Having survived the assaults of ignorant moralists before the Reformation, the foreign exchange market was subjected, during the far more secular age of the late sixteenth century onwards, to the assaults of regulators on behalf of the nation-state. Writers who have been misnamed ‘bullionists’ adopted the ignorant view that an outflow of gold or silver bullion abroad was iniquitous, and that this calamity was brought about by the machinations of evil foreign exchange dealers, who deliberately sought gain by depreciating he value of the nation's currency. Nowhere was there any insight that the outflow of bullion might have been performing an economic function, or was the result of underlying supply and demand forces. Despite their insights into Gresham's law and debasement, Thomas Smith and Gresham would have to be placed in the ‘bullionist’ category. The policy conclusion of the bullionists was all too simple: the state should outlaw the export of bullion and should severely regulate or even nationalize the foreign exchange market.
The exchange dealers battled back, with sensible and powerful arguments. Thus in 1576 they argued, in a ‘Protest against the State Control of Exchange Business’, that state intervention would cause a drying up of commerce. On the low value of the English pound, they replied that ‘we can say nothing but that our exchanges are made with a mutual consent between merchant and merchant, and that abundance of the deliveries or of the takers make the exchange rise and fall’.
One prominent bullionist of the early seventeenth century was Thomas Milles (c.1550–c.1627). In a series of tracts from 1601 to 1611, Milles advances the old bullionist position. Foreign exchange transactions, Milles opined, were evil; they were institutions with which private merchants and bankers, ‘covetous persons (whose end is private gain)’, rule in the place of kings. Something new, however, had been added. For the powerful East India Company had been chartered in 1600, to monopolize all trade with the Far East and the Indies. The East India trade was unique in that Europeans purchased a great deal of valuable muslins and spices, but the Indies in turn bought very little from Europe except gold and silver. European nations, therefore, had an ‘unfavourable balance of trade’ with the Far East, and the India trade therefore quickly became a favourite target for mercantilist writers. Not only were goods being imported from the East as against few exports, but specie, bullion, seemed to flow eternally eastwards. Milles therefore took up the bullionist cudgels by calling for restriction or prohibition of the Indies trade, and attacking the activities of the East India Company.
Milles was also eager to intensify regulations against the Merchant Adventurers, the governmentally privileged monopoly for the export of woollen cloth to the Netherlands. Instead, he craved a return to the old privileged raw wool export monopoly of the Merchant Staple. In fact, Milles went so far as to call the old regulated Staple trade the ‘first step towards heaven’.
It is certainly likely that Milles's eagerness to regulate and prohibit foreign trade and bullion flows was connected with his own occupation as customs official. The more regulation, the more work and power for Thomas Milles.
Stung to the quick, the secretary of the Merchant Adventurers, John Wheeler (c.1553–1611) replied to Milles's charges in his Treatise of Commerce, in 1601. Wheeler upheld the ‘orderly competition’ of the 3500 merchant members joined together in the privileged monopoly, as against the unorganized, dispersed, ‘straggling and promiscuous trade’ of free competition. He also engaged in semantic trickery by asserting that monopoly by definition means only ‘single seller’; hundreds of merchants linked together into a privileged export company were able, after all, to act virtually as one privileged firm. In Wheeler's own words, these merchants were ‘united and held together by their good government and by their politic and merchantilike orders’ – backed up, we must not forget, by the armed might of the state. Sneering at the idea of free competition, Wheeler smugly opined that any merchant who loses a little liberty will be better off ‘being restrained... in that estate, than if he were left to his own greedy appetite’. When John Kayll, over a decade later in The Trades Increase (1615), protested that the monopoly of the Merchant Adventurers would ‘unjustly keep others out forever’, his pamphlet was suppressed by the archbishop of Canterbury and he earned a stint in jail for his pains.6
Later, in the 1650s, Thomas Violet had a Milles-type motive for special pleading in his call for prohibition of the export of bullion. Violet had been a professional ‘searcher’ and government informer seeking out violations of the law prohibiting the export of bullion. Now, in A True discoverie to the commons of England (1651), he sought to reinstate that good old law, and he accompanied his call for reinstatement of bullion prohibition with a request that he himself be employed once again to seek out violators. To the embarrassing fact that he, Violet, had himself been convicted and punished for violating these very provisions, he countered with a ready quip, ‘an old deer-stealer is the best keeper of a park’.
The most distinguished bullionist of the early seventeenth century was Gerard de Malynes (d.1641). Malynes was a Fleming born in Antwerp to the prominent van Mechelen family, probably changing his name to Malynes when he emigrated to London in the 1580s (perhaps in response to the Spanish persecution of Protestants in the Netherlands in that era). Malynes was listed as an alien in the records of that period, and as a member of the ‘Dutch’ Protestant Church. He is also depicted in the records as a ‘merchant stranger’, that is, as a merchant from abroad.
Malynes turned out be a speculator and an unscrupulous, even crooked, businessman, embezzling money from his Dutch business associates. He was often on the verge of bankruptcy, and his partner and father-in-law, the Antwerp-born Willem Vermuyden, died in debtors’ prison. Malynes, nonetheless, was a linguist, and highly educated scholar, deeply interested in literature, the Latin language, mathematics and classical Greek philosophy. He was also well versed in scholastic doctrine.
A member of a royal commission of 1600 to study economic problems, Malynes began his bullionist writings in 1601, in particular A Treatise on the Canker of England's Commonwealth, and published many tracts on into the 1620s. Like Gresham and the sixteenth century bullionists, Malynes fulminated against the foreign exchange dealers, asserting superficially and incorrectly that exchange rates were set by wilful conspiracies of exchange dealers. Malynes was more rigorous than previous bullionists; instead of institutions to control exchange dealings, he advocated a government ‘bank’ which would enjoy a monopoly on all foreign exchange transactions.
Intertwined with his star-crossed business career was Malynes's service in government, becoming at various times a top bureaucrat at the Royal Mint and a financial adviser to the Crown. Malynes also had a personal stake in the revival of rigorous exchange control, for he himself eagerly anticipated filling the resurrected post of royal exchanger. To Malynes, there was a ‘just’ exchange rate at the legal par, and the government's task was to enforce it.
In an earlier tract in 1601, Saint George for England Allegorically Described, Malynes, harking back to an old theme, denounced foreign exchange dealings as ‘usury’, and expressed the hope that by tight control this usury could die a gradual death.
To advocate rigorous exchange control, Malynes of course had to deny that the foreign exchange market could in any way equilibrate or regulate itself, or that exchange rates were set by supply and demand forces. To Malynes goes the dubious credit for the emergence of the spurious and pernicious ‘terms-of-trade’ fallacy. This doctrine argues that a balance of trade deficit and export of bullion will not regulate itself. For higher foreign exchange rates and cheaper domestic currency, will not, as one might believe, spur exports and retard imports. Instead, the ‘unfavourable’ terms of trade of, say, the pound in terms of foreign currency will lead to even more imports and fewer exports, thus driving more bullion out of the country. Even if a cheaper pound will bring in less foreign exchange revenue (a highly unlikely event seen more often in armchair speculation than in practice), one wonders where the English would continue to find either foreign currency or specie to pay for the higher-priced foreign products. Surely the specie would eventually run out, and for that reason alone, some market mechanism would have to come into play to restrict foreign imports or the export of specie.
Thus Malynes managed to take the absurd position that, whatever happens in the foreign exchange market, specie will keep flowing out of England. Flowing out if the pound should be expensive, since this will restrict exports and encourage imports (a correct insight), but also flowing out if the reverse happens, because of the ‘terms-of-trade’ argument. The specie outflow was therefore blamed on the metaphysical malevolence of the exchange dealers, and it could only be cured by severe government control, including prohibition of the export of bullion. Malynes also advocated control of the exchange rate at the legal mint par, which would mean in the context of the time a substantial appreciation, or higher value, of the pound sterling. Yet, continuing in the faulty terms-of-trade mode, Malynes saw no problem of specie outflow from such a marked appreciation of the currency. In fact, he hailed the higher domestic prices that would supposedly draw more specie into the country.
In a similar bizarre twist, Malynes, correctly noting that the inflationary influx of specie from the New World had hit the other countries of Western Europe before coming into England, yet concluded that this was a terrible event for England. For instead of realizing that lower prices made English goods more competitive abroad, Malynes concluded that these ‘unfavourable terms of trade’ put England into a poor competitive position and led to a permanent outflow of specie.
In view of his record in propounding tissues of egregious fallacies, it is curious that Malynes has had a good press among historians of economic thought, even among those who disagree with his basic outlook. They seem to laud him for recognizing that prices vary directly with the quantity of money, so that a country losing gold will find its prices falling, whereas a country accumulating gold will see its prices rise. But Malynes, eager to indict the workings of international prices and exchanges rather than explain how they work, was scarcely willing to develop the full implication of his occasional insights. Furthermore, considering that this ‘quantity theory’ had long been known, and developed and integrated for centuries, by the Spanish scholastics, Bodin, and others, Malynes's achievements seem dubious at best.