|
Now that we've been bashing the Mercantilist notion that Britain could
have a "shortage of silver," while France has a surplus, while silver
can flow freely between the two, let me stop here and say that there
really was a shortage of silver coinage in Britain, before 1700 -- and afterwards also, but for a different reason.
February 14, 2016: The Balance of Payments
January 17, 2016: David Hume, "On the Balance of Trade," 1742
First, let's assume that silver (or gold, but British preferred silver
for their coins before 1700), can flow freely between Britain, France,
and elsewhere in Europe. Also, let's assume that anyone can take
foreign silver coins, or raw silver bullion, to the mint and have coins
made, with minimal expense.
It would seem that there could be no possible shortage of silver
coinage in Britain, unless there were a shortage across the continent
and the world, which of course there never was.
But, there were actually a lot of problems with coinage, which we are
not familiar with today, and which were not well understood at the time
either.
For 2000 years before the invention of coinage in the 8th century BC,
people in Mesopotamia and the eastern Mediterranean world used gold and silver as money,
trading as raw bullion in any form. This was good, in some ways: you
could never have a "devaluation," and there never was one. A gram (or
"mina") of silver or gold was everywhere the same, unchanging. The problem was
that you had to weigh and perhaps assay the silver at every
transaction, and the weighing had to be precise.
The advantage of coinage was standardization: no longer did silver have
to be weighed at every transaction. You could just count out
standardized units.
However, this introduced a new problem: face value versus actual metal
content. Standardization required treating every coin the same -- the face value. But,
the reality was that every coin was different. Often, the difference
between face value and reality was small enough that it didn't matter.
But, sometimes the difference was too large to be ignored.
Coins naturally wear down. Or, they could be artificially "worn" via
clipping, or even by the government intentionally debasing the coinage by minting new coins with
the same face value as existing coins but lower silver content. If a coin was 1%
underweight, it maybe didn't matter. But what about 10%? How about 20%?
Let's say that the standard for a new silver coin was 10 grams of
silver. Coins coming from the mint would weigh 10 grams. You could take
10 grams of silver to the mint and have a coin made.
However, over time, the coin wore down so that it only weighed 8 grams.
Now, people have a choice. They can treat the 8-gram coins as being
worth only 0.80 of a full-weight coin. But, now all the coins are
treated differently. They lose their standardization. We are back using
scales for every transaction, and treating the coinage as raw bullion.
Or, people could accept the lightweight coin, especially if such
lightweight coins are very common, such that they are the norm and
full-weight coins are a rarity. And, especially if the government is
willing to take them in payment of taxes at full value. Now, the 8 gram
coin is treated the same as a 10 gram coin.
It doesn't take long to figure out that, if anyone gets a ten-gram coin
in trade, they keep it, and only spend the 8-gram ones. The effective
value of the coinage falls from 10 grams to 8 grams. All the 10 gram
and 9 gram coins disappear from circulation. This is Gresham's Law:
Wikipedia on Gresham's Law
Before long, people figure out that foreigners treat the 10 gram coin
as being worth, naturally, 25% more than an 8 gram coin. They only care
about bullion weight. The 10-gram coins naturally get used in foreign
trade, to pay for imports. They literally disappear from the country.
The amount of coins in circulation decreases.
In 1690, William Lowndes, Britain's secretary to the Treasury,
estimated that over ?3 million of silver coins had been minted since
1663, but, at that time, virtually none of them were still in
circulation. The total silver coinage at the time was about ?6 million.
This also implies that all the coinage in circulation dated from before
1663, maybe centuries before, which is why they were so worn.
So we see that foreign trade -- paying for imports with silver coinage
-- here actually does reduce the silver coinage of the society,
producing a genuine shortage. But, it had nothing to do with the
Balance of Payments or a "price-specie flow" mechanism, but rather the
problem of face value vs. actual weight of worn coins.
Also, nobody takes ten grams of silver to the mint to make a new 10
gram coin. That would be silly. The standard coin in trade is now 8
grams. A new coin would cost 1.25 old coins, plus a minting charge, and
would be worth the same in trade as an 8-gram coin. So, no new coins
are made, no matter how available silver bullion might be.
You can see how this can become a problem. It was a big problem in
Britain before the Great Recoinage of 1696-1699, when the government
took all the worn coins it received in tax payments, melted them down
and made new coins. They were, on average, over 20% underweight.
Since the pre-1700 period was also the era of Mercantilist thought in
Britain (and elsewhere), we can see how these things can get started.
After the recoinage, the problem of coin wear largely disappeared in
Britain. But, it was soon replaced by a different, although similar,
problem.
For many centuries, Britain used silver coinage almost exclusively.
Other places in the world, notably the Byzantine Empire and the trading
states of Italy, were more gold-centric, but Britain was a silver-user.
This changed in 1663, with the introduction and widespread use of the
gold guinea coin. This new coin was the first example of a die-struck
"machined" coin, similar to the way coins are made today, compared to
the hand-hammered coins that had been used until that time. So, not
only was it a much higher-quality coin than other newly-minted coins of
the era, but it was also a vastly better coin than the extremely worn
silver coinage in Britain in the 17th century.
This gold guinea coin soon became popular with bankers, who, around
that time, were also issuing Britain's first banknotes. The new
banknotes were often based on (and redeemable for) the gold guinea, not
the worn silver coinage. However, the silver coinage was still the
standard of value and the unit of account in most situations.
After the silver recoinage, gold was "overvalued" in the bimetallic
system. The gold guinea then had an official value of 22 shillings,
more than the market value of the contained gold, which made it
profitable to take gold to the Mint to be coined. From 1700 onwards,
the Mint coined gold almost exclusively. The value of the guinea was
later reduced to 21.5 and then 21 shillings in 1717, but this still
made gold cheaper than silver. What
this means is that the market value of a "British pound" of gold
coinage was a little less than the market value of a "British pound" of
silver coinage. Gold was the cheapest to deliver. Thus, it became the
preferred method of payment; and also the standard of value. Put
another way, the market value of the silver content of a silver
shilling coin was more than a shilling, which would obviously prevent
anyone from taking bullion to the mint to be coined. This
condition persisted throughout the 18th century, resulting in a chronic
shortage of small-value silver coins throughout the century even while silver
bullion was exported from Britain. Once again, it would have appeared
that silver exports -- in the first decades of the 18th century, the
East India Company alone was exporting over a million ounces of silver per
year -- were causing a shortage of silver coinage in Britain. In 1713-1716, 1.2
million ounces of gold were minted into coinage, with much of the gold
imported from Brazil.
The eventual solution to this was the token coin, introduced in Britain
after 1816, and based -- oddly enough -- on the principles of
banknotes, which had been developed in Britain since the 1650s. The
silver content of Britain's silver coinage was reduced, such that the
value of contained silver was about 90% of face value. However, this
required that the supply of coinage be controlled. No longer could
silver bullion be freely taken to the Mint to be coined; nor could
governments themselves mint coins as they wished. Rather, silver
coinage was redeemable, much like banknotes, in gold coin, by this way
establishing their value and also limiting their supply. Effective
token silver coins were used in the United States from the cessation of
"free coinage of silver" in 1873, until the elimination of silver
coinage in 1962.
| |