I began posting a series of comments from Helen Schofield on the history of money yesterday. Today I add her third and fourth instalments. The series will continue over the weekend.
Instalment Three
This lack of government control over demand in the domestic English economy is something Desan points out strongly. She uses it to help explain the big evolutionary change in the design of money in England towards the end of the 17th century. There was, however, in my opinion another driver of this design change and although Desan alludes to it the explanation is best found in the book by Moshe Arye Milevsky (a Professor of Finance at York University in Canada) entitled “The Day The King Defaulted: Financial Lessons From The Stop of The Exchequer In 1672.”
To best understand this book a little more explanation is needed. Whilst English governments could create coinage using Royal Mints starting in Anglo-Saxon times in 886 AD in the Tower of London monarchs used other means of raising money such as the issue of assigned and unassigned tallies. They also borrowed money usually from rich individuals and from foreign banks. Banks only really got going in England with gold-smith banks in the earlier part of the 17th century (although trade between countries had created quasi-banks to allow Bills of Exchange to operate. These were vellum/parchment financial instruments first invented by the Arabs around the 8th century AD and became extensively used in the Lombard area of Italy in the 13th century for foreign trade purposes).
https://www.britannica.com/topic/bill-of-exchange
Monarchs were borrowing money for two main reasons firstly, to support their life-style which they believed should be luxurious and prestigious to win public respect which also included representing the well-being of the nation against that of others (useful to deter attack). Secondly, they needed to either pursue wars (with securing access to silver and gold a prime objective, think exploration of the New World) or defend the country when attack actually threatened.
Instalment Four
I think by now your head will be spinning with the information I've provided so far, even worse Desan and Milevsky are telling us 17th century England was a key area of the world for the evolutionary design of money because a lot happened in this century. After some pondering I've decided the best way to facilitate getting a handle on this complexity is by writing about them under the following headings; Technology, Trust, Institutions/Agencies, Financial Instruments, The 1672 Exchequer Stop, The Bank of England 1694, and Lessons To Be Learnt.
Technology
We don't tend to think much today about the role played by technology in money creation way back in the 17th century. In the early part of the 17th century the main technology deployed in England was coinage, using vellum/parchment for a Bill of Exchange financial instrument and keeping account records of extended credit/loans and of course wooden tally sticks. However, at the end of the 16th century mass paper production began in England and together with the 15th century development of the printing press in Europe which spread to England this opened up a massive opportunity for cheaper production of printed material leading to largish scale production of bank notes beginning at the end of the 17th century.
Trust
The 17th century in England saw the inevitable breakdown of trust in England between two ruling bodies the monarchy and Parliament this was largely over three issues the Divine Right to Rule and Parliamentary Sovereignty, Religion, and Spending by the monarchy. The issue of who should have the final say in matters affecting the English nation is somewhat akin to what's been happening in the United States over the last few years with Donald Trump playing the role of petulant king wanting everything entirely his way aided and abetted by a Republican Party “aristocracy” in the Senate. This was finally resolved by the Glorious Revolution in 1688 when Parliament circumscribed the monarch's powers especially levying taxes and blocked the chances of an absolute monarchy being imposed again.
In the case of religion it's probably not remembered that the opposition to usury was still strong in the Catholic faith in the 17th century in England. Indeed Thomas Clifford who is believed to have been the adviser to Charles II that resulted in The Stop of The Exchequer in 1672 was somewhat of a fanatical Catholic opposed to usury. In the background was a predominantly protestant English nation that was not only suspicious that both Charles I and II were dominated by Catholic advisers but both had married Catholic wives.
There were two specific incidents if not three that created strong distrust amongst the wealthier members of English society. Merchants and gold-smiths were used to using the vault at the Royal Mint in the Tower of London to store valuables such as coinage and bullion. At the start of the Civil War Charles I temporarily impounded this wealth. There is a view that Charles II did the same when he was attempting to get gold-smith bankers and wealthy merchants to lend him more money. There are conflicting views whether this actually happened. Then there is the Stop of The Exchequer. More about this later.
We also shouldn't forget the Civil War itself which split the nation.
Finally, there was the management of the specie based coinage which was never for most of the 17th century adequate to meet demand for reasons I've already outlined.
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A thought on the two themes as apply in the late 20th century. Technology….money is now digital with the arrival of IT. Trust…..banks have usurped institutions of government and citizens have lost trust in parliamentary government. It is not yet clear whether authoritarianism or a an enhanced form of democracy will emerge. The latter will be more resilient and adaptable so will win out in the end but possibly not before a failed experiment with authoritarianism.
Thanks Helen,
I too am a great fan of looking at historical evolution of money ,we can indeed learn a lot from what happened in the past. You do see the same old problems despite the change in technology, politics and power. Money and who gets to create it is still front and central to everything. They say “money is power” but to be more accurate that should read “money creation is power”. That is, if you look at who actually creates the money we use(in whatever form that may be) they are the ones who have the power. In the early days, going back to the Romans, right up to the 17th Century that power more or less lay with the Monarch. However as expected this resulted in a large amount of abuse of that power by Sovereigns who thought they represented God’s will on the planet, so not exactly open to running a monetary system that helped the majority.
Naturally,over time the new middle wealthy classes resented having their wealth stolen as you describe. Wealth was also stolen when the face value of coinage used was frequently “revalued” or collected in and reissued with less gold/silver content, which gave the King free money at the cost of those who held the currency. France for example suffered 123 Royal debasements of its coinage from 1285 to 1490.
The increase in trade also became an important factor, particularly on the European continent. Currency debasements gave rise the grwoth of fledging merchant banks in Europe before the UK. What these banks did was to circumvent the traditional money systems use to that point. Large well known merchant banks or trading houses,usually owned by wealthy families like the Medici’s ,were well known and trusted. So their credit was universal across borders, which was significant. For the first time ever bills of credit could be issued by a bank or trading house in one country and used in another and transferred into the local currency. This was a new development in that money(credit) was able to cross national borders and currencies, something that the old national coinages never really had ben able to do. So money became “paperised” so to speak,coins were no longer needed for business. It was through just bills and ledgers that the major banks would meet every few months at a central location and settle their debts(netting out or rolling over debts in various currencies). So finance centres sprang up. The city of Bologna became the first Manhattan according to Felix Martin in his book “Money ;An unauthorised autobiography” with new found wealth and new multi story towers!(180 in all, over a 4km square)..
These merchant bankers challenged the power of the Kings. Lyons became large centre for clearing houses too. The merchant banks were essentially issuing private money. These were bought(for a fee) by smaller tradesmen who could use this “money” in places where their own credit was unknown but where the merchant bank’s was…very useful for international dealings. This private payments system moved trade away from Sovereign Money. Banking had been invented. Though they had massive balance sheets they effectively has no real assets to worry about. They grew faster than normal commercial businesses for that reason. Genoa, Florence and Barcelona also became centres of finance and cheque usage flourished. Fractional reserve banking was born. Money created via issuing bits of paper and cheques, eventually these banks even created their own currency the “Ecu-de Marc”, a private monetary standard. All this circumvented the powers of the Kings of Europe to create the money.
The Dutch banks were the first to completey topple the Sovereign strangle hold on creating the nations money by setting up the first central bank. The merchant banks had finally overthrown the Sovereign. The Bank of England was soon to follow in1694, thanks to William of Orange’s reign, being even more profligate than that of Charles II. This was without doubt a revolution just as real as the political one in 1688.
As Felix Marti puts it ,the business class could now halt the “financial incontinence” of the King. Sadly we inadvertently ended up replacing one tyrant with another! What we need today is to reclaim that right to create money and actually give it back to the Sovereign, of course that is the power that now has that been transferred via the prerogative of Royal Assent…..namely give it back to our Government. And about time after over 400 years!
@ Vince Richardson
Thanks Vince I never quite knew why the tower homes in Bologna (of which there were previously many more) existed. They are certainly somewhat weird to come across after visiting other old towns and cities in Italy.
The paper by Jeffrey Lau and John Smithin which I find myself repeatedly referencing probably because it comes close to summarising much of Christine Desan’s work has two interesting parts in it which refer to Bills of Exchange directly and indirectly. Both are Simmel quotes:-
“According to Simmel, ‘money is only a claim on society . . . money appears, so to speak, as a bill of exchange from which the name of the drawee is lacking.’ ”
“Money ‘is always credit because its value rests upon the recipient’s confidence that he will be able to acquire a certain quantity of goods in exchange.’ ”
The point I would like to make is that the evolutionary re-design of money that took place in England in 1694 with the establishment of the Bank of England not only overcame the short-comings of specie money but also helped towards resolving the split government problem.
So you had an increased democratisation of Bills of Exchange on a national basis through the issue of banknotes which ultimately led to an increase in the amount of currency that the ordinary worker could use on a daily basis without having to resort to credit tabs and the inherent trust issues attached to these.
Certainly as far as government (the biggest purchaser of goods and services in the UK), manufacturers and merchants were concerned the introduction of banknotes provided a more direct payment method not to mention savings method.
In Christine Desan’s view the increased volume of currency circulation, slow though it was, affected demand in a very radical way leading to the increased productivity in Britain we now call the Industrial Revolution:-
“Contrary to the entrenched wisdom, the British did not merely develop existing forms of credit — bills of exchange, merchant clearing-houses, forms of forced public lending. They actively (and often accidentally) re-made credit so that it radically expanded the money stock and related forms of liquidity. The leap in productivity that scholars identify — in particular that jump in productivity that occurred between 1780 and 1820 — occurred just when British banking came into its own.”
https://justmoney.org/c-desan-the-power-of-paradigms-in-histories-of-economic-development/
Sorry I forgot to reference the Lau and Smithin paper again:-
https://www.researchgate.net/publication/5172361_The_Role_of_Money_in_Capitalism/link/548898b00cf2ef344790a152/download
Actually with reference to the BoE setting up in 1694, its architect William Paterson from my understanding, eventually solved the problem of the Treasury’s increasing deficits for the tax weary elite. William of Orange having spent fortunes on a war with France had left the Exchequer in a tight spot to say the least. Paterson’s solution was to create a private bank that would lend to the King in return for future tax receipts. Though this had indeed been done before(with the danger of sudden and fatal default) , he got the King to agree something further in return, something no other British king had ever allowed and something that probably passed most people by. This was that the King would give Royal approval of the banks right to issue the national currency. This was in effect a sharing of money creation(seigniorage) powers, the bank would be allowed to issue notes on behalf of the crown which gave Royal backing to a private bank liabilities.
It has to be said that this deal helped both sides, the King restored his credit worthiness and the banks benefitted from the security of having their lending being accepted as the safest form of money…aka the national currency. The two sides soon became joined at the hip to a point that Adam Smith in 1776 said “Without the state, the Bank would have lacked authority ; without the Bank the state would have lacked credit”.
But crucially the banks had been given the legal backing to create private money and lend it out.It set a model for the rest of banking history. But we still have a peculiar reserve system still in place where Sovereign money remains as the only form of settlement for private banks
As a matter of interest today the MI money supply(money in overnight bank deposit accounts) in 2009 was around £1 trillion. By 2020 that M1 figure is over £2 trillion. So that’s an extra £1 trillion in a decade, QE in that time has been £895 bn ,which more or less accounts for this increase, the banks of course can themselves increase this through excess lending over loan repayments, but it looks like the majority of that increase in money in circulation is actually newly state created money. Which is showing that the state has been increasingly using its old powers to create our money once again.
https://tradingeconomics.com/united-kingdom/money-supply-m1
You ate 100% right on M1
Thanks for the reply,
I have no doubt that the extension of credit at that time did indeed help the Industrial Revolution along with a ,few other factors like coal, geography ,the Royal/Merchant Navies and the invention of the steam engine .
As a child growing up in the 60’s I think I was probably among the last generation that was still brought up to believe that the British Empire was something to be proud of. And sure enough I grew up believing that. That we superior British had subjugated almost a quarter of the planet because of our sheer brilliance and superiority. As things have evolved recently this attitude is becoming increasingly questioned. Money creation helped for sure but to what ends? Seems to me now that all that was for the forces of War, Slavery ,Imperialism ,exploitation and much human misery in the colonies as well as the cotton mills and coal mines at home. It also created a very wealthy banking class who have been the bane of normal functioning economy ever since with never ending booms and bust cycles and added inequality.
In other words it unleashed hell. ; )
I know you and most followers of this blog don’t approve of this either, so it is well worth us looking at how this came about.
@ Vince Richardson
Well I deal with your comment in my Seventh Installment when I talk about the rot setting in with Britain legislating in the Gold Standard (specie money returns with a vengeance!) in 1844.
Of course the Gold Standard helped encourage imperialism quite considerably. Ironically the Industrial Revolution had helped make gold extraction from mines much easier but then this revolution had of course substantially increased domestic demand.
Specie money had never really gone away despite the invention of banknotes and global capitalism walked hand-in-hand with imperialism. So, for example, a central argument for why the American Revolution took place was that the colonists struggled to get hold of British specie money and what they did get hold of rapidly disappeared back to the UK to pay for British imports. This is why they wanted their own currency but the British elite didn’t want them to have one. They regarded the USA as a basic commodity producing country not a manufacturing country.
Vince
I also grew up in the 1960s with a legacy of pure war history books. Since then my views have changed. What strikes me now is we acquired an empire with so few resources. In many ways it seems to be based on bluff. We did have command of the seas and no powerful competitor, but we ruled India with very few forces.
I think part of the reason in Asia was that we replaced local rulers who were often no better and could not offer some of the advantages of modernity.
In Africa it was more case of brute force and in Australia and Canada, little effective oposition.
So it varied but, as you say, with some very dark areas such as the opium war, the Irish famine ans slavery.
A year ago I gave a talk to my local Western Front Association on what happened when the troops came, backto a land fit for heroes. Researching the era again after some years, what struck me is the extent that the City and finance have taken precedence over industry.
Hi Helen,
Coincidentally 1844 was the year of the Bank Charter Act when the BoE banned all private bank note issue and only allowed the BoE to do so ,in an attempt to stop the many bank crises. Specie would no doubt be more secure way of payment. Most of those using paper would be the wealthy as you have pointed out. I did read a marvellous book about banking in the NE England(where I live) in the 1800’s which showed the many runs local banks experienced. There also was always a shortage of coin, many banks made their own pennies and even these were forged at times such was the demand. The penalty for forgery was death! and the BoE had dozens executed for simply passing on forged notes….even innocently!…it was quiet disgraceful and vindictive action by the bank which was producing very easy to forge notes at that time. It was eventually stopped after a London women was hung, the outcry eventually convinced the govt to ban the sentence.
I would have thought that having Sterling as the world reserve currency helped the UK more than being on the gold standard. It’s easy to rule the globe when everyone needs your money to trade. The obsession with gold standardising was ridiculous, as John Locke’s argument about creating pure silver coins proved. Besides gold only covered a fraction of outstanding liabilities of banks in the UK. There was not enough gold to cover all the debt. As usual confidence was the key. End of the day that’s all that keeps a bank solvent.
Ian,
Well I take some consolation from the fact that British Imperialism was slightly better than the French from what have seen. I was in Vietnam last year and they really have a bad reputation over there,the thing that amazed me most though was that the Vietnamese seemed to hold little grudge against Americans, though there was plenty official, govt PR to criticise the USA as you would expect, the people didnt seem to be that bothered. I guess they are mostly young now and have no direct experience of the “American War” as they call it.
Interesting to see the word through different eyes.
A big part of the monarchy demanding huge amounts of money, whether bullion, coinage, promissary notes etc was the constant wars with the French, Spanish and Dutch. Later of course in more recent times with Germany and the cold war with the USSR. The military industrial complex is still a huge factor in demands and there seems to be no problems raising the huge sums required for Trident, aircraft carriers and so on.
@ Bill Hughes
We’ll see what Biden can do to reduce tension between nations. Trump didn’t appear to understand “Barge Economics” so made a big deal of re-negotiating a Phase One Trade Deal with China but global capitalists are switching production to other low cost production countries. China is “re-badging” some of its production through Vietnam.
http://thomaspalley.com/?p=87
Biden’s approach I think will be one of forming alliances with other nations to see if they can agree a set of joint-constraints that limit the negative effects of countries playing the “Barge Economics” game.
The military-industrial complex has played a key role in maintaining the domination of the world economy by the US dollar. The dollar’s value has probably been helped by the productive capacity of the “defence” industry but probably even more importantly by the military power it grants the US to maintain the oil price – after the abolition of the gold standard by Nixon in 1971 the value of the dollar has been backed by oil has it not? – or has been until now , as we see the decline in the value of oil in a climate change challenged world.
@ Jim Osborne
I don’t think you can ignore the technique of non-USA countries buying USA treasury bonds as a way of boosting the value of the American dollar so US consumers can buy more foreign-made imports. If you then also operate your economy on the basis of rigging your currency so that it doesn’t increase in value (or not by normal market adjustment) due to demand for your exports like China then the USA dollar value is artificially propped up. This has all kinds of repercussions one of course being a mentally unhinged president!
https://www.lowimpact.org/chris-cook-oil-markets-from-nixon-to-trump/
Check out this interview with Chris Cook (Senior Research Fellow, Institute for Strategy, Resilience & Security, University College London), who plots the history of the dollar and its link to the oil price from the Nixon era to Trump
@ Jim Osborne
Yes I knew about Nixon making the Middle-East oil producing countries “an offer they couldn’t refuse” oil being priced in American dollars. Indeed pressure was put on Iran by maritime insurance companies around the world refusing to insure oil tankers that went to Iran and also the Americans blocked Iran or their supporters using Fedwire which is the usual means for moving American dollars around to pay for oil transactions.
So yes I agree that the American military/business complex has also played a role in helping maintain the value of the American dollar. Being the world’s policeman has its perks.
One thing I meant to put in my Christine Desan and MMT saga but forgot at the end is that MAD (Mutually Assured Nuclear Destruction) has probably made the world safer for global capitalism (Barge Economics) whilst the use of conventional relatively small scale wars (Iraq) or the threat thereof has allowed the United States to throw its weight around.
As far as oil is concerned the United States is rapidly moving away from its dependency on imported oil both in terms of sourcing its own but moving away from fossil fuel use period. We shall see how well Biden succeeds in growing this move away from such dependence using climate change threat as a dangling carrot and rear-end stick!
This is instalment Two isn’t it? Titled Instalment Three.
I thought I explained that…..