The Great Coinage Debate

How did England Solve the Big Problem of Small Change?

The early modern English had a perpetual problem: they were always out of money.

From the medieval period until the nineteenth century, literate observers complained incessantly of a “scarcity of money,” by which they meant the currency needed to pay wages, make basic transactions, and carry on domestic trade in foodstuffs and manufactures. With paper in its infancy as a medium of exchange, this meant commodity money, usually silver. But there was a pervasive sense among the English that there was never enough to go around, leading the early “bullionists,” like Thomas Mun, to advocate restrictions on the export of precious metals or the command of a favorable trade balance to ensure that an adequate supply of coin could be maintained. During the seventeenth century, this sense became a “neurosis,” and the English government made persistent efforts—to little avail—to stop the perceived outflow of silver. Mercantilism was born not out of mere folly, but of a real fear that the wheel of economic activity might grind to a halt.

Why does any of this matter? In general, the workings of a complex pre-industrial economy were impossible without a stable form of money. The high value of gold made it a poor choice for everyday transactions, which thrust silver into the primary role as medium of exchange (while gold was the store of value). One contemporary writer noted that “the common payment [is] made in silver ... payments run betwixt merchant and merchant in silver; in the Customs House in silver; and all petty payments throughout the kingdom in silver.” It could be made into smaller-value coins than gold and thus used for more everyday transactions, as well as for the payment of workers’ wages. But as the English economy grew during the seventeenth century, both in income per capita and in population, the volume of currency in circulation became repeatedly and increasingly inadequate. “[T]he scarcity is so great,” wrote one commentator, “that a man may go into a great many shops in London, of great trade and commerce, before he shall get a 20s. piece in gold to be changed into silver.” Higher levels of economic activity required either a larger supply of coin or more repeated use of the monetary medium, and there were limits to both. The hard money stock could be expanded in only two ways: debasing the currency (lowering its silver content) or getting additional precious metals to produce more specie. There were obvious limits to the former—eventually you’d be unable to detect the silver in the silver coin, and it was politically disastrous—and the latter was inelastic.

I’ve been thinking about this issue over the past week because of a recent post by Anton Howes. He, in turn, was considering the implications of arguments made by Joe Francis to the effect that an increase in the English money supply, thanks in large part to an influx of Spanish bullion from the Americas, helped to promote economic growth in early modern England. Joe cites my co-author Nuno Palma in suggesting that the expansion of England’s stock of precious metals during the early seventeenth century, and then again in the eighteenth, was a contributing factor behind the Smithian growth and industrious revolution that took place during the period. The mechanism proposed by Palma is this: a larger money supply made payments easier, decreasing transaction costs and increasing specialization. With greater access to coin, Englishmen were less dependent on interpersonal credit relationships or barter, and consequently fewer exchanges failed to occur because of insufficient trust or non-coincidence of wants. Spillovers from monetization included higher urbanization, as the need for in-kind payments diminished, and thus kick-started the positive feedback loop of urban growth, agricultural development, and interregional specialization that was so characteristic of successful economic development in early modern Europe. Increasing the money supply also reduced the threat of deflation, which could make England’s goods less competitive on foreign markets through exchange rate appreciation and cause consumers to defer purchases in the expectation of lower future prices.

Joe’s adaptation of the Palma mechanism—that money-driven specialization in the countryside provided the basis for urbanization and the motive force for structural change—is internally consistent and outwardly compelling. Anton, Pseudoerasmus, and I have suggested in various places that foreign commerce in various ways played the opposite role, boosting the population of London and transmitting urban demand to rural areas, but I will concede that it’s difficult to muster adequate data demonstrating the backward linkages from export-facing sector (I am working on this issue). In the absence of such evidence, however, it’s fair to say that trade made up a sufficiently small part of England’s national product prior to the late nineteenth century that the burden of proof falls on the commercial theorist. But is monetization an effective substitute?

Palma marshals an impressive array of evidence in support of the monetization-growth nexus. From the late sixteenth century, the money supply increased faster than the domestic price level (by 22 and 3 times respectively), such that real coin supply per capita rose from £1 to £1.5 in the 1550s to nearly £5 in the 1790s. The advance was driven primarily by an expansion of hard currency, with substitute media such as paper rarely making up more than 30 percent of the total until the early nineteenth century. Until 1797, moreover, all Bank of England notes were convertible into specie, meaning that the bullion stock limited the amount that could be issued, and since the smallest notes issued (£5 and £10) exceeded the unskilled weekly wage, they were all but useless for payments and transactions. Coin and credit, he asserts, were complements rather than substitutes. Other genuine substitutes, such as reputation-based credit and mutual debt settlement, were limited by the need for interpersonal relationships in transactions. The systems developed by late medieval peasants in times of coin shortage could never have been extended into the national economy. His “short macroeconomic history of early modern England” is as follows: stagnation in the sixteenth century as price inflation kept up with the increasing coin supply, followed by a breakthrough in the 1630s when the Spanish began to send silver to Flanders by way of Dover, where the English took a cut. The coin stock per capita approximately doubled. For the rest of the seventeenth century, however, the per capita supply was actually stagnating, if not declining, and it was not until after the Methuen Treaty with Portugal in 1703 that a vast influx of Brazilian gold arrived to push the total to a higher eighteenth-century plateau. All this, Palma argues, coincides with the end of England’s destructive medieval deflation and the beginnings of English structural transformation out of agriculture.

All of Palma’s mechanisms for a positive link between monetization and growth should have had some effect. Complaints about silver shortages offer empirical evidence about the difficulties of basic economic activity in a cash-strapped commodity regime, while it’s hard to deny that specialization and market participation would have increased in conjunction with availability of coin. Interregional trade would have certainly been facilitated, boosting the demand for non-essential goods whose consumer bases were extended outside the parish, and whose purchase could be made without truck by anonymous merchants. And deflation would certainly have been worse in the absence of the bullion shocks. What I have a harder time buying—excuse the pun—is monetization as a launchpad for growth, especially in the Francis-ian sense. First, the timing appear to off. As Anton notes, urbanization began in the depths of England’s demonetized deflationary regime in the late sixteenth century, well before the per capita money supply began to increase; London’s population had risen from 50,000 to 200,000 by 1600. Sustained income per capita growth in England, on the other hand, started during the seventeenth century—coinciding with the initial bullion shock—but continued unabated despite the stagnation in the per capita coin stock. The second shock from Portuguese gold had no such stimulative effect, and a leveling-off of the rate of growth ensued during the eighteenth century.

Moreover, England appears to have been constantly lacking in usable currency despite the American injections. Lucassen (2014) lays out two conditions for “deep monetization,” or the possession of an adequate supply of small change: the existence of denominations equal to one hour or less of work, and in sufficiently large quantities to pay anyone for five hours or more per day. As Palma’s data shows, the second condition was only met between 1630-60 and 1730-60. This accords with the plentiful historical evidence on small-denomination shortages, which only intensified during the eighteenth century. “In the seventeenth century,” writes B. L. Anderson, “the Treasury had consistently failed… to maintain the supply of coin needed to meet the nation's day-to-day transactions, so that by the following century the lack of a uniform and sufficient currency was beginning to make itself felt in the exchanges of the poorer classes, in wage payments and retail trade.” This is exactly what the silver shock was supposed to avoid. Worse, coin of all denominations consistently failed to circulate through the countryside; thus the Home Counties were oversupplied (especially with copper) and the rest of the nation starved. It didn’t matter if large bullion inflows arrived, because most people never had access to the resulting currency. And silver flowed out of circulation as fast as the mint could coin it; persistently undervalued, it was exported to purchase gold—which, as we discussed above, added little to the effective money supply. During the early eighteenth century, only £1,000,000 of silver may have had to meet the needs of 6 million Englishmen. The mint’s reluctance to coin copper or the smallest denominations of silver only worsened the real shortages faced by the working class.

But the business of ordinary life did not stop. Instead, Englishmen devised substitutes. Tradesmen’s tokens issued by industrialists and shopkeepers for fractional payments, including of wages, which circulated solely around localities and whose volume varied inversely with official coinage. A Liverpool saddler named Thomas Clarke released six tons, and John Kershaw, a woolen manufacturer, was responsible for the coin of Rochdale. “In the absence of public provision,” writes Peter Mathias, “industrialists and others were forced to create for themselves private institutions and devices which enabled the momentum of industrial change to be maintained.” The emergence of large, wage-paying ventures during the period and the widening range of marketed goods created a double need for adaptation to scarcity, and it was met, if rather clumsily. Other expedients included the use of foreign coin and the reciprocal cancellation of debts, measured in money of account but conducted orally among illiterates. The latter method could be used to pay rents, tithes, and taxes, and was even resorted to by merchants and landowners to pay off bills of exchange. These kinds of solutions were undoubtedly inefficient by comparison with the hard money ideal, but the vital point is twofold: first, that they were necessitated by a continuing shortage of usable currency, and second, that they worked. Growth was cramped, but it happened anyway.

Bullion-infused monetization undoubtedly facilitated Smithian growth, which may have been significantly hampered in its absence, but it is less clear that metal imports were a necessary precondition, much less the initial stimulus. If silver and gold did not circulate anyway, then the provinces—where the industrial spinning enterprises were starting up—would have experienced shortages whether or not there were inflows. The countryside did not specialize because of a sudden availability of silver coinage; to all evidence, there wasn’t one. And as Pseudoerasmus points out, while some gold and silver were necessary as an accounting mechanism in oral debt cancellation, it was not actually required that much (or any) actual coin be present beyond that needed for the settlement of balances. Furthermore, England accrued bullion because of its successful proto-industrial and urban development. The rise of a low-cost traded woolen sector was the most effective magnet for the coin being unearthed by her colonial rivals in the Americas. Brazilian gold, for example, was famously exchanged for English textile exports to settle the country’s trade surplus with Portugal. Silver was linked with England’s mercantile success on the high seas and her low-cost woolens. The same forces that brought about monetization also contributed to urbanization, agricultural productivity, and structural change.

By the time England had begun to modernize, she had yet to fully monetize.