This is the third in a series of comments from Helen Schofield on the history of money. The first is here, and the second here. Today I offer what Helen describes as her fifth and sixth instalments. The series will end tomorrow.
Institutions / Agencies
Whilst I've explained that “Lombard” style quasi-banks or agencies have been around in Europe since the 13th century and 9th century in Arab parts of the world to lubricate trade between countries I didn't expand on the nature of goldsmith banks in England. These were fractional reserve banking operations. They got going in England towards the middle of the 17th century. Originally engaged in gold-smithing operations making jewelry, serving utensils and cutlery, even crowns and diadems, etc. they had to keep the precious materials they worked with safe in vaults. (Note whereas gold-smithing had been a trade Jewish people had specialised in the Jews had been expelled from England at the end of the 13th century by Edward 1st. It was Oliver Cromwell who allowed them to return in 1657 which meant the gold-smiths in England were predominantly English.)
Over time they made these vaults available to wealthy members of the public who wanted to store valuable assets such as coinage and tallies, etc. Of course they charged a fee for this storage and provided a receipt itemising what they were storing. At some point the proverbial light bulb went on in their head that since many customers kept their valuable items in storage for years especially coins and tallies they could actually utilize them to make money on them. Of course, the fact they were doing this was not a complete secret to many of their customers since they were paying interest to their customers to “bank” coins and tallies with them!
The one institution that was missing, and common knowledge throughout much of the 17th century that this was so, was something that would create a currency that was more readily available and stable than the specie coinage of gold and silver. This was the big conundrum because it ran up against the issue of trust both for domestic and foreign trade purposes. If governments or events threatened the value of specie coinage then at least some value or indeed possibly all could be salvaged by selling it as bullion, usually in other countries.
As Christine Desan points out in her “Making Money” book this conundrum was somewhat alleviated by the large amounts of gold and especially silver flooding into Europe from the New World. However, economic historians argue that not a lot of the benefit of this inflow went to England and there were two outcomes. Most of the inflow got recycled to the East for the import of commodities and although Spain benefitted the most it was already a trade deficit country because it didn't produce much of what other countries wanted. The consequence was countries like the UK had to produce commodities and goods for export whilst Spain never bothered and lived briefly “high on the hog” till the New World flow of gold and silver started to dwindle not least because the English navy came to dominate the seas.
The conundrum of how to achieve a better functioning English currency was resolved as Christine Desan argues very much by accident and as we will see The Stop of the Exchequer played a powerful role in this that also has parallels with the cause of the GFC in 2007/2008. But first before we get to “The Big Stop” we need to know about the financial instruments available in the 17th century.
Financial Instruments
This section is concerned with the main financial instruments being used during the 17th century in the run-up to The Stop of The Exchequer in 1672. I've already mentioned the English especially the merchant class were familiar with the Bill of Exchange which was also used domestically as well as for foreign trade (the domestic use eventually evolved into the cheque).
The tally stick is another financial instrument. Although of ancient origin they were first introduced into England by Henry I around 1100. In 1660 when Charles II first came into power under the Restoration he decided his income awarded by Parliament was inadequate and started selling tally sticks to the gold-smith bankers at a discount. The bankers set up a secondary market to on-sell the tallies at a profit. In this way Charles II avoided accusations of usury by selling the tallies with an interest rate attached. This manoeuvre, however, paved the way for the introduction of the Treasury issuing a financial instrument that paid interest. Enter George Downing!
In May 1667 Downing was made secretary to the Commissioners of the Treasury and he took part in the management and reform of the Treasury. It was Downing who was responsible for promoting the idea of Treasury Orders which paid 6% interest. These were the forerunners of what we now know as Treasury bonds or gilts. The way Downing implemented the Treasury Orders was to have each order assigned a number. The amount loaned by the purchaser on the order was unlimited except by a particular hypothecated tax revenue stream expected. So for example, in Milevsky's book he quotes what is called The Eleven Month Tax. There was no set redemption date on the Treasury Order the principal plus 6% interest was redeemable when the tax revenue came into the Exchequer and payout was determined by what number you had on your Treasury Order the lower your number the earlier you got the money. There was no restriction on trading the Treasury Orders to others.
Finally, as already mentioned, the gold-smith bankers were issuing receipts including paying interest on coinage and tallies and possible other valuables left in their safe keeping. Working on the principle of fractional reserve banking the gold-smith bankers began using some of their customers' coinage and tallies from their vaults to buy Treasury Orders. As Milevsky says in his book little did they know they were buying their own murder weapons.
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Vince Richardson raised the interesting point on my first two installments that under the Roman Emperor Tiberius there was a credit crunch with the government having to resolve it by being the Lender of Last Resort. Here’s a more extensive discussion of this period which has the further merit of seeing the similarities with the GFC of 2007/2008 (nearly 2000 years later!):-
https://epicenter.wcfia.harvard.edu/blog/financial-crisis-then-and-now
Nothing new under the sun as the old adage says but here was a government created money (actually brass based coins, sestertii) operation to back up money continuing to be used stabily for the purposes of reinforcing social cooperation.
Vince references his knowledge of the Tiberius credit crisis to Felix Martin’s book “Money” which I bought about the same time as buying Christine Desan’s book “Making Money” so I got side-tracked by Desan’s book and didn’t read Martin’s. I started reading it yesterday and wish I had read it earlier before I started writing about Desan and her relevance to MMT. Martin has a great chapter about how John Locke screwed things up for the British by not understanding how money helped reinforce social obligation. He quite literally believed the weight of silver in a coin reinforced this obligation which makes you wonder why he wasn’t insisting on a set weight for the new-fangled paper banknote! Anyway it looks as though Felix Martin’s book is a good source for augmenting the work done by the two book authors I reference Desan and Milevsky to better understand money as an MMT project.
Helen
Might you do a reading list to add to the end of this?
It would help me, at least
Richard
Yes I’ve partially done one at the end of Installment Eight. I’d tried to concentrate on keeping the references to what I believed to key sources rather than over-burdening the Installments text with lots of references. I guess I wasn’t sure how interested readers would be interested in the history leading up to MMT. It still feels somewhat nerdy even pedantic to me but I’m losing that rapidly as I read the excellent comments to my saga.
I’m amazed for example reading in Felix Martin’s book that John Locke believed the value of money directly related to the weight contained in a silver coin (or a gold one for that matter) then I discover after following up on 33 AD Roman credit crisis this was resolved by Tiberius (monarch) having a 100 million brass coins created (sesterii). Assuming this is all true I think there’s an Addendum for me to write that includes far more references including adding references to things I said in the Eight Installments if that’s OK.
Please!
Hooray, a case for references! And now a bibliography. Heaven!
But it was the fashion for a more scientific approach – Isaac Newton went as ‘Master of the Mint’ making sure all coins were standardised.
To this day the BoE is in charge of banknotes (except when Bradbury’s were issued when they were ‘treasury notes’) and the Mint comes under the Treasury …
@ Peter May
Peter I think Isaac Newton swallowed John Locke’s understanding of money all that he did was make the specie money more perfectly shaped and less vulnerable to stealing the content of the coins:-
http://blog.perthmint.com.au/2015/09/29/how-isaac-newton-helped-shape-our-coins/
I am delighted to hear you approve Martins book, its the best I have read on money and written in an easy interesting style ,even economic novices like me can get to grips with it.
On the side subject of Spain and gold from the New world, it wasn’t all plain sailing for the Spanish. The sheer volume of gold and silver entering Spain cause massive inflation throughout the 16th century, which played havoc with Spain’s economic development and it had fallen short of the rest of Europe by the time it had blown its its gold reserves on foreign goods, there being no Spanish products to buy at reasonable prices. I also read that Elizabeth helped pay off the English national debt with the gold pirated from Spanish ships but not enough for it to spoil or deter the productive capacity of England at that time.
This also reminded me of my favourite historical gold story concerning the African King Mansa Musa from the 14th Century Kingdom of Mali .It has bee estimated he was the richest man who ever lived . He took a huge caravan of followers through Egypt on pilgrimage and spent so much gold whilst staying there that he almost ruined the economy with the ensuing inflation it created as well as causing similar problems in Medina and Mecca.
A great example of how too much money in an economy will always prove to to be bad thing.
https://www.ancient-origins.net/history-famous-people/mansa-musa-richest-man-history-006847
It is also a great example of the foolishness of using precious metals as a currency. Gold in particular is a largely a useless metal. All the effort and pollution created in mining it makes it an overall cost to society not a benefit. As Beppe Grillo (Italian 5 star party leader) once joked; what the point of digging(useless) gold out of a hole in the ground and then burying it another hole under a bank. Let is just build the bank on top of the gold and we can all save a lot of effort and go and do something else more useful instead!
David Graeber also mentions that most of the silver from the New World ended up in China.
If it wasn’t for China’s insatiable desire for silver (and huge economy), Spain’s conquest of the Americas would have become economically unviable. Europe’s economy was just not big enough to absorb all that silver.
I’ve been to Potosi in Bolivia, where most of the silver came from. High up in the Andean plateau, it was the wealthiest city in the world, during its heyday. It’s full of grand Spanish architecture, but surrounded by total desolation for miles. The strangest of places.
Vinnie,
Graeber’s comment makes sense, there was probably not enough goods available to buy, the inflation was bad enough in Spain ,it would have been a lot worse had that not gone somewhere. Funnily enough this is what happened in the 20th Century ,importing Chinese goods, except it did the opposite as it kept prices of ordinary goods down due to cheap Chinese Labour and goods.
I do recall the Incas being amazed by the Spaniards love of gold ,which must have seemed an irrational obsession for a metal they had no monetary value for. Apparently they had no money system and paid taxes via work sate decreed quotas according to this site, they seemed to have an altogether rather different society and values.
https://www.tourinperu.com/blog/inca-gold-culture-invasion-role
Vince.
Yes, the Aztecs as well.
Montezuma famously asked Cortez why the Spanish wanted gold so much.
Cortez replied “We have a disease of the heart that can only be cured by gold”.
The Aztecs didn’t value gold other than for it aesthetic value.
The Inca’s had a elaborate accounting system using Quipus. Knots tied in cords but no “money” as we would call it.
China’s role as the recipient of much of the Spanish loot from the Americas, just shows how global the economy was, even then. Without it, Spain’s conquest would have probably run out of steam.
I believe that the much of the gold and silver was shipped from Cartagena, to China, via the Philippines and never even landed in Europe, having gone direct across the Pacific.
I’ve always wanted to do something like this for this blog and I really welcome Helen’s efforts. Helen has made me want to buy the book! I have to say though that I Desan could do with some better sub-editing in my view.
I tell you, reading some of the reviews and anti-MMT blogs recently has opened my eyes as to how a certain mindset are shitting their pants out there at the prospect of people learning the facts about money creation. And that’s not because I’m after some sort of Utopia – I just see that we miss the opportunity to balance the needs of all sectors of society and the planet.
As I write in the copies of ‘The Deficit Myth’ that I am still buying for friends and family/colleagues ‘Expecting something better starts with knowing what is possible’. BTW, a new cheaper paperback version of this book seems scheduled for May 2021.
I like the idea of the legal aspects of Desan’s approach – marrying the legislature to the sovereignty aspect of Government and fiat money. It is a powerful repudiation of Neo-liberal reductionism. It further legitimises the possibilities of the Courageous State because like all the other things that Right wing populism does not like it uses the facts of history – not emotion – to make its point. And they hate it don’t they, and seek to suppress history and dominate with their own false narrative?
I’m about to go quiet on this blog now (some of you might breath a sigh of relief – fair enough) because of work – I’m really busy and will be unable to contribute meaningfully for some time.
Take care everyone and I’ll see you some time.
Good luck with work
I promised today off the blog, but am failing to do that
Thanks very much – I need it!
Flippin’ heck – never mind me saying Desan could do with a good sub-editor – I could do with one too – I missed the work ‘THINK’ between ‘I’ and ‘Desan’. Terrible!!
Anyhow – Ciao!
Isn’t the Greek myth about King Midas the story of Donald Trump who didn’t want to take the coronavirus seriously because it stopped him and his fellow Americans from using the economy to turn everything into gold mythologically speaking, a “Gold Standard” perverted?
https://www.greeka.com/greece-myths/king-midas/
A bit off topic but, assuming you don’t already know, Mike Sivier on his Voxpolitical blog is plugging your Utube vids on MMT… Fame at last!!!
https://voxpoliticalonline.com/2021/01/30/there-is-always-plenty-of-money-dont-let-the-tories-lie-to-you-again/
More seriously, I think your Utube series is ace and have been following it, plus referring others to it. Even my 86 year old brexit/tory voting dad has been watching them. His verdict, “This kind of makes sense…. kind of.”
I still don’t profess to entirely understand MMT, or to be able to articulate that which I think I’ve grasped, but I’m slowly but surely getting there (I think.)
Was it Galbraith who said something along the lines of, “If people understood how money actually works it would blow their minds.” I think I’m still stuck in the partially mind-blown phase as a bit of me simply refuses to accept that it can all be so obvious and simple.
Regardless, I’m determined to understand MMT properly, even if I end up thinking it’s wrong and it takes me until the year 3000.
Many thanks
[…] intended to post the fifth and sixth instalments of Helen Schofield’s history of money yesterday, but actually only did the fifth. However, having now agreed with Helen and that at least one more instalment than expected is […]
Hi Richard.
Is all this going on the WIKI page?
Would be good to read it a few times more. The additional comments are also good. Could these be included as well?
If I get time
I admit time is in in very short supply right now
Including time off
I am told that Terry Pratchetts ‘Making Money’ is a pretty accurate summation of the situation, and not much more weird than anything else written on the subject.
thanks for the three articles on history of money.
This is also another historical version of using credit without actually using coinage/currency across great distances , without using official channels. Human are quite inventive when it comes to moving money. This is the Hawala network,
https://en.m.wikipedia.org/wiki/Hawala#:~:text=Hawala%20or%20hewala%20(Arabic:%20%D8%AD%D9%90%D9%88%D8%A7%D9%84%D8%A9%20%E2%80%8E%20%E1%B8%A5aw%C4%81la,%20meaning,huge%20network%20of%20money%20brokers%20(known%20as%20hawaladars).
@ Vince Richardson
Wow! Thanks Vince. Very interesting. Adds the ingredient of “reputation” to the “trust” that’s involved in the use of money. Also maybe helps explain the system Romans used for moving commodities and goods between distant countries to circumvent Roman law. See page 246 William V. Harris “A Revisionist View of Roman Money” 2006 which can be downloaded from the following website:-
https://www.academia.edu/38733467/CREDIT_MONEY_IN_THE_ROMAN_ECONOMY
Hi Helen,
I certainly share the view that money is a man made concept and we can use it in many ways, most obviously the best way would to be the best outcome to the most people rather than the best outcome to a chosen few, which is how it works right now.
Martin mentions a French 14th century scholar name Nicholas Oresme who first questioned “whether it was right for a sovereign to manipulate the monetary standard. And if it was, the in whose interests should he do so?”
“He concluded that money is not the property of the sovereign but the entire community that uses it.”
So what he was saying is that money belongs to us all not just the issuer,(be that a King, bank or Govt). It is OUR money…the peoples money.
Oresme added that the ability of some to accumulate a lot of money is entirely possible but besides the point ,which is that issuance of money is an “essential public service” and so should be issued in the interests of the public at large. He called for the community to be allowed to decide how much money be produced not the Sovereign who “may not in any way usurp it.” In his day, quite revolutionary, but ignored of course. It still strikes us all that we need to finally achieve what he called for 660 years ago.
As to the Golden Rule I hadn’t thought about that before, but on reflection you are correct, it is tied in to that,…..do unto others and love one another…money should be about spreading the greatest amount of care and love to others that we possibly can, it is a sacred duty. Unlike Rishi Sunak’s sacred duty to balance the budget.
@ Vince Richardson
What you’ve posted here Vince is I think an important contribution to our Western understanding of money as a “bearing instrument” because it adds in the ingredients of “trust” and “reputation” so much so the “bearing instrument” doesn’t even have to physically move apart from the conveyance of the “password”.
The unit of accounts underlying Hawala are produced through the social relationship of citizens to their state and then exchanged between countries through social relationships.
An important factor affecting “reputation” appears to be religious belief and part of that the “Golden Rule” which appears fairly ubiquitous in the major religions. As religion declines in the West the Rule of Law has increasingly taken over as the cement of contract law.
Now in the present we have the power of the state to subvert money by deciding not to do sufficient QE because vested interests want the state’s books balancing or think this a best outcome.
So this situation then takes us back to the “Case of the Bankers” 1690 to 1700 ruling which attempted to constrain how the state operated a country’s monetary system but only partially succeeded on behalf of the citizens.
Food for thought! Can it be made illegal for the state not to engage in QE when deflationary circumstances dictate or indeed engage in increased taxation too soon when deflationary circumstances remain? What legal criteria could be deployed to force government to optimise the citizens economy? These are questions coming out of the unresolved business of 17th century England!
I am not sure about legality, but this might also make a fiscal rule I might believe in