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Tuesday, May 21, 2013

Child, Locke, the rate of interest, and the coinage

One of the most prominent economic writers of the latter half of the seventeenth century in England was the eminent Sir Josiah Child (1630–99). He was a wealthy merchant who was usually affiliated with the powerful East India Company and indeed rose to be its governor, and the central concern in his economic writings was the by now traditional apologetics for the East India interests. That is: no one need worry about balance of trade from one specific country to another; a broader look at a nation's balance should be taken; and therefore the East India Company's notorious gold and silver exports to, or deficits with, the Far East are justified if we consider the company's re-exports to, and hence surpluses with, other countries. Because of this broader emphasis on the overall balance of trade, later economists often associated Child with a free trade, laissez-faire approach.

Unwary historians were also entrapped by many of Child's fulminations against monopolies and monopolistic privileges granted by the state to cities, guilds or trading companies. Again, they assume that Child was an advocate of laissez-faire; what they overlooked was that Child was always careful to defend, as a special exception, the monopoly granted to the East India Company.
Child never attained the genuine laissez-faire view that even the overall balance of trade was unimportant; on the contrary, he insisted that gold and silver bullion could only be exported freely if the overall effect of such export would be a net import of specie, in other words, an overall favourable balance of trade.

Unfortunately, Child's work was interpreted as solid laissez-faire doctrine in the eighteenth century, and particularly by the mid-eighteenth century devotee of laissez-faire, Viscount de Gournay, who translated Child into French as part of his programme of spreading laissez-faire doctrine in France. As a result, Child's work achieved undeserving fame in the following century.
One of Josiah Child's main deviations from free market and laissez-faire doctrine was to agitate for one of the favourite programmes of the mercantilists: to push the legal maximum rate of interest ever lower. Formerly discredited ‘usury laws’ were making a comeback on faulty economic rather than natural law or theological grounds.

From the early decades of the seventeenth century, English mercantilists were bitter at the superior prosperity and economic growth enjoyed by the Dutch. Observing that the rate of interest was lower in Holland than in England, they chose to leap to the causal analysis that the cause of the superior Dutch prosperity was Holland's low rate of interest, and that therefore it was the task of the English government to force the maximum rate of interest down until the interest rate was lower than in Holland. The first prominent mercantilist tract calling for lowering the interest rate was that of the country gentleman Sir Thomas Culpeper, in his brief Tract Against the High Rate of Usury (1621). Culpeper declared that Dutch prosperity was caused by their low rate of interest; that the English high interest rate crippled trade; and therefore that the government should force maximum interest rates down to outcompete the Dutch. Culpeper's pamphlet played a role in Parliament's lowering the maximum usury rate from 10 to 8 per cent. Culpeper's tract was reprinted several times, and Parliament duly pushed the maximum rate in later years down to 8 and then 6 per cent.

Each time, however, resistance increased, especially as government intervention forced down the maximum rate repeatedly. Finally, in 1668, the mercantilists tried for their most important conquest: a lowering of the maximum interest rate from 6 to 4 per cent, which would presumably result in rates below the Dutch. As a propaganda accompaniment to this bill, Culpeper's son, Sir Thomas Culpeper, in 1668 reprinted his father's tract, along with one of his own, whose title says it all: A Discourse showing the many Advantages which will accrue to this Kingdom by the Abatement of Usury together with the Absolute Necessity of Reducing Interest of Money to the lowest Rate it bears in other Countreys.
Culpeper Senior's pamphlet was published along with the influential contribution by the already eminent merchant and man of affairs, Josiah Child, in his first pamphlet, Brief Observations concerning trade, and interest of money. Child was a prominent member of the king's council of trade, established in 1668 to advise him on economic matters. Child treated lowering the maximum rate of interest to 4 per cent as virtually a panacea for all economic ills. A lower rate of interest would vivify trade, and raise the price of land; it would even cure drunkenness.

Josiah Child's pamphlet and his testimony before Parliament were centrepieces of the debate swirling around the proposal. Child's critics pointed out effectively that low interest in a country is the effect of plentiful savings and of prosperity, and not their cause. Thus, Edward Waller, during the House of Commons debate, pointed out that ‘it is with money as it is with other commodities, when they are most plentiful then they are cheapest, so make money [savings] plentiful and the interest will be low’. Colonel Silius Titus pressed on to demonstrate that, since low interest is the consequence and not the cause of wealth, any maximum usury law would be counterproductive: for by outlawing currently legal loans, ‘its effect would be to make usurers call in their loans. Traders would be ruined, and mortgages foreclosed; gentlemen who needed to borrow would be forced to break the law....’
Child feebly replied to his critics that usurers would never not lend their money, that they were forced to take the legal maximum or lump it. On the idea that low interest was an effect not a cause, Child merely recited the previous times that English government had forced interest lower, from 10 to 8 to 6 per cent. Why not then a step further? Child, of course, did not deign to take the scenario further and ask why the state did not have the power to force the interest rate down to zero.

Child's critics raised another telling point: how is it that the Dutch were able to get their interest rates low purely by economic means; how come the Dutch did not need a usury statute? Child's absurd rejoinder was that the Dutch would have pushed their interest rate down by statute if their market rate had not fallen low by itself.

It should be noted that this low interest deviation from laissez-faire accorded with Josiah Child's personal economic interest. As a leading East India merchant, Child and his colleagues were great borrowers not lenders, and so were interested in cheap credit. Even more revealing was Child's reply to the charge of the author of Interest of Money Mistaken that Child was trying to ‘engross all trade into the hands of a few rich merchants who have money enough of their own to trade with, to the excluding of all young men that want it’. Child replied to that shrewd thrust that, on the contrary, his East India Company was not in need of a low rate since it could borrow as much money as it pleased at 4 per cent. But that of course is precisely the point. Sir Josiah Child and his ilk were eager to push down the rate of interest below the free market level in order to create a shortage of credit, and thereby to ration credit to the prime borrowers – to large firms who could afford to pay 4 per cent or less and away from more speculative borrowers. It was precisely because Child knew full well that a forced lowering of interest rates would indeed ‘engross all trade into the hands of a few rich merchants’ that Child and his colleagues were so eager to put this mercantilist measure into effect.

When the House of Lords’ committee held hearings on the interest-lowering bill during 1668–69, it decided to hold testimony from members of the king's council of trade, of whom Josiah Child was a central figure. But another important figure was a very different member of the council of trade, and also a member of the Lords’ committee, the great Lord Ashley, John Locke's new and powerful patron. As a classical liberal, Ashley opposed the bill, and at his behest, Locke wrote his first work on economic matters, the influential though as yet unpublished manuscript, ‘Some of the Consequences that are like to follow upon Lessening of Interest to Four Percent’ (1668). Locke made clear in this early work his profound insight, as well as thoroughgoing commitment, to a free market economy, as well as to his later structure of property rights theory.

Locke displayed straightaway his skill at polemics; the essay was basically a critique of Child's influential work. First, Locke cut through the holistic rhetoric; of course, he pointed out, the borrowing merchant will be happy to pay only 4 per cent interest; but this gain to the borrower is not a gain for the national or general good, since the lender loses by the same amount. Not only would a forced lowering of interest be at best redistributive, but, Locke added, the measure would restrict the supply of savings and credit, thereby making the economy worse off. It would be better, he concluded, if the legal rate of interest were set at the ‘natural rate’, that is the free market rate ‘which the present scarcity [of funds] makes it naturally at...’. In short, the best interest rate is the free market, or the ‘natural’ interest rate, set by the workings of free man under natural law, i.e. the rate determined by the supply of and demand for money loans at any given time.

Whether or not Locke or Ashley proved decisive, the House of Lords finally killed the 4 per cent bill in 1669. Three years later, Ashley became chancellor of the Exchequer as Earl Shaftesbury, and the following year Locke became secretary to the council for trade and plantations, which replaced the old council of trade. At the end of 1674, however, Shaftesbury was fired, the council of trade and plantations was disbanded, and Locke followed his mentor into political opposition, revolutionary intrigues, and exile in Holland.

John Locke finally returned to London with the overthrow of the Stuarts and the Revolution of 1688, returning in triumph on the same ship as Queen Mary. Locke returned to England to find the old East India crowd up to their old tricks. England was in dire financial straits, Charles II having ruined public credit with his Stop of the Exchequer, and the East India people had once again introduced a bill in 1690 for the compulsory lowering of interest to 4 per cent. At the same time, Sir Josiah Child was brought back to expand his pamphlet into a Discourse About Trade (1690), an anonymous book reprinted three years later as A New Discourse of Trade, with Child's name blazoned on the title page. It was the New Discourse that was to make such an excessive impression on eighteenth century thinkers. In addition to the renewed arguments for lower interest, the Discourse and the New Discourse added more apologetics for the East India line on trade and on monopolies.

In response, John Locke's new political patron, now that Shaftesbury had died, Sir John Somers, MP, apparently asked Locke to expand his 1668 paper to refute Child's and other proponents of the 4 per cent bill. Locke responded the following year with his expanded book, Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money (1692) which brought Locke's previously unpublished arguments into public debate. Locke's work may have been influential in the 4 per cent bill once again being killed in the House of Lords.

The latter part of Locke's Considerations was devoted to the great recoinage controversy, into which England had been plunged since 1690. In that year, England's basic money stock of silver coins had deteriorated so far, due to erosion and coin-clipping, and the contrast of these inferior ‘hammered’ coins to the newer, uneroded and unclipped ‘milled’ coins was so great, that Gresham's law began to operate intensely. People either circulated the overvalued eroded coins and hoarded the better ones, or else passed the poor coins at their lower weight rather than at their face value. By 1690 the older hammered coins had lost approximately one-third of their worth compared to their face value.

It was increasingly clear that the Mint had to offer recoinage into the new superior coins. But at what rate? Mercantilists, who tended to be inflationist, clamoured for debasement, that is, recoinage at the lighter weight, devaluating silver coin and increasing the supply of money. In the meanwhile, the monetary problem was aggravated by a burst of bank credit inflation created by the new Bank of England, founded in 1694 to inflate the money supply and finance the government's deficit. As the coinage problem came to a head in that same year, William Lowndes (1652–1724), secretary of the treasury and the government's main monetary expert, issued a ‘Report on the Amendment of Silver Coin’ in 1695 calling for accepting the extant debasement, and for officially debasing the coinage by 25 per cent, lightening the currency name by a 25 per cent lower weight of silver. In his Considerations, Locke had denounced debasement as deceitful and illusionist: what determined the real value of a coin, he declared, was the amount of silver in the coin, and not the name granted to it by the authorities. Debasement, Locke warned in his magnificently hard-money discussion, is illusory and inflationist: if coins, for example, are devalued by one-twentieth, ‘when men go to market to buy any other commodities with their new, but lighter money, they will find 20s of their new money will buy no more than 19 would before’. Debasement merely dilutes the real value, the purchasing power, of each currency unit.

Threatened by the Lowndes report, Locke's patron John Somers, who had been made Lord Keeper of the Great Seal in a new Whig ministry in 1694, asked Locke to rebut Lowndes's position before the Privy Council. Locke published his rebuttal later in the year 1695, Further Considerations Concerning Raising the Value of Money. This publication was so well received that it went into three editions within a year. Locke superbly put his finger on the supposed function of the Mint: to maintain the currency as purely a definition, or standard of weight of silver; any debasement, any change of standards, would be as arbitrary, fraudulent, and unjust as the government's changing the definition of a foot or a yard. Locke put it dramatically: ‘one may as rationally hope to lengthen a foot by dividing it into fifteen parts instead of twelve, and calling them inches...’.

Furthermore, government, the supported guarantor of contracts, thereby leads in contract-breaking:

The reason why it should not be changed is this: because the public authority is guarantee for the performance of all legal contracts. But men are absolved from the performance of their legal contracts, if the quantity of silver under settled and legal denominations be altered... the landlord here and creditor are each defrauded of twenty percent of what they contracted for and is their due...

One of Locke's opponents both on coinage and on interest was the prominent builder, fire insurance magnate and land bank projector, Nicholas Barbon (1637–98). Barbon, son of the fanatic London Anabaptist preacher and leather merchant and MP Praisegod Barbon,18 studied medicine and became an MD in Holland, moving to London and going into business in the early 1660s. In the same year as Child's Discourse About Trade, Barbon, who had just been elected to Parliament, published the similarly titled Discourse of Trade (1690), again timed to push for the 4 per cent interest bill in Parliament. An inveterate debtor and projector, Barbon of course would have liked to push down his interest costs.

In 1696, Barbon returned to the lists in a bitter attack on Locke's Further Considerations on the coinage. Arguing against Locke's market commodity, or ‘metallist’, view of money, Barbon, urging devaluation of silver, countered with the nominalist and statist view that money is not the market commodity but whatever government says it is. Wrote Barbon: ‘Money is the instrument and measure of commerce and not silver. It is the instrument of commerce from the authority of that government where it is coined...’

Fortunately, Locke's view triumphed, and the recoinage was decided and carried out in 1696 on Lockean lines: the integrity of the weight of the silver denomination of currency was preserved. In the same year, Locke became the dominant commissioner of the newly constituted board of trade. Locke was appointed by his champion Sir John Somers who had become chief minister from 1697 to 1700. When the Somers regime fell in 1700, Locke was ousted from the board of trade, to retire until his death four years later. The Lockean recoinage was assisted by Locke's old friend, the great physicist Sir Isaac Newton (1642–1727) who, while still a professor of mathematics at Cambridge from 1669 on, also became warden of the Mint in 1696, and rose to master of the Mint three years later, continuing in that post until his death in 1727. Newton agreed with Locke's hard-money views of recoinage.
Barbon and Locke set the trend for two contrasting strands in eighteenth century monetary thought: Locke, the Protestant scholastic, was essentially in the hard-money, metallist, anti-inflationist tradition of the scholastics; Barbon, on the other hand, helped set the tone for the inflationist schemers and projectors of the next century

Austrian Perspective on the History of Economic Thought (2 volume set)

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