exchange.”18 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.”19 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.”20 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.21 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.”22 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.”23 As such, it served at the pleasure of the relevant authorities, and “if the king or the community so decides, it loses its value.”24 This was an idea one step further on from the broad understanding of the an
cients 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.25
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.
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 17s 10½d 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.
ENTER THE DRONE: THE APOTHEOSIS OF 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 som
e, 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.
