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Making money : coin, currency, and the coming of capitalism/

By: Desan, Christine,

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Chapter Author: Christine Desan

Chapter Title: Introduction

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Introduction

Perhaps the most powerful revolutions are the ones that deny they ever hap- pened. They install a new approach and erase an earlier practice so successfully that we look at the world through the structures they leave behind. The reinven- tion of money in early modern England was one such event. This book is about the old ways of making money, the revolution that redesigned that medium, and how that revolution disappeared from view .

At first glance, money seems an odd place for a revolution. According to much of modern thought, money is an instrument, an empty signifier, a function. In economic terminology, it is a unit of account, a mode of payment, and a medium of exchange, more interesting for what it does than for what it is. But that, in fact, is part of the revolution's vanishing act.

If we look behind the dry labels that sum up what money does, we find the real drama. In order to make a "unit of account," a society must create a measure that everyone will understand as a common value and use when setting a price on objects, labor, even time. The measure must take shape that travels from the center of a society to its margins. Whether it wears, or tears, or is absolutely opaque to those who hold it, it cannot remain abstract but must deliver value immediately, by definition the premier "mode of payment," the best of all credits. It must move hand to hand, a "medium of exchange" for strangers as well as friends, for those without trust or further contact as well as those who can reciprocate at a later time.

Making an entity that can answer demands at once so intimate and so impersonal, so material and so artificial-making money-is a governance project, one of the most penetrating that societies undertake. "Money" is a practice orchestrated among a group to produce the very functions that econo- mists abstract-a way to mark value, maintain it evenly as a means of payment across a real time and place, and pass it among participants. Made by engaging the same people who use it, money is no neutral technology. It is instead a constitutional (small "c") effort in a very particular sense: money is a mode of mobilizing resources, one that communities design for that end and individuals appropriate for their own purposes. It defines authority and distributes material as it operates.

Once we look at money as a constitutional undertaking made by the societies that circulate it, a panorama long obscured by our modern myopia comes into view. The English world has engineered many different moneys over the centur- ies. Those efforts were critical sites of debate and distribution that configured

2 Introduction

political economic life, just as they were affected by that environment. Recogniz- ing the way those societies "made money" illuminates the way their inhabitants negotiated value with each other. It documents, yet more specifically, the way their measure-money-defined their exchange.

Silver coin, the paradigmatic money of the early world, at first appears simple-a slug of metal, a natural store of value that passed between people who recognized its worth. In fact, the English penny was a highly contrived product. Set apart by their need for a medium and by their capacity to define it, political authorities directed money's creation. They controlled minting, estab- lished coin's count, enforced its use to pay debts, and policed its exclusivity as a medium. They also charged for it at the mint: individuals paid up in extra amounts of silver bullion and came away with coin. "Making money" this way brought sovereign and subject into contact over a matter essential to them both. The price of money was one issue and the pace of minting was another. But the English also debated the power of the penny in relation to the amount of revenue taken in it; they struggled to keep money circulating; they negotiated remedies when coin failed; and they improvised ways around money altogether. They argued over the rights that attached to coin, the political power to manage it, the way to conceptualize it, and more. As they made money, they made the English political economy.

The view to past practice also exposes moments of radical change. The coming of capitalism was one such time, a crucial transformation in modern history. Late in the 17th century, the English broke the pattern they had maintained for centuries. Their government began minting metal into coin for free. Immediately thereafter, the government began paying investors to lend it money in the shape of bank notes that circulated and operated as a public mode of payment. In turn, the government licensed banks to multiply money by lending to individuals on the basis of the coin and public debt the banks held.

The changes went to the heart of the system, where they worked in tandem. First, and in an unprecedented step, the government shared its monopoly over money creation. Reserving responsibility for defining the unit of account, the government granted banks the authority to spread that unit further in paper and at a profit. Second, the government now paid for money instead of selling the liquidity it created. The mechanism that produced liquidity was no longer the calculus made by people who anticipated the cost of making money from metal, coin by coin. It was a grant made by the government that paid for the transmu- tation and encouraged investors to expand the money supply still further in return for a fee from individuals borrowing from them.

Over the next several centuries, the level of cash irrigating daily exchange in England increased enormously. The money stock that individuals were willing

to hold grew sometl institutions unknowr essential to the basic governance shifted; · agency. The legalitie make room for the Other issues, like th, money, arose and wt the daily level, a difft celebrated banks as ' cage" of material st integrated by a mo norms of internation

At the same time, was a precious resou: obsessed with the w stubbornly, that proj that claimed the mrn money was made m money's origins that project of imagining economy," one econc

1 This estimate comparei given limits in the data. Fm England and private banks c the Early Stages of Industr University Press, 1967), 42- Population, Wages, and Pric For 2009 money supply, inc the U.K., see Bank of Englai co. uk/boeapps/iadb/newinte accessed June 26, 2014, <h data is unavoidable, but sh1 region, respectively. Price fi~ UK Recession in Context- (2010), and the associated or the rise in prices and fall i1 correcting for inflation, the ]

2 Alexander Hamilton, "ll of the First Federal Congress E. Veit (Baltimore: Johns He Spirit of Capitalism, trans. T

3 Frank Hahn, Money ana importance of the way mon Economics, ed Steven N. Dur a textbook approach, see N. C 157-158; for the proposal of i of the Monetary System," in

nvironment. Recogniz- e way their inhabitants re specifically, the way

world, at first appears passed between people was a highly contrived eir capacity to define it, ntrolled minting, estab- liced its exclusivity as a duals paid up in extra aking money" this way essential to them both. g was another. But the

o the amount of revenue ey negotiated remedies oney altogether. They

cal power to manage it, money, they made the

· cal change. The coming in modern history. Late ey had maintained for in for free. Immediately d it money in the shape

ode of payment. In turn, ending to individuals on

they worked in tandem. ared its monopoly over

the unit of account, the unit further in paper and ey instead of selling the · dity was no longer the · g money from metal,

at paid for the transmu- supply still further in

gating daily exchange in individuals were willing

Introduction 3

to hold grew something like 65-fold, corrected for inflation.1 Banks of issue- institutions unknown to the English during the Middle Ages-became structurally essential to the basic activity of the economy. Across that period, approaches to governance shifted; they newly privileged material incentives, productivity, and agency. The legalities that had maintained gold and silver moneys withered to make room for the law that represented and multiplied them in paper form. Other issues, like those many decided in the course of maintaining commodity money, arose and were determined, elaborating a new monetary architecture. At the daily level, a different pattern and culture of exchange emerged. An advocate celebrated banks as "nurseries of national wealth"; a critic condemned the "iron cage" of material striving. And at the global level, nations were increasingly integrated by a monetary-financial code far more exacting than the public norms of international law.2

At the same time, money itself became a mystery. The consensus that money was a precious resource produced by the sovereign faded. A world that had been obsessed with the way money was made became a world that denied, just as stubbornly, that project and its importance constituting society. The discipline that claimed the most competence over the subject rejected claims that the way money was made mattered. Macroeconomic textbooks adopted a fable about money's origins that fit within a paragraph and monetary theorists defended the

· project of imagining money's history in light of its form. "The best models of the economy," one economist noted, "cannot find room" for money at all.3

1 This estimate compares money supply per capita corrected for inflation in 1688 and 2009; it is rough, given limits in the data For 1688 money supply, including specie and bank notes both from the Bank of England and private banks circulating in England and Wales, see Rondo E. Cameron et al., eds., Banking in the Early Stages of Industrialization: A Study in Comparative Economic History (New York: Oxford University Press, 1967), 42-46. For 1688 population in England and Wales, see Peter H. Lindert, "English Population, Wages, and Prices: 1541-1913," Journal of Interdisciplinary History 15, no. 4 (1985): 633-634. For 2009 money supply, including retail deposits and private sector sterling holdings of notes and coins in the U.K., see Bank of England, Interactive Database, accessed June 26, 2014, <http://www.bankofengland. co.uk/boeapps/iadb/newintermed.asp>. For 2009 population in the U.K., see World Bank, DataBank, accessed June 26, 2014, <http://databank.worldbank.org/data/home.aspx>. The geographic shift in the data is unavoidable, but should be controlled to some extent because it is analyzed per capita for each region, respectively. Price figures are taken from Sally Hills, Ryland Thomas, and Nicholas Dimsdale, "The UK Recession in Context-What Do Three Centuries of Data Tell Us?," Bank of England Quarterly Q4 ·(2010), and the associated online database. Arguably, the comparison should not correct for inflation, since the rise in prices and fall in monetary value has made many more small exchanges possible. Without correcting for inflation, the per capita rise in the money supply is more than 8,000-fold.

2 Alexander Hamilton, "Report of the Secretary of the Treasury, Dec. 14, 1790," in Documentary History of the First Federal Congress of the United States of America, vol. 4, ed. Charlene Bangs Bickford and Helen E. Veit (Baltimore: Johns Hopkins University Press, 1986), 177; Max Weber, The Protestant Ethic and the Spirit of Capitalism, trans. Talcott Parsons (London: Routledge Classics, 2001 [1930]), 123.

3 Frank Hahn, Money and Inflation (Oxford: Basil Blackwell, 1982). 1. For a classic example dismissing the importance of the way money is created, see James Tobin, "Money," in The New Pa/grave Dictionary of Economics, ed Steven N. Durlauf and Lawrence E. Blume, 2nd ed. (London: Palgrave Macmillan, 2008), 2; for a textbook approach, see N. Gregory Mankiw, Macroeconomics, 5th ed. (New York: Worth Publishers, 2003), 157-158; for the proposal of a "conjectural history," see Kevin Dowd, "The Invisible Hand and the Evolution of the Monetary System," in What Is Money?, ed. John Smithin (London: Routledge, 2000), 139.

4 Introduction

Medieval observers thought that malting money was central to political com- munity, a matter that "inheres in the bones of princes."4 In the modern era, it was an abstraction created by exchange, simply the vocabulary of price. "Real money" was not a matter made by governments, but by the economy. And that was perhaps the point: liquidity was a matter better assumed or left aside. Whether it cost money to make money, who paid and who profited, how constructing money mattered to a society were not questions that anyone asked, despite the fact that reinventing money had reorganized the political economy.

The combination-a medium that was profoundly influential and whose influence was explicitly overlooked-gave the early modern turn even more impact. It diverted attention from the way that money, made and maintained differently, had operated in earlier and other worlds. It introduced a distinctive money, one unmatched in its abundance and penetrating in its reach. It sub- merged one of the most significant distributive issues of our times. And it constricted understanding of money and the way it operated by locating it as something dismissed by its own experts, who had effectively emptied it of living content.

The events of 2008 demonstrated the tremendous import of money as we have made it-and the radical limits to our knowledge about the way it works. The collapse in the U.S. housing market became a crisis when the short-term money markets froze. While some people understood the way banks multiplied the money supply, very few had mapped the activities of the "shadow banking" sector, or recognized that its operations had extended far further than the dollar-denominated units that acted as money. (Even after the financial crisis, some $20 trillion in short-term dollar-denominated IOUs, including money market funds, issued by those actors still circulates.) In response to the crisis, the U.S. Federal Reserve effectively shifted much of the wholesale money market onto its own balance sheet, more than doubling its size, first by loans to the financial sector and then by taking permanent holdings of mortgage-backed securities.5 The Fed's emergency action was both familiar and unparalleled. As the author of the high-powered money at the base of bank-generated liquidity, the Fed could provide the liquidity needed during the crisis. At the same time, the steps it took to support those institutions holding toxic assets were economically untested, legally ambiguous, and confounding to the public at large.

It was neither the first nor the most traumatic of the dramas generated by the way money is made. But with an urgency born of global meltdown, the crisis

4 The Case of Mixed Money (1605) in T. B. Howell, Cobbett's Complete Collection of State Trials and Proceedings for High Treason and Other Crimes and Misdemeanors from the Earliest Period to the Year 1783, vol. 2 (London: R. Bagshaw, 1809), 114, 118 (Monetandi jus principum ossibus inhaeret).

5 Morgan Ricks, "A Regulatory Design for Monetary Stability," Harvard John M. Olin Discussion Paper Series (2011), 8; Perry Mehrling, The New Lombard Street: How the Fed Became the Dealer of Last Resort (Princeton, NJ: Princeton University Press, 2011), 2.

demonstrated that h upside down, shake politics. In the U.S. immediate aftermatt rate spiked above 10 wanted more work o percent. Real gross c Households lost $ I 7 2009, including $5.6 the Fed's monetary p reform became the recession.7 Money's supplied the main str

The book aims to English world and ili period introduced ra1 same time, it makes ◄ runs from the early m during the 17th centu developed their new i approach in the early conceptual element, tl about what it is and standard as well as re, models in many of its

"Capitalism" has as marks the moment towards self-interest i the country's money. repertoire of material to its users, now issuec

6 See Center for Budget an, cfm?fa=view & id=3252> Sim Next Financial Meltdown (Ne The Financial Crisis Inquiry R, and Economic Crisis in the Un Even after prices for both reai worth was 16.5 percent less th Ret;ort, 392.

See, e.g., "America's Stall Give Up," The Economist, Jun Times, June 27, 2012; Christin: June 9, 2012.

ntral to political com- the modern era, it was of price. "Real money" nomy. And that was

r left aside. Whether it ed, how constructing one asked, despite the economy. · fluential and whose dern turn even more made and maintained troduced a distinctive g in its reach. It sub- of our times. And it rated by locating it as ely emptied it of living

rt of money as we have the way it works. The the short-term money banks multiplied the e "shadow banking" far further than the

er the financial crisis, Us, including money response to the crisis, olesale money market , first by loans to the s of mortgage-backed

and unparalleled. As -generated liquidity,

. At the same time, the sets were economically lie at large. amas generated by the

meltdown, the crisis

Collection of State Trials and he Earliest Period to the Year

ossibus inhaeret). John M. Olin Discussion Paper ame the Dealer of Last Resort

Introduction 5

demonstrated that how money is made matters. It can-it did-turn the world upside down, shake millions out of work, redistribute wealth, and dominate politics. In the U.S. alone, more than 8 million people lost their jobs in the immediate aftermath of the crisis. Using a narrow definition, the unemployment rate spiked above 10 percent in October 2009; rebalanced to include those who wanted more work or were too discouraged to continue looking, it reached 17.5 percent. Real gross domestic product fell further than at any point since 1946. Households lost $17 trillion of net worth between 2007 and the first quarter of 2009, including $5.6 trillion because of declining home prices.6 Just as striking, the Fed's monetary policy rather than congressionally designed fiscal stimulus or reform became the instrument most actively invoked to solve the economic recession? Money's modern design in many ways caused the crisis; it then supplied the main strategy to act on that crisis.

The book aims to demonstrate that "making money" has long shaped the English world and that revising the design of money during the early modern period introduced radical change. The argument is historical at its core; at the same time, it makes conceptual claims about money's definition. The narrative ·runs from the early medieval period in England to the coming of capitalism there during the 17th century. The account ends after considering the way the British developed their new system in the following century and institutionalized their approach in the early architecture of the 19th century Gold Standard. As to the conceptual element, the effort to understand money leads inherently to theories about what it is and how it is operating. The approach taken here draws on standard as well as revisionist economic models, although it diverges from those models in many of its interpretations and conclusions.

"Capitalism" has as many definitions as commentators; I use it as a label that marks the moment when English society institutionalized the orientation towards self-interest as the animating force-the pump-that would produce the country's money. That occurred literally when the English invented a new repertoire of material value, a particular kind of currency. Money, long charged to its users, now issued as a resource underwritten by public funds and endorsed

6 See Center for Budget and Policy Priorities, accessed June 26, 2014, <http://www.cbpp.org/cms/index. cfm?fa=view & id=3252> Simon Johnson and James Kwak, 13 Bankers: The Wall Street Takeover and the Next Financial Meltdown (New York: Pantheon Books, 2010), 182; Financial Crisis Inquiry Commission, The Financial Crisis Inquiry Report: Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States (Washington, D.C.: Government Printing Office, 2011), 390-392. Even after prices for both real estate and equities had recovered somewhat and stabilized, household net worth was 16.5 percent less than it had been three years earlier. Commission, The Financial Crisis Inquiry Rei;ort, 392.

See, e.g., "America's Stalling Recovery Crisis," Financial Times, July 8, 2012; "Central Banks: Don't Give Up," The Economist, June 28, 2012; Editorial Desk, "Time for Bankers to Intervene," The New York Times, June 27, 2012; Christina D. Romer, "It's Time for the Fed to Lead the Fight," The New York Times, June 9, 2012.

6 Introduction

for expansion by banks operating for profit. The redesign placed a new logic at the molten center of "capital" itself.

The English experience anchors a more general claim about capitalism because of the evidence that Britain exported its monetary system with astonishing effect. In that case, the Eurocentrism of our financial and monetary structures should be attributed and analyzed. The modern vocabulary of value-one commonly deployed across the globe today-here gains parochial roots, a historicized logic, a set of capacities that were unanticipated and escaped evaluation as they developed. Those characteristics confuse efforts to understand the money that, in a shape that owes much to its early modern reinvention in England, affects so many populations in the contemporary world. The effort here is to map money as an institutionalized practice, deeply connected to the markets it enables and fluid enough to change dramatically. According to this narrative, a peculiarly English contrivance eventually presents itself as the abstract medium of an autonomous market.

The conventions and the counter-theory

The book begins with the conventions that so deeply root our intuitions about money. A remarkable consensus joins thinkers on both the right and left. It locates "the market" as a terrafn of economic activity and identifies "money" as mere instrumentality. The market is substance, money is form; the way money is categorized supports our assumptions that it is a simple commodity, a social convention, or an abstract "numeraire." A myth that money emerges naturally from the trades of enterprising individuals or their agreement on a common symbol of value supplies all the history that is necessary in the modern consensus. The division of labor between the "market" and "money" in the myth diverts attention from the institutions that really make and maintain money.

Attending to those practices generates a countervailing theory of money. Money, whether we look at its origins in a community or its continuous renewal there, appears as an activity designed to organize a material world. As suggested by the historical record, money is contrived by a group to measure, collect, and redistribute resources. The community may be a state, but it can also be a collective organized along lines of loyalty, religion, or affinity to which people make recurring contributions of labor or goods. The history in this book con- siders the way early Anglo-Saxon communities made money and traces their shifting strategies forward to the sovereigns of the modern world. But "private" organizations, cities, commercial collaborators, and other entities can undertake to make money, and many have. As their work organizes their members, they produce their own politics. Arguably, they build towards a new governing group

and may even be shu Given how often co1 work to keep up that wake, the history of tt by participants both models that map m01

Money appears in g themselves or their ac uses its singular positi bargaining pair of ind who contribute resou marker back, like a rec world-a world beref resources contributed goods and services th; everyone. One more tv back the units from an useful to anyone who c a community without a hand to hand as carrie:

As a practice, money that authority. They ca labor they need, markir in the tokens from whc the community can u provides a novel servi immediately recognize,

In fact, communities supply of tokens as it medieval English gover modern successor licen sovereign unit of accou methods become essenti made by the fiscal action market that results.

Taken together, the constitutional design oJ

8 Thus money is not adequate of Money, trans. H. M. Lucas (1 appropriately stresses the structUJ emphasis on the singular capa< foundational dependence on co infrastructural elements that en transferability of a medium.

gn placed a new logic at

about capitalism because 111 with astonishing effect. ~tary structures should be

value-one commonly ial roots, a historicized ~aped evaluation as they Jrstand the money that, in Dn in England, affects so ~ here is to map money as arkets it enables and fluid ative, a peculiarly English ~dium of an autonomous

1'-theory

lroot our intuitions about pth the right and left. It and identifies "money" as ls form; the way money is nple commodity, a social ~oney emerges naturally greement on a common in the modern consensus. ney" in the myth diverts j.tintain money. railing theory of money. '°r its continuous renewal erial world. As suggested

p to measure, collect, and 1tte, but it can also be a

affinity to which people history in this book con-

money and traces their k\ern world. But "private" 1er entities can undertake ~zes their members, they ~s a new governing group

The conventions and the counter-theory 7

and may even be shut down as potential competitors to a higher-level "public."8

Given how often communities have made money, how constantly they must work to keep up that medium, and how rich is the evidence they leave in their wake, the history of the practice of making money is full. It accords with accounts by participants both old and new, and comports with a number of economic models that map money's creation.

Money appears in groups that draw on the contributions of members to support themselves or their activities. It arises when a stakeholder, acting for the group, uses its singular position to specify and entail value in a way that no individual or bargaining pair of individuals can do. The stakeholder gives a marker to people who contribute resources earlier to the group than they are due and takes the marker back, like a receipt, from those people at a time of reckoning. In an illiquid world-a world bereft of a common measure-the marker used to assess the resources contributed will have extraordinary status: it creates a standard for goods and services that could not previously be compared in a unit shared by everyone. One more twist makes the measure into money. If the stakeholder takes back the units from anyone's hand, those units will convey material value that is useful to anyone who owes a contribution to the center. Unlike other resources in a community without a currency, the stakeholder's units gain the capacity to travel hand to hand as carriers of value recognized by all participants.

As a practice, money allows great capacity to the stakeholder and those assisting that authority. They can govern by taxing and spending: they select the goods or labor they need, marking them with a token, and collect contributions later, taking in the tokens from whoever owes resources. At the same time, individuals within the community can use the standard markers for private exchange. Money provides a novel service as it packages material value in a way that can be immediately recognized and transferred.

In fact, communities that create money for collective purposes can expand their supply of tokens as individuals demand them for their own purposes. The medieval English government sold people money for private use at the mint; its modern successor licenses commercial banks to issue checkable deposits in the sovereign unit of account when they make loans for private use. Both of those methods become essential ways of "making money." They supplement the money made by the fiscal actions of the stakeholder, and they have defining impact on the market that results.

Taken together, the practices that instill money's functions compose the constitutional design of that money. They include political determinations to

8 Thus money is not adequately captured by a "state theory." See Georg Friedrick Knapp, The State Theory of Money, trans. H. M. Lucas (London: MacMillan, 1924). The Knappian term, chartalism, is broader and appropriately stresses the structural role of fiscal demand. The approach taken here nevertheless diverges in its emphasis on the singular capacity of the unit of account to allow assessment across items, that unit's foundational dependence on coordinated (as opposed to bilateral) engineering, and the plethora of legal infrastructural elements that enable alienation in money terms, define obligation, and ensure the easy transferability of a medium.

~---------... -... ____________________________________ _

8 Introduction

represent value in a particular way-in silver coin, for example, or in paper tax credits; decisions to charge people individually for money or to subsidize it through the general revenue; strategies that give one medium a monopoly or that multiply the credit forms that can circulate. As societies make many choices like these, they configure currencies differently. The moneys that result are highly engineered projects, not the happy by-product of spontaneous and decentralized decision. To be sure, the individuated actions of those using money-a diffuse and rowdy crowd-matter. Those forces become part of the debate over money's design; people's decisions about money create or diminish demand; their agency shapes the flow of money in and out of supply. Money is neither public nor private in a categorical sense; it gains effect through the action of each on the other.

A world of commodity money

By the 11th century, the constitutional career of coin was well underway. Governments in England, as on the Continent, needed a medium that would allow them to move resources; the challenges they faced to collect and distribute value outmatched in many ways the difficulties that individuals faced on that score. As the earliest surviving account of the Exchequer put it at the end of the 12th century, "Money is necessary, not only in time of war, but also in time of peace. For in the former case, revenue is expended on the fortification of towns, the payment of wages to the soldiers, and in many other ways." And when the end to hostilities arrived, "weapons of war are laid aside, churches are built by devout princes, Christ is fed and clothed in the persons of the poor, and the Mammon of this world is distributed in other acts of charity."9 Currency acted, then, for public ends most and least worldly, each of utmost importance.

Along the way, money also made daily life. The English population began to use pennies in part because they owed their rulers in that coin. But once it worked for that purpose, money also offered a measure and mode of payment that people could circulate between themselves. The "free minting" approach adopted in England traded on the demand by individuals for currency. A common European practice, it charged users for money creation: the mint took silver bullion from individuals and returned them a slightly lesser amount of metal in coined form- units of specified content and carefully decreed count. Those "just pennies" were often worth the sacrifice of raw metal. They alone were accepted and used by authorities, who enforced their flow through the hands of individuals. The English common law action for debt played a unique role in that effort. It defined suits for money differently from other claims, including those for silver, a quirk

9 Richard fitz Nigel, "Dialogus de Scaccario," in English Historical Documents, 1042-1189, ed. David C. Douglas and George W. Greenaway (London: Eyre & Spottiswoode, 1953 [circa 1179]), 492.

that protected money's I times, that was unsurprJ syncrasy of English lawn assimilating coin to met: "nominalism." Bound w that would come to be a,

In medieval Europe, 1 Despite its reputation as that instability. The fragi one that joined metal c Medieval money circula coin after coin, that peo tively simple propositior or gold content. The mar pennies against gold deni raising the prices they o that offered the same cc clipped coins, silver and inating among them, ho value. Their actions sub,

Rescuing money becar the first place. Both in E11 their coined currencies b dated pennies to bring 1 Those initiatives took lt of political right that ci English set a distinctive , countries, even as they v its content. Common la~ the recoveries that credi1 for relief.

Commodity money, r one that absorbed Euro] "make money" ordered from each other. The E11 across several centuries, goods or more. At the individuals pay for mo: amount of pressure on t were the moneys denom Yet the coins themselves

example, or in paper tax oney or to subsidize it

medium a monopoly or · eties make many choices

eys that result are highly neous and decentralized using money-a diffuse the debate over money's

· sh demand; their agency ey is neither public nor gh the action of each

oin was well underway. d a medium that would to collect and distribute

· dividuals faced on that er put it at the end of the f war, but also in time of the fortification of towns, er ways." And when the

de, churches are built by ns of the poor, and the harity."9 Currency acted, tmost importance.

ish population began to t coin. But once it worked e of payment that people g" approach adopted in cy. A common European

t took silver bullion from fmetal in coined form- hose "just pennies" were re accepted and used by nds of individuals. The

le in that effort. It defined g those for silver, a quirk

ocuments, 1042-1189, ed. David 1953 [circa 1179]), 492.

A world of commodity money 9

that protected money's passage by unit count as opposed to weight. In ordinary times, that was unsurprising. But at moments of monetary upheaval, the idio- syncrasy of English law mattered. While Continental jurists developed arguments assimilating coin to metal, English common law debt would preserve monetary "nominalism." Bound within writs later dismissed as archaic was an approach that would come to be adopted across the modern world.

In medieval Europe, moments of monetary upheaval were in fact common. Despite its reputation as a solid anchor for value, commodity money itself caused that instability. The fragility stemmed from coin's nature as a compound of value, one that joined metal content and special status as a liquid form of wealth. Medieval money circulated when content and form netted out to a value, in coin after coin, that people were happy to give and take. But that was a decep- tively simple proposition. Coins in use wore down and got clipped, losing silver or gold content. The markets for those metals shifted, changing the value of silver pennies against gold denominations. Sovereigns competed for bullion supplies by raising the prices they offered at their mints. As the commodity value of coins that offered the same count began to differ ( old and new pennies, whole and clipped coins, silver and gold cognates), the people holding them began discrim- inating among them, hoarding or melting some and passing others off by face value. Their actions subverted coin's circulation.

Rescuing money became as essential to a monetary system as establishing it in the first place. Both in England and on the Continent, public authorities managed their coined currencies by constantly recalibrating them. Commonly they depre- ciated pennies to bring their metal content back into line with their face value. Those initiatives took legal as well as practical shape: they became assertions of political right that configured and redistributed property. Here again, the English set a distinctive course. They took less silver from the penny than other countries, even as they vehemently asserted the sanctity of its count rather than its content. Common law debt reappears as a vehicle of monetary policy, policing the recoveries that creditors could claim at law and sending them to Parliament for relief.

Commodity money, made and remade, became a defining political project, one that absorbed European communities. Their determinations about how to "make money" ordered people and their possessions. Societies soon diverged from each other. The English would keep their money anomalously powerful- across several centuries, the smallest coins bought a half-day labor's worth of goods or more. At the same time, the English maintained the tradition that individuals pay for money at the mint. The combination put an enormous amount of pressure on the penny. That unit and a skeletal array of its fractions were the moneys denominated to capture a huge amount of economic exchange. Yet the coins themselves were scant, as people minimized the amounts they paid

10 Introduction

for money. Pennies moved quickly hand to hand ( or had a high monetary "velocity"), as users forced more exchanges out of the existing currency.

The power of the penny figured in both public and private life. Elites con- tended over taxes instead of arguing about the when and whether of debase- ments. That pattern configured high politics, shaped the claims of right made by the wealthy and, perhaps, their habits of mind. Sound money seemed to represent the very character of England, even as sovereigns there asserted the authority to determine absolutely-and at times to alter-the value of each coin. Meanwhile, the strength of the penny stratified the market, inducing exchange at the top that was impossible at the bottom. "The pouere [poor] common retaillours ofvitailles, and of o[th]er nedefull thyngs, for defaute of such coigne" often could not make sales, wrote the Commons in 1445, nor could "many of oure seid soveraine lordes pouere liege people ... hie theyme."10

England's approach to making money reached beyond its most immediate carrier, coin: it engendered surprising forms of credit. Medieval authorities would institutionalize a circulating public debt that was among Europe's earliest and most extensive in the picturesque but enormously effective and occasionally coercive form of "tallies," little wooden sticks that marked claims to tax revenue. Tallies could be given to the Crown's creditors, passed between people, and taken back by the government as a kind of currency. Their history has been largely lost. But at a critical moment in the 17th century, England's tally tradition informed its invention of public bonds and, in turn, bank notes.

At the same time, those at the low end of exchange struggled to ameliorate the harsh illiquidity of their awkward currency with an elaborate practice of private consumption credit. That practice bound neighbors together in thick networks of reciprocal relation. But while the interchange enabled economic activity, attempts to understand it as either communal or efficient miss the mark. Money's absence prevented people from deals that were immediately effective, an option the wealthier enjoyed. And litigation over the debt disputes that followed was often oppressive, dividing and dragging down the populations it frequented.

Polities made money very differently on the Continent, where silver coin was commonly diluted until it easily lubricated small transactions, while gold denom- inations were marked for international trade and maintained constant in metal content. While English money drove many inhabitants to consumption credit, the two-tiered coinage of the Italian city-states more likely invited its users to borrow for investment. In England and in Florence, money conveyed value in the deals, purchases, and payments of daily life, but exactly how it did so-how it related the people holding it to each other, how it connected them to the political

10 W. M. Ormrod (ed.), "Henry VI: Parliament of February 1445, Text and Translation," in The Parliament Rolls of Medieval England, ed. C. Given-Wilson et al., item 11. Internet version at <http:// www.sd-editions.com/PROME>, accessed June 26, 2014 (Leicester: Scholarly Digital Editions, 2005) .

.----------------~- ----

center, how it affected depended on a blend of Making money was intei that Europeans created. eventually including ti approaches to the south,

The way modern mone) Most accounts assume t: create paper money. Fr accounts, we inherit the t Even more alchemical is people holding notes we1 they would be able to pa

In fact, the history do when we track the proct money today. Modern n vated by legal rules, drive the way people relate, wl value and why, all animat at the end of the 17th C( Rather than a resource d1 supplied by the governmi towards profit. That cha ship, both to the governr

The narrative here foe needs to be peopled and . But if we select for the e: visible, a striking transfot it worked. The basics sug practices in favor of an a

First, the change occur effectively monopolized 1 commandment of the pri beginning of the 17th ct money and credit, that ci Treasury agreed. Making

11 For a classic example, see Ri P.S. King & Son, 1929), 40-43. Fe

...

r had a high monetary txisting currency.

private life. Elites con- and whether of debase- ~ claims of right made by oney seemed to represent asserted the authority to pf each coin. Meanwhile, exchange at the top that

~on retaillours of vitailles, 1e" often could not make mre seid soveraine lordes

ond its most immediate edieval authorities would ng Europe's earliest and ffective and occasionally led claims to tax revenue. etween people, and taken tory has been largely lost. a tally tradition informed

ruggled to ameliorate the :,orate practice of private •ther in thick networks of onomic activity, attempts e mark. Money's absence effective, an option the s that followed was often s it frequented. ~t, where silver coin was :tions, while gold denom- tained constant in metal s to consumption credit, ilcely invited its users to 1ey conveyed value in the y how it did so-how it icted them to the political

Text and Translation," in The 1 l. Internet version at <http://

,xly Digital Editions, 2005).

Money reinvented 11

center, how it affected their activities and attitudes to the outside world- depended on a blend of decisions that were political, material, social, and legal. Making money was integral, in other words, to the disparate political economies that Europeans created. Those decisions in turn inflected the area's geopolitics, eventually including the colonizing initiatives that configured European approaches to the south, east, and west.

Money reinvented

The way modern money replaced commodity money has long been a mystery. Most accounts assume that the customs of private banks somehow accreted to create paper money. From the checks issued by goldsmith-bankers to clear accounts, we inherit the bank note as a national money, written on a gold reserve. Even more alchemical is the evaporating importance of metal. Strangely enough, people holding notes were content to let the gold go, trusting to convention that they would be able to pass their paper on to others for value. 11

In fact, the history does not match the myth. A very different story emerges ·when we track the processes that remade money in the 1690s-and that make money today. Modern money is pervasively and precisely grounded. It is acti- vated by legal rules, driven by institutions, implemented by practices that change the way people relate, what they owe and to whom they owe it, where they find value and why, all animated by a different theory of human agency. As it emerged at the end of the 17th century, money would be organized on a new principle. Rather than a resource defined by a public's claim on its members, currency was supplied by the government as it recognized and rewarded individual orientation towards profit. That change shook people into a profoundly different relation- ship, both to the government and to one another.

The narrative here focuses on the basic elements of the drama. The account needs to be peopled and shaded, put into political color, adjusted and improved. But if we select for the exercises that "make money," a structural shift becomes visible, a striking transformation that revolutionized English money and the way it worked. The basics suggest a modern turn that displaced and obscured earlier practices in favor of an approach remarkable on several scores.

· First, the change occurred at the center. Government not only made money, it effectively monopolized that power. Money was created "by the authority and commandment of the prince," affirmed the Privy Council sitting as a court at the beginning of the 17th century; the sovereign determined the currencies, both money and credit, that circulated. At the end of the century, the Secretary of the Treasury agreed. Making money is a "right of regality," he wrote. Echoing the

11 For a classic example, see Richard David Richards, The Early History of Banking in England (London: P.S. King & Son, 1929), 40-43. For consideration of the convention more generally, see pp. 24-37.

1-------------..... _ .. _______________________________ _

12 Introduction

medieval Exchequer manual, he advocated a recoinage to meet the ends of"war," "commerce," and to satisfy "publick, but also ... all private revenues, rents, debts, and other occasions, which concern the very existence of the great political body."12 Cash remained as elemental to conducting war and peace in the early modern world as in the medieval.

What the government made, however, it could remake. The monetary revolu- tion occurred when the government and individuals renegotiated the way they would interact to produce money. Here, much of the action was improvised and erratic. The Stuart monarchs picked up the cost of coin and undermined old traditions like tallies out of desperation, not grand design. They often experi- mented without anticipating the end results. They began issuing public bonds, for example, without any clear intent to realign the relationship of the monarch with its subjects.

But certain innovations had staying power and structural import-like the role of public debt that circulated and bore interest. Bonds concretely represented the government's promise of future revenues. That promise of future revenues had always been the anchor of money: when a stakeholder pledged to collect contri- butions in a particular unit, it created demand for that unit. The stakeholder's commitment to take incoming revenues, be it tribute or taxes, in a certain form from many debtors thus effectively defined a society's unit of account. But the innovation of circulating public bonds marked a new era. Bonds signified a fiscal promise to take contributions; that promise would now be mediated by a host of creditors with claims against the public. The change split the public into tax- payers and bondholders, directing benefits previously absorbed by the govern- ment from one group of citizens to another. As importantly, the change gave the government a mechanism to secure paper money: notes taken by the authorities to pay down the debt would hold value as cash.

Second, the monetary revolution helped drive the modern era's radical recast- ing of human agency and its relationship to the public good. If the English entered the Reformation through the side door of Tudor expediency, their decision nevertheless created serious questions about the place of individuals in the larger order. The Civil War that engulfed England in the middle of the 17th century channeled the uncertainty into a contest over "interests": participants debated how public ends and private priorities should be reconciled. Curiously, the Restoration offered the stage on which liberal visions could take concrete shape. It was the Stuart monarchy, re-established, that introduced the English to circulating bonds that paid interest to the government's creditors. When the monarchy did so, it endorsed the theory that individuals could help the public by

12 The Case of Mixed Money (1605), 117; William Lowndes, A Report Containing an Essay for the Amendment of Silver Coins (London: Charles Bill & the Executrix of Thomas Newcomb, 1695), 109-110 (emphasis in original).

pursuing their own inte The new approach crea1 advantages to the great judgment gained stature. public power over mon attention to "private re' liberalism as a construct of political society.

The ascendance of libe ship between individual , acted out in debates over Perhaps most unsettling debt accorded to the intc that the government clait

On the one hand, Eng always protected the sov1 unit of account. Indeed, it money's identity as a so government's ability to esl through society. It followc money for larger public e might injure a narrower other hand, the governm among creditors expectin, itself, the industry of publ mutual benefit of all. The century constitutional la1 Bankers, the House of Lo ment to its bondholders. 1:

But that decision only sl confirmed that the goverr public bonds, although Pa obligation. At the same tir authority to adjust the v, collision between the publ revalue money went to ti ironclad promise to pay r redefined by the governm

13 The Case of the Bankers (1690 Proceedings for High Treason and 1783, vol. 14 (London: R. Bagshaw,

, meet the ends of"war," te revenues, rents, debts, e of the great political ~ and peace in the early

e. The monetary revolu- negotiated the way they ~on was improvised and ln and undermined old J.gn. They often experi- ssuing public bonds, for nip of the monarch with

ral import-like the role ncretely represented the of future revenues had

aedged to collect contri- unit. The stakeholder's taxes, in a certain form µtlt of account. But the ► Bonds signified a fiscal e mediated by a host of •lit the public into tax- osorbed by the govern- tly, the change gave the aken by the authorities

ern era's radical recast- c good. If the English 1,1dor expediency, their place of individuals in the middle of the 17th

'interests": participants ~ reconciled. Curiously, ps could take concrete troduced the English to s creditors. When the ould help the public by

Containing an Essay for the 11s Newcomb, 1695), 109-110

Money reinvented 13

pursuing their own interests. More accurately, it institutionalized that theory. The new approach created a reality in which the quest for profit could bring advantages to the greater group. Investors became patriots, and commercial judgment gained stature. On second look, when the Treasury Secretary invoked public power over money at the end of the century, he paid unprecedented attention to "private revenues, rents, debts, and other occasions." Arguably, liberalism as a construct would draw from that category for its own paradigm of political society.

The ascendance ofliberal theory raised enduring questions about the relation- ship between individual welfare and the larger public good; those questions were acted out in debates over the design of money as the currency of material value. Perhaps most unsettling was how the priority that the new institution of public debt accorded to the interests of investors should be reconciled with authority that the government claimed to manage money.

On the one hand, English law still enshrined nominalism. The doctrine had always protected the sovereign's ability to pronounce the material value of the unit of account. Indeed, it remains good law today. Then (and now), it confirmed money's identity as a sovereign liability: coin was maintained because of the government's ability to establish its value at a level that kept it circulating robustly through society. It followed that, when authorities needed to change the value of money for larger public ends, they could do so despite the fact that their action might injure a narrower set of people who lost because of the change. On the other hand, the government had made long-running contracts that circulated among creditors expecting money with set value. According to the government itself, the industry of public credit depended on protecting their interests for the mutual benefit of all. The highest judicial tribunal soon agreed. In a late 17th century constitutional landmark that came to be known as The Case of the Bankers, the House of Lords denied the government's discretion to delay pay- ment to its bondholders. 13

But that decision only sharpened the constitutional puzzle. The new judgment confirmed that the government was obliged to pay the money promised by its public bonds, although Parliament alone retained the latitude to implement that obligation. At the same time, the older doctrine of nominalism reiterated public authority to adjust the value of money when circumstances so required. The collision between the public's obligation to bondholders and its responsibility to revalue money went to the very core of the developing system: what did an ironclad promise to pay money to an individual mean, when money could be redefined by the government paying it? Conversely, when must a government

13 The Case of the Bankers (1690-1700) in T. B. Howell, Cobbett's Complete Collection of State Trials and Proceedings for High Treason and Other Crimes and Misdemeanors from the Earliest Period to the Year 1783, vol. 14 (London: R. Bagshaw, 1812), 1.

14 Introduction

redefine money for the common good, despite the ironclad promise in money that it owed to individuals? The quandary would grow more pressing over the next century, as the government expanded the role that investors, pursuing their own interests in profits, played in the system of modern money creation.

That development takes the drama over the invention of modern money, third, to its climax-the transformation that occurred when the English government determined to share its authority over money creation with a bank. Later generations, awash in a world with many forms of liquidity, could remark the "financial revolution" of 18th century Britain without asking about its cash ingredients. But those ingredients were a radical innovation. Longer-term credit, private notes, book accounts, or bills of exchange might hasten the ability of money to circulate, but only money furnished a unit of account that could be spent at face value in all transactions by the government and individuals, and taken in payment the same way. By the 1690s, economic observers understood that as quantities of money dropped, so did prices, all other things equal. But they had no desire to live in a world where prices fell relentlessly, stirring protests as people resisted taxes of rising real value, private debtors lost money, and falling prices pushed exchanges below· the monetary floor. More immediately, war increased political ambitions to expand the money supply in the short term.

The Bank of England emerged out of a frenzy of experiments about how the government could borrow immediately by creating cash out of the promise of taxes to come. The story about the way the Bank's notes came to prevail as the England's dominant currency would unfold slowly-but within a decade the attributes that established them as money had taken root. Most extraordinary was the fact that the government now paid instead of charging for the quality of cash. Erecting an architecture that privileged one bank's notes, it ordained them "money" and compensated the investors who issued them. At the same time, the government installed a new theory at the heart of the political economy-the theory that individuals pursuing profits produced money.

The Bank was a consortium of individuals who loaned the Crown money in the form of paper promises-to-pay specie. Sometime after the government began spending Bank of England notes (originally, Bank bills) interchangeably with specie, it started taking them in satisfaction for taxes. The activity effectively equated the paper issues of the Bank with the coin it promised to give if required to redeem them. In conditions of political stability, there was little need for anyone holding a Bank note to cash it in. That included the government-as long as it owed the Bank, it had reason to take Bank notes, some portion of which it could set off against its outstanding debt. It was an advantage no other bank could offer and purely "private" notes could not effectively compete.

In fact, the government could use Bank notes again and again, as long as it taxed enough to maintain the widespread belief that it would soak them all in.

Exchequer bills, one of the : experimented, worked exac ises had become money. It c worked to pay the govern among themselves in the rr

Indeed, the English dee promise of taxes in the futu revenues of the kingdom co money had been reinventc invented. Confronting the within its authority, the g account; it took that unit b the measure to act as a n process had given earlier n coin or tally, that the gover Now it similarly marked ~ bills.

That constancy-the fo community-may be the cc nize a currency. Likewise, observers to attach the wc material figuring of a politic to each cash, from coin to l promise of physical treasu1 maintain it as the measur, money. That commitmen1 content or on paper, maint English history.

The continuity of mone: because otherwise, the mo1 redrafted. Bank-based cum ern capitalism.

A new mechanism now minted all of the silver and it added Bank notes to the c for delivering units of accc government borrowed not obligation with interest to t fiscal needs, but individua licensed the Bank to lend in system, people had put up 1

----------------------- -

lad promise in money more pressing over the vestors, pursuing their

money creation. f modern money, third, e English government n with a bank. Later

· dity, could remark the asking about its cash

on. Longer-term credit, t hasten the ability of account that could be t and individuals, and

c observers understood r things equal. But they

ssly, stirring protests as lost money, and falling ore immediately, war

y in the short term. riments about how the out of the promise of came to prevail as the t within a decade the ot. Most extraordinary

ging for the quality of notes, it ordained them . At the same time, the

political economy-the

e Crown money in the the government began ) interchangeably with The activity effectively ised to give if required

ere was little need for d the government-as

, some portion of which vantage no other bank ly compete.

d again, as long as it ould soak them all in.

Money reinvented 15

Exchequer bills, one of the alternatives to Bank notes with which the English also experimented, worked exactly the same way. A certain category of paper prom- ises had become money. It offered a unit of account interchangeable with coin. It worked to pay the government or individuals. And insofar as people used it among themselves in the meantime, it moved hand to hand as a medium.

Indeed, the English decision-to create money to borrow now out of the promise of taxes in the future-restated a far older logic about how the incoming revenues of the kingdom could be given current value as money. It turns out that money had been reinvented in much the same circumstances as it was first invented. Confronting the need to collect and distribute resources from those within its authority, the government selected and spent a particular unit of account; it took that unit back in payment for public obligations; and it allowed the measure to act as a medium between individuals in the meantime. That process had given earlier moneys their particular value as the units, whether in coin or tally, that the government would spend first and take back in the future. Now it similarly marked and managed Bank promises-to-pay and Exchequer bills.

That constancy-the foundation of money in the viability of a political community-may be the common aspect that brought contemporaries to recog- nize a currency. Likewise, it may be the structural attribute that invites later observers to attach the word "money." Incoming revenues are, after all, the material figuring of a political community's basic soundness. The value common to each cash, from coin to Bank notes, lay in a public promise, but rather than a promise of physical treasure, it was the promise to spend and tax in the unit, maintain it as the measure, and enforce it as the medium that marked it as money. That commitment, whether written in a medium with commodity content or on paper, maintained the continuity of money over a millennium of English history.

The continuity of money's character as a public promise is critical precisely because otherwise, the monetary constitution of England had been completely redrafted. Bank-based currency would introduce the political economy of mod- ern capitalism.

A new mechanism now pumped money into circulation. The government minted all of the silver and gold that came to it at public cost. More important, it added Bank notes to the cash stream. When it did so, it endorsed a novel device for delivering units of account-sovereign liabilities still-into circulation. The government borrowed notes, spent them, and collected them to pay off its obligation with interest to the Bank investors. Those notes met the government's fiscal needs, but individuals desired currency as well. The government soon licensed the Bank to lend in the form of notes to individuals. Under the medieval system, people had put up bullion to buy money at the mint. Under the modern

16 Introduction

system, they put up collateral to the Bank, and borrowed its paper. A flow of notes based on a promise of productivity would replace the flow of coins formed from silver. The new approach to money creation, innovated by public authority and informed by the liberal invocation of individual interests as privileged motivators, would realign the way people understood money, the political and private work that maintained it, and "the market" that resulted.

That claim takes us to the fourth and last aspect of the monetary revolution considered here: its astonishing aftermath. Money's reinvention catalyzed a debate over what money really was that lasted more than a century. Written in the urgencies of the moment, over decades of experimentation with coin and paper, was a fundamental division. For some, the opportunity to think about money as public credit, a promise of value made at the center of a political community, led to proposals that located value-the matter promised-in the internal operations of the nation. According to those theorists, money could be made of out incoming revenues as well as other materials; a sovereign group had potency, the possibility of making money by its own arrangements to establish credit. "Credit theorists" began to articulate money as a constitutional project. Adam Smith, like others, expressed the stakeholder theory of money explicitly.

For others, the answer lay precisely in externalizing value, taking it out of governance altogether. According to this view, money could, indeed should, be understood independent of a political community. As if on cue, John Locke enters the frame at this point. When he defined money as a matter emerging from private exchange beyond (and before) the borders of the state, he was writing liberalism's script. In his hands, money became a finite amount of metal-but it was not a commodity money of the old type. Locke had in mind the silver used by traders across the oceans of the world, an evocative image that would have been unrecognizable to the early English courts. For them, money was a matter irreducibly sovereign, a measure made within the bounds of the state. For Locke, it was an artifact of individuated action explicitly outside of political territory, a medium emanating from decentralized deals. As such, it was a utility naturally occurring-the identity it gained in classical economic theory.

Over the long 18th century, the English brokered a compromise between the two positions, a paradoxical approach that gave capitalism great capacity as well as profound shortcomings. On the one hand, the English adopted Locke's position enthusiastically. The Great Recoinage of 1696 and the architecture of the Gold Standard followed from the position that money was, or should be treated as, a commodity beyond the control of the state-ideally, it was a fixed amount of metal. That position reordered the priorities of governance, sanctify- ing the claims of creditors and bolstering the legitimacy of credit instruments as the promise of coin with a static content.

The same position effectively destroyed commodity money as a working system. "Commodity money" of the traditional sort had never run according to

the Lockean logic and coul of coin demonstrates, soci of coin regularly to maint: ment, the ladder of silver , period fell apart during · pivotal. More striking still denominational ladder leJ from country banks, and , began operating as supplt held on reserve. Shortages the denominational barrie exchange they could mak Europeans, the English bi even as they claimed to b~ that money was or should significant influence, some lish monetary system.

On the other hand, Par make money. It may hav1 money according to the : particular kind of credit. T: rate in the guinea was the gold pivot. In turn, public equivalent stature with tha1 rose dramatically over the , During the Napoleonic v' despite being inconvertible ness as the unit of account

During the 18th century monetary architecture. Th credit that flowed from < banks, to a center that est: obviously, each of the inst promised money designatt reached beyond merchant keepers, producers, and otl

English law supplied tt Common law debt makes reserve lending. Later obse: modern world, often overlc tional reserve banking allo~

..

its paper. A flow of flow of coins formed kl by public authority terests as privileged

bey, the political and alted. monetary revolution

llvention catalyzed a a century. Written in tation with coin and 1Unity to think about center of a political er promised-in the

nsts, money could be sovereign group had

1>.gements to establish 1<>nstitutional project. of money explicitly. alue, taking it out of ld, indeed should, be on cue, John Locke

ls a matter emerging of the state, he was

1 a finite amount of ~- Locke had in mind evocative image that

rts. For them, money lin the bounds of the

explicitly outside of deals. As such, it was cal economic theory. promise between the great capacity as well ish adopted Locke's d the architecture of ~ was, or should be ,ideally, it was a fixed governance, sanctify- credit instruments as

noney as a working ~er run according to

, ... Money reinvented 17

the Lockean logic and could not be maintained on that theory. As the long history of coin demonstrates, societies using commodity money recalibrated the content of coin regularly to maintain it in circulation. Left without that kind of manage- ment, the ladder of silver denominations in place in England since the medieval period fell apart during the 18th century. The gold unit of account became pivotal. More striking still, a set of new moneys began to fill in the rungs of the denominational ladder left vacant. Token moneys, Bank notes, the currencies from country banks, and other credit advanced in the new unit of account-all began operating as supplements to the gold unit of account, now increasingly held on reserve. Shortages of small change would eventually fade as a result, and the denominational barriers that had sorted people relentlessly by the size of the exchange they could make gave way. Unintentionally, but earliest among the Europeans, the English broke away from the strictures of commodity money, even as they claimed to base their system more adamantly on it. The argument that money was or should be a matter outside of political control thus exercised significant influence, some anticipated and some quite unexpected, on the Eng- lish monetary system.

On the other hand, Parliament constantly exercised its political authority to make money. It may have theorized money as a commodity, but it practiced money according to the prescriptions of those who understood money as a particular kind of credit. The government's decision to tax and spend at a certain rate in the guinea was the event that replaced the silver unit of account with a gold pivot. In turn, public fiscal activity assimilated Bank of England notes to equivalent stature with that gold unit of account. The government's taxing power rose dramatically over the century, creating demand for the money it recognized. During the Napoleonic Wars, Bank notes would function as English money despite being inconvertible into gold coin; that period confirmed their effective- ness as the unit of account independent of gold coin.

During the 18th century, the English constructed the tiered structure of their monetary architecture. Their design related a proliferation of currencies and credit that flowed from country banks, brokers and, eventually, joint-stock banks, to a center that established the potency of those media as money. Most obviously, each of the institutions ranging out from the center issued notes or promised money designated in the public unit of account. Commercial banks reached beyond merchant finance; they created money that laborers, shop- keepers, producers, and others took as payment and passed on in exchange.

English law supplied the engineering that supported the new currencies. Common law debt makes a remarkable reentry here to legitimate fractional reserve lending. Later observers, thoroughly immersed in the institutions of the modern world, often overlook the contrived nature of that operation. But frac- tional reserve banking allows banks to promise access to the same sovereign units

18 Introduction

of account to both borrowers and depositors at once. Given the government's interest in policing its own liabilities, who multiplies them, and how they do so, the activity requires sovereign permission. Contemporaries to the early practice denounced it as fraud or even counterfeiting. In the legal debate, common law debt supported the argument that deposits were the bankers' own money, to risk as they wished. As it was interpreted in the early courts, the doctrine thus sanctioned money creation by commercial banks. They lent at a retail level, to individuals as well as businesses, setting England apart from the Continent.

Finally, each banking institution cleared its accounts at the Bank of England: everyone required funds recognized by all as credible in order to settle any cash balances-and only the Bank could ensure that kind of money. The system that Parliament orchestrated thus reached through the unit of account, the courts, and the Bank of England to the plethora of "private" banks and brokers.

The new design was prolific. In effect, the government used its fiscal system to direct money demand to a paper unit of account and then licensed multiple purveyors of cash, allowing them to extend the money supply for private use. The mints once sold money to people in exchange for bullion. Banks and brokers now advanced currency on a promise of future productivity and, if they were careful, good security. They became the experts who determined how money entered circulation and how heavily it flowed. Like the Bank, they issued money accord- ing to the profits they anticipated, given the returns they expected from borrow- ers. Cash based on a promise of productivity was far more accessible than cash based on an advance of bullion. The system thus paired money transparently defined by the government's fiscal authority with the private dispensation of cash.

The cash abundance of the modern world contrasts dramatically with the monetary scarcity of the early world; the system as a whole expanded currency manifold. For centuries, Europeans had improvised modes of transferring credit between trading partners, including banks of transfer and bills of exchange. But when they developed banks of issue, paired with fractional reserve banking and centralized clearing, the English were adding currencies that could travel hand to hand indiscriminately-cash. As Walter Bagehot would note in the late 19th century, "we have entirely lost the idea that any undertaking likely to pay, and seen to be likely, can perish for want of money; yet no idea was more familiar to our ancestors." 14 The very fecundity of the new way of making money must have fed the explosive economic growth that characterizes modernity.

The system that produced such abundant liquidity came with a dark side-the deep fault lines that have rendered modern finance so fragile. The design was disciplined at the center by the need to settle balances in the public unit of account-Bank of England notes or gold coin. But those reserves were tiny

14 Walter Bagehot, Lombard Street: A Description of the Money Market (New York: John Wiley, 1873, 1999), ll8.

compared to the flow 1 the cash demanded if to gold coin or Bank deposits that held va: even those that came ing simply on how in contingency in their , modity coin with its J bullion. The booms a1

The history here er structure of their syste to suspend convertibi demand that those ins the English to reconsi private exchange, sine embracing the alternat early Gold Standard , theory and in policy.

Those who enginee: under no illusions. Th was, in fact, a mode < authority orchestrated regularly need to resc1 than an occasion for activity was, after all, ran all the way from d, redistribution that atte

According to these touchstone of coin's cc trade. The design posit connected to the valu society. The effort was still determined by pu individuals for cash se viduals considering th proponents, a set of p appropriately correctec

15 The structure of bank-bi lender oflast resort compreher promise of private productivit expected productivity of the co contributions even when priva

e. Given the government's them, and how they do so, raries to the early practice legal debate, common law ankers' own money, to risk courts, the doctrine thus ey lent at a retail level, to

rt from the Continent. ts at the Bank of England: in order to settle any cash

of money. The system that t of account, the courts, and

and brokers. ent used its fiscal system to and then licensed multiple

supply for private use. The 'on. Banks and brokers now 'ty and, if they were careful,

ined how money entered they issued money accord- ey expected from borrow- more accessible than cash

aired money transparently rivate dispensation of cash. asts dramatically with the

a whole expanded currency modes of transferring credit r and bills of exchange. But ctional reserve banking and ies that could travel hand to ould note in the late 19th

dertaking likely to pay, and o idea was more familiar to f making money must have

s modernity. came with a dark side-the so fragile. The design was

ances in the public unit of t those reserves were tiny

arket (New York: John Wiley, 1873,

Money reinvented 19

compared to the flow of funds soon carried by the system. They could not provide the cash demanded if everyone holding claims to money wanted to convert them to gold coin or Bank notes all at once. Private bank notes, bills, and demand deposits that held value according to private promises of future productivity, even those that came with collateral, could flourish or fail as currencies depend- ing simply on how immediate and concerted the demand for money was. That contingency in their capacity to provide liquidity rendered them unlike com- modity coin with its prepayment of value, acquired and carried in the form of bullion. The booms and busts of modern times began in the late 18th century.15

The history here ends with the crisis that forced the English to confront the structure of their system. In 1797, a wartime run on the banks led the government to suspend convertibility: those holding currency from banks could no longer demand that those institutions redeem it for gold coin. That development invited the English to reconsider the trope that money was a commodity produced by private exchange, since it was so obviously a fiction at the time. But rather than embracing the alternative-a money that was public in fact-the architects of the early Gold Standard determined that money should be treated as private in theory and in policy.

Those who engineered the early national version of the Gold Standard were under no illusions. They understood better than many of their heirs that money was, in fact, a mode of mobilizing collective value. They admitted that public authority orchestrated their system, would be required to manage it, and would regularly need to rescue it. For them, however, that reality was a threat rather than an occasion for maintaining the domestic economy. That rich font of activity was, after all, a terrain of cross-cutting claims to public concern that ran all the way from defense to poor relief, with all the dangers of debates about redistribution that attended.

According to these advocates, money should be "made" according to the touchstone of coin's content, gold, as that value was established in international trade. The design posited that the money flow of a society should be organically connected to the value of a commodity set externally to the activity of that society. The effort was to control money production within the polity, a matter still determined by public fiscal practice along with the domestic demand by individuals for cash services, by subjecting that production to a veto that indi- viduals considering their advantage in foreign exchange would exercise. For proponents, a set of prescriptions followed. Regularly, deflation and austerity appropriately corrected money's expansion along with the bad investment and

15 The. structure of bank-based credit that extended public money made the Bank's capacity to act as lender oflast resort comprehensible as well as necessary. While commercial banks advanced money on the promise of private productivity, the Bank advanced money on the anticipation of future revenues-the expected productivity of the country as a whole. It therefore retained its ability to act by enlisting taxpayers' contributions even when private banks were stymied.

20 Introduction

overconsumption it had produced. Responsible banks periodically required res- cue, given their structural role as money creators. Public debt imposed obliga- tions on a state like those private debt imposed on individuals; those obligations should not be conditioned on the health of the community, despite the fact that the economy had its source in that domestic space.

Viewed over the long term, the orthodoxy of the early Gold Standard brought the English approach to money to earth far from where it began. Money in the medieval world was an emphatically internal medium. Its making consumed officials who understood the pull of demand for money's commodity content from the outside as a scourge and who struggled to provide money for domestic necessities. By contrast, money for its 19th century engineers was a matter that should be modulated by an external reference point. They sought to discipline their money supply by defining "the market" as the activity that took place outside of states and the political authority they represented.

Ultimately, the insistence institutionalized in the early 19th century that money be understood as private was the strange and selective answer to the constitutional quandary posed when the government determined to make a collective medium-money~according to a method that prioritized individual interests. According to the architects of the Gold Standard, public authority to make money was legitimate only insofar as it furthered the ends of that medium, now understood as commercial. That approach prioritized the agency of entre- preneurs and the business community. If the public purposes of money seemed to disappear, they could be brought back into view by understanding the polity as, itself, a stage for the aggregate of private activity that made the economy. An argument developed as an escape from politics thus returned to colonize the politics at its core.

Within that paradigm, economics came of age as a discipline. In its world, money appeared to be made by the economic exchange of individuals, acting each for their own interest. Their choices claimed sanctity and their activity, rather than the requirements of the political community, indicated the appropri- ate amount of money in society. "The market" that set the standard was, after all, the market outside the boundaries of political community-the international trade in bullion. Money was infinitely divisible in any case-it could be modeled as an abstraction. That treatment rendered irrelevant the constitutional design that constructed money.

The modern approach to money thus made it unnecessary to attend to the way it was made and maintained in law, politics, and the categories of knowledge that knit society together. The old paradigm of money-a medium charged to indi- viduals by the government but claimed as a public resource-had disappeared. A new amalgam-money publicly financed at a profit to individuals but analyzed as an opaque phenomenon-came to animate the modern political economy.

The combination wrc it as the way money o market it helped ere~ social convention, an to perpetuate itself.

The drama posed het the start in a more c island inhabitants to those in the Levant, a in its territorial reach raw materials of mo extractive ventures o and authority across ·

The struggle to m, throughout the early America, where the colonists to experimt currencies of the pr, towards self-governai divide the new world

It was only after 1 English experiment i conspicuous disciples a government that de bank of issue, and pre unify disparate states gion suggests the glob

As its history revea The traders who mm metal that had high somewhere else. Mere implies. Rather, they largely disjointed syst1

By contrast, moderi a matter of contracts commitment integratt tory than has ever exis tives that are unpreci beneficial and destru penetrates-needs to

dically required res- ebt imposed obliga- als; those obligations , despite the fact that

ld Standard brought began. Money in the s making consumed commodity content money for domestic rs was a matter that sought to discipline

'vity that took place d. y 19th century that ective answer to the termined to make a prioritized individual , public authority to

ends of that medium, the agency of entre-

s of money seemed to tanding the polity as, de the economy. An ned to colonize the

scipline. In its world, of individuals, acting 'ty and their activity, dicated the appropri- tandard was, after all, ·ty-the international -it could be modeled constitutional design

to attend to the way ries of knowledge that ·um charged to indi- ce-had disappeared.

dividuals but analyzed rn political economy.

Money reinvented 21

The combination wrote a peculiar theory of value into place, while universalizing it as the way money operated, without more. In that circumstance, money and the market it helped create would appear the inevitable product of human interest, social convention, and exchange. The new order thus gained a remarkable power to perpetuate itself.

* * * The drama posed here centers in England-but money enmeshed England from the start in a more complex geography, one that tied Anglo-Saxons to Danes, island inhabitants to populations on the Continent, and Europeans to Africans, those in the Levant, and peoples further east. Indeed, while this history is narrow in its territorial reach, the story is one that extends much further. A desire for the raw materials of money, silver and gold, drove Western Europeans into the extractive ventures of the 16th century. That compulsion reconfigured space and authority across the Atlantic world.

The struggle to make money, in the literal sense, in turn shaped settlement throughout the early modern era. One notable case concerned British North America, where the English by their imperial policy on money induced the c~lonists to experiment with new ways of making a medium, the early paper currencies of the provinces. Those innovative moneys-and the orientation towards self-governance and local control that they engendered-would help divide the new world from the old.

It was only after the Revolution that Americans became adherents to the English experiment in modern money, but they were soon among the most conspicuous disciples of the new order. To its advocates, the United States needed a government that defined the sovereign money, deployed it through a powerful bank of issue, and preserved the public debt; only that kind of government could unify disparate states and compete internationally. That early instance of conta- gion suggests the global dynamics that followed.

As its history reveals, medieval money had been a decidedly domestic affair. The traders who moved between worlds used silver or gold, not money but a metal that had high value precisely because it could be made into money somewhere else. Merchants did not introduce money as the conventional story implies. Rather, they shuttled between economic centers, the translators in a largely disjointed system.

By contrast, modern economic capital flows across borders in monetary form, a matter of contracts that tie together banks, investors, and governments. That commitment integrates the globe into a far more homogeneous monetary terri- tory than has ever existed. In that territory, domestic politics encounters impera- tives that are unprecedented. The character of capitalism-its capacities both beneficial and destructive, its modes of migration, the extent to which it penetrates-needs to be analyzed as a network that both defines and diffuses

22 Introduction

liquidity. Those flows of capital now dominate the economic climate, dispensing abundance and drought.

When the visibility of money as a political project faded, the way it had realigned the societies that authored it also disappeared from view. With that disappearance went compelling questions about the consequences of the transformation- including the role of fiscal action in supporting the value of money, the distributive stakes in the modern arrangement, and the alignment of rights and interests acted out in the ethics of capitalism. That absence, a void of history and theory, undermines the effort so urgent to our present moment to understand the political economy we inhabit.

Money has long starn: those accounts convei law, and economics, ~ and neoclassical moc market it lubricates. A money expresses in i objects ... in abstract c tions." Karl Marx coul money as a commodi represents as commod inhere in their produ1 nomics echoes the ph economists agree," ace affects nominal variabl variables" in the long 1 and monetary spheres; register of value. 1

History, however, ur to its practice, money . relations between objec into those relations." 1 resources within a co communities intervene and the people who h includes the legal dyna1 the compliance and cot the market and fully en

The case for a new assessment of the co: "Money" and "market," roles in the dominant According to that stor_

1 See Georg Simmel, The Phi1 A Critique of Political Economy, Mankiw, Macroeconomics, 4th E