[PDF]History Of Money

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John F. Chown


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A HISTORY OF MONEY


Everyone is familiar with money. Yet few realise that currently contentious
issues and financial difficulties are not new. On the contrary, most are firmly
rooted in the past and when examined help to put current economic problems
into historical context.

This book presents a detailed history of money from Charlemagne's reform
in approximately AD 800 to the end of the Silver Wars in 1896. It also offers a
summary of twentieth century events and an analysis of how the past relates to
present problems. The book examines how virtually all modern difficulties
associated with money have precedents in the past. It discusses how a
mercantile system developed alongside simple, metallic, medieval coinage, in
a way which has important lessons for the countries now emerging from
central planning. It covers the great periods of monetary disputes, Henry VIII
and Sir Thomas Gresham, Isaac Newton's Great Recoinage of 1696, Ricardo
and the Bullion Committee Report, the battle between the Banking and
Currency schools, and the much neglected but increasingly relevant, issues of
bemetallism and European monetary union in the late nineteenth century. The
monetary theories of such diverse characters as Locke, Defoe, Swift and Sir
Walter Scott are discussed as well as those of many economists. The coverage
is international, and includes the controversial private banking period in the
early United States between Independence and the Civil War.

John Chown founded J.F.Chown & Company in 1962. His firm specialises
in international tax. He is also co-founder and Executive Committee member
of the Institute for Fiscal Studies. He has previously been editor of the Journal
of Strategy in International Taxation and for some years was a contributor to a
regular column in the Financial Times. He has written and lectured extensively
on taxation and finance in the United Kingdom, the United States, Canada,
Europe, Australasia and the Far East. He is currently on the editorial board of
Treasury Today published by the Institute of Chartered Accountants.


A HISTORY OF MONEY


From AD 800


John Chown


i Routledge


Taylor & Francis Group


LONDON AND NEW YORK


First published 1994
by Routledge and the Institute of Economic Affairs
11 New Fetter Lane, London EC4P 4EE


Simultaneously published in the USA and Canada
by Routledge
29 West 35th Street, New York, NY 10001


Routledge is an imprint of the Taylor & Francis Group
This edition published in the Taylor & Francis e-Library, 2005.


“To purchase your own copy of this or any of Taylor & Francis or Routledge’s collection
of thousands of eBooks please go to www.eBookstore.tandf.co.uk.”


© 1994, 1996 John F.Chown


All rights reserved. No part of this book may be reprinted or
reproduced or utilized in any form or by any electronic,
mechanical, or other means, now known or hereafter invented,
including photocopying and recording, or in any information
storage or retrieval system, without permission in writing from
the publishers.


British Library Cataloguing in Publication Data
A catologue record for this book is available from the British Library


Library of Congress Cataloguing in Publication Data
A catalogue record for this book has been requested


ISBN 0-203-34706-4 Master e-book ISBN


ISBN 0-415-10279-0 (hbk)
ISBN 0-415-13729-2 (pbk)


1


CONTENTS


List of tables


Foreword


INTRODUCTION


PartI Money as Coin


2
3
4
5


SOME CONCEPTS OF MONEY
MONEY IN EUROPE TO 1250
MONEY IN THE COMMERCIAL REVOLUTION


THE GREAT DEBASEMENT OF HENRY VIII'S
REIGN


THE RECOINAGE OF 1696—LOCKE, LOWNDES
AND NEWTON


FORMALISING THE UNITED KINGDOM GOLD
STANDARD


BIMETALLISM IN THE NINETEENTH CENTURY


MONETARY UNION IN THE NINETEENTH
CENTURY—THE COLLAPSE OF BIMETALLISM IN
EUROPE


BIMETALLISM—THE UNITED STATES AND INDIA
SUPPORTERS AND OPPONENTS OF BIMETALLISM
THE EARLIER HISTORY OF MONEY


Part II The Development of Credit and Banking


13
14
15


INTRODUCTION
CREDIT AND THE TRADE FAIRS
THE DEVELOPMENT OF BANKING AND FINANCE


vii


101
107


114
122
127


16
17
18
19


20


21


THE SOUTH SEA BUBBLE: 1720
DEPOSIT BANKING IN ENGLAND
MONEY AND BANKING IN THE UNITED STATES


AFTER THE BANK WARS: THE UK/US CRISES OF
1836 TO 1839


PRIVATE BANKING IN THE EARLY UNITED
STATES


THE BANK CHARTER ACT OF 1844 AND THE
CRISIS OF 1847


Part III Inconvertible Paper Money


22
23


24


25
26
27


28


29


INTRODUCTION—LAND BANKS


JOHN LAW, RICHARD CANTILLON, AND THE
MISSISSIPPI SCHEME


THE AMERICAN REVOLUTION AND THE BIRTH
OF THE DOLLAR


THE FRENCH REVOLUTION AND THE ASSIGNATS
THE SUSPENSION OF PAYMENTS: 1797 TO 1821


THE AMERICAN CIVIL WAR AND THE
GREENBACKS


SOME OTHER CASES OF INCONVERTIBLE PAPER
MONEY


POSTSCRIPT—THE EARLY TWENTIETH CENTURY


Notes
Bibliography and bibliographical notes
Index


181


191


199
204


213


220
230
244


254


261


270
231
290


LIST OF TABLES


2.1 Bimetallic ratios in Europe from 1300 to 1900 14
4.1 The value of the lira di piccoli: 1282 39
5.1 Units of weight in the Tower and Troy systems 41
5.2 The coinages of Henry VIII and Edward VI: Silver 35
5.3 The coinages of Henry VIII and Edward VI: Gold 56


5.4 Quantities of silver and gold coin issued during the reigns of Henry 57
VIII and Edward VI


5.5 The coinages of Henry VIII and Edward VI: bimetallic ratios 58

6.1 Annual average coinage: 1558 to 1694 60

7.1 Components of money supply: 1815 to 1913 71

8.1 Bimetallic ratios, France: 1815 to 1895, and imports (exports) of 78
silver and gold resulting from the operation of Gresham’s law

20.1 Growth of US Banks and circulation of US $: 1792 to 1813 184

25.1 Value of Assignats: 1789 to 1796 229


27.1 How the North financed the American Civil War 251


FOREWORD


The history of money in all its facets impinges on almost every aspect of
social and economic history. At one end of the spectrum it touches on the
discovery of metals and mining technology, and the production of coin (and
later paper) and the technological changes involved in these. It ranges over the
means of circulation of money and to the institutions that emerge— different
kinds of banks according to theories and circumstances—to facilitate its
transmission. The story does not get far before public finance enters; in fact
the needs of public finance frequently come first, and so the risks of inflation
and of its effects in the economy arise. A popular notion that has appeared at
many times is that purchasing power can, by a monetary innovation, somehow
be increased to improve the lot of the poor. This last lies behind some of the
many schemes promoting land banks and the like, where the reserves are long-
term assets. In more modern times monetary policy enters the story, and its
relationship with other policies and its impact on the real economy have
extended the historian further.

Interestingly, in the early days of academic economic history in the first part
of the twentieth century money was at the very centre of the discipline,
generated a lot of excitement, and featured regularly in the academic journals.
It faded somewhat after that as issues of economic growth and development
became dominant. But in the closing years of the twentieth century discussion
of money is returning to a more central role. This is not surprising since the
great debates currently are about inflation, exchange rate regimes, the proper
conduct of bankers, European central banking, and what is necessary to
establish market economies in the former Soviet Union and in eastern Europe.

John Chown's book will be of interest to a wide readership for he introduces
these subjects in monetary history, dealing with a host of topics of current
interest and at a level accessible to a wide range of students and practitioners
and policy makers. The book opens up the world of monetary history ranging
over the use of coin in early medieval Europe, through its role in the
commercial revolution, the great debasement of Henry VIII's reign and the
Locke-Lowndes debate in the financial revolution of the late seventeenth
century. There 1s extensive discussion of that difficult subject bimetallism in
Europe, the USA and in India. The development of modern banking is a major


vii


subject in itself, and Chown devotes Part II to this story taking the reader
through from the earliest forms in Europe to the emergence of modern
banking. This story touches upon all the difficulties encountered in the
creation and transmission of money, the sometimes resulting crises, and so
introduces the possibility of the need for supervision or regulation, and the
numerous debates to which that leads.

This book will serve as an excellent introduction to the many topics in
monetary economics that concern us today; and it shows that there is both
insight and instruction to be gained from discovering that they have almost all
been around before. The book will have great appeal to those approaching the
subject for the first time; but there is also much of interest for those who are
familiar with the subject. This is a grand sweep across several centuries
covering some of the most fascinating experiences in monetary history.

Forrest Capie
City University Business School


1
INTRODUCTION


Since 1914 the world has been bedevilled by inflation, depression, devaluation,
unstable exchange rates and other 'diseases of money'. In 1923-4 hyper-
inflation wiped out the currencies of Germany, Hungary, Poland and Russia.
Greece went the same way in 1944, and Hungary (again) in 1946. The
depression of the 1930s had, some would argue, led directly to the Second
World War. In the 1970s, nearly all countries suffered from double digit
inflation or worse.

The proposals for European Monetary Union produced some unexpected
turns: this is a saga which will run and run. Proud and prosperous Germany ran
into economic problems from which they thought they were exempt. Who
would have thought that Germany's inflation rate would exceed that of
France? This happened because of a serious technical error in setting the terms
of the monetary union between the two Germanies (in 1990, following the
collapse of East Germany) which had its perhaps inevitable repercussions in
1992 with the expensive partial collapse of the Exchange Rate Mechanism
(ERM). The president of the Bundesbank, asked to comment on the rate
chosen, said ‘it was a political decision’, and he was not being polite. The
ERM was again in serious difficulty in the summer of 1993.

It would be unfair, unrealistic and narrow to blame all our ills on, and give all
the credit for our prosperous times to, the failure or success of monetary
management. No one can really understand the history of this century, or hope
to prescribe for the problems of the next, without some understanding of how
money and its management can affect, and affect profoundly, broader,
economic, political and social affairs. The successful statesman, businessman,
investor or trader sees this crisis, that stock market boom, the other free fall or
rise in the dollar or the oil price in perspective. He knows what has happened
before and can better judge what can happen this time than those who,
ignorant of the past, are condemned to repeat its mistakes.

Even those who make it their business to remember last time and who are
familiar with what happened in 1929, are tempted to believe that there was,
before 1914, a golden age of the gold standard when prices were
stable, employment was full and the intending traveller could pull down from
his father’s bookshelf a dusty but still accurate ready reckoner which told him


2 AHISTORY OF MONEY


how many francs, marks, or lire he would receive for his pounds or his dollars.
There was such a golden age, but it had lasted for all of eighteen years, since
1896. Economists, and those whose business it is to comment on, or react to,
economic affairs, have to understand money. History helps a great deal. This
book is not so much a history for economists as an economist's view of
history. Rather to his surprise the author discovered how many of the world's
apparently modern problems have their precedents in the past.


THE PLAN OF THE BOOK


The book has been divided into three main sections, which to some extent
overlap chronologically. Part I deals with coinage, and Part II with banking
and credit as it developed to supplement what was basically a gold, silver or
bimetallic standard. Part III deals with experiments, beginning (in the West) in
1720 with the type of inconvertible paper money we have today.

The main story in this book begins in about 800 AD when Charlemagne
reintroduced silver money to the West with the concepts of pounds, shillings
and pence. The history of coinage actually begins in about 800 BC when the
first coins were struck from electrum, a naturally occurring alloy of silver and
gold, bearing the sign of a half lion as a guarantee of their weight.

The history of money goes back even further. Primitive societies must soon
have found the need to progress from simple barter such as ‘two horses for
that field' to finding the need for a standard item which could be used as a
medium of exchange to facilitate triangular or more complex barters or in
some cases, more subtly, simply as a unit of account by which values could be
compared without the unit of money necessarily changing hands. Mrs Quiggin
(1949) describes the wide range of expedients adopted by primitive societies in
her book Primitive Money, a labour of love which she began to write when she
was already 70 years old. Only one society, that of the Incas of Peru, appears
to have developed an organised civilisation without the invention of money
(Hemming: 1970).

Eventually, societies developed the idea of coined metal. Its natural
advantages tended to supplant rival forms of money, and a sophisticated
monetary economy developed in the ancient world. It is quite clear, from even
a cursory reading of the sources, that many of the problems and events we
shall discuss had their parallels in earlier centuries. I can offer only a
tantalising glance at a few of these earlier events. There were certainly
monetary crises under Solon of Athens, Cleopatra of Egypt and the Emperor
Nero which seem, from a brief study, just as interesting as the later ones we
shall be studying.

During the early period, money meant coins. Charlemagne divided a pound
weight of silver into 240 deniers or pennies, and this efficient and sound
system was imposed on the territories he conquered. Various English kingdoms
(which were to be united in 973) were never conquered, but chose to adopt the


INTRODUCTION 3


system. Later, though, it was England alone who preserved the Carolingian
system with only modest, but technically interesting, depreciations for many
centuries. In the rest of Europe, the coinage became very sick indeed (not long
after the death of Charlemagne) and soon all that circulated were grubby
pieces of base metal with just a taint of silver. On the Continent, sound money
had effectively to be reinvented to meet the needs of the dramatic revival of
trade in the thirteenth century. At this stage, the Italian city states become the
main centre of interest.

The whole mechanism of government-induced inflation, which we now
associate with ‘turning on the printing press’, can be seen at work within the
framework of a simple silver coinage. The Navy has always argued that even
for those whose destiny 1s to navigate a nuclear submarine, there is no training
like sail training. Get back to first principles, learn to face the elements with
few mechanical aids and you really will understand the weather and what
going to sea in ships 1s all about. Really understanding how money works in a
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