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Uses and Abuses of Gresham's Law
in the History of Money

by Robert Mundell
Nobel Prize for Economics, 1999

8. The Great Recoinage

One of the most interesting and controversial episodes in English monetary history arose as a result of a faulty diagnosis of a situation that required an understanding of Gresham's Law. This episode has been dubbed in the literature "The Great Recoinage." It arose as a result of the deteriorated state of the coinage in Britain in the last decade of the 17th century and the devoted attention paid to it by the eloquent historian Lord Macaulay.

In the 1690s, old and the new sorts of coins circulated side by side. There even remained a few coins dating from before Elizabeth's reign, having escaped her recoinage. There were even some debased iron and copper coins silvered over of Henry VIII and earlier. The confusions it created became the subject of the literary writings of Dryden, Blackmoor and Cibber. In the latter's comedy, The Fool of Fashion, the hero declares naughtily that

Virtue is as much debased as our money, and faith, Dei gratia, is as hard to find in a girl of sixteen as round the brim of an old shilling.

In his History of England, Macaulay ridicules the actions taken to correct the situation since the "Glorious Revolution" of 1688:

Since the Revolution, the state of the currency had been repeatedly discussed in Parliament. In 1689 a committee of the Commons had been appointed to investigate the subject, but had made no report. In 1690 another committee had reported that immense quantities of silver were carried out of the country... Schemes were formed for encouraging the importation and discouraging the exportation of the precious metals. One foolish bill after another was brought in and dropped. At length, in the beginning of the year 1695, the question assumed so serious an aspect that the Houses applied themselves to it in earnest. The only practical result of their deliberations, however, was a new penal law, which, it was hoped, would prevent the clipping of the hammered coin and the melting and exporting of the milled coin. It was enacted that every person who informed against a clipper should be entitled to a reward of forty pounds, that every clipper who informed against two clippers should be entitled to a pardon, and that whoever should be found in possession of silver filings or parings should be burned in the cheek with a red-hot iron. Certain officers were employed to search for bullion. If bullion were found in a house or on board of a ship, the burden of proving that it had never been part of the money of the realm was thrown on the owner. If he failed in making out a satisfactory account of every ingot he was liable to severe penalties. This Act was, as might have been expected, altogether ineffective. During the following summer and autumn, the coin went on dwindling, and the cry of distress from every county in the realm became louder and more piercing.

Macaulay was referring to an Act passed in 1695 which provided that anyone who bought, sold or knowingly possessed any coin clippings should forfeit them, be liable to a fine of £500, and be branded on the right cheek with a capital R. The laws against clipping included capital punishment and were actually enforced: instances of condemnation to death followed by execution occurred by the dozens; seven men were hanged and a woman burnt in a single morning for a crime of this kind.(44)

William Lowndes, the newly-appointed Secretary of the Treasury,(45) had been requested to undertake an investigation into the state of the currency. He prepared a paper, entitled A Report containing an Essay for the Amendment of the Silver Coins, on September 12, 1695, that was circulated to members of both Houses of Parliament.(46) While repudiating any debasement of the currency, he suggested, as a necessary measure for placing it on a satisfactory basis, that all denominations of the silver coin should be raised 24 percent.(47)

Opposition to devaluation came from Whig quarters, led by two astute men of affairs and two of the most famous intellectuals of any time:

But happily for England, there were among her rulers some who clearly perceived that it was not by halters and branding-irons that her decaying industry and commerce could be restored to health. The state of the currency had, during some time, occupied the serious attention of eminent men closely connected by public and private ties. Two of them were politicians who had never, in the midst of official and parliamentary business, ceased to love and honor philosophy; and two were philosophers, in whom habits of abstruse meditation had not impaired the homely good sense with which even genius in mischievous in politics. Never had there been an occasion which more urgently required both practical and speculative abilities; and never had the world seen the highest practical and the highest speculative abilities united in an alliance so close, so harmonious, and so honorable as that which bound Somers and Montague to Locke and Newton.(49)

Macaulay is in error on a number of points, but his account is nevertheless of great interest because his became the conventional wisdom in the nineteenth century.(51) He understood nothing about the functions of money as a unit of account and the characteristics that make money accepted ad talum. He is also in error in attributing to Newton the same opinion as Locke; although he later changed in mind, moving to Locke's position, Newton, as Warden of the Mint initially supported devaluation. Macaulay is also in error in supposing that Locke's solution would solve the problem or put an end to the cruel penalties on exporters of bullion or coin.

New coins were minted to correct the problem but, of course, they were the first to be exported. In 1694, "King Billy's War" was underway and William III needed money to outfit the Channel fleet. In exchange for a loan of £1.2 million, he issued a charter for the Bank of England, which advanced him the money. Not realizing the impact these new notes would have on the coinage, the government effected a recoinage at great expense to the treasury. But no sooner had the new coins been produced than they were exported. Ignorance of Gresham's Law at that time extended to the highest quarters and included not just Montagu, Chancellor of the Exchequer (later Earl of Halifax), Lord John Somers, the chief minister to William III and leader of the so-called "Junto," but also the two greatest intellectuals of the age, Isaac Newton and John Locke. The recoinage had fallen victim to Gresham's Law.

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