Authors: Felix Martin
Money (43 page)
1.
Described in Frankel, 1977, p. 15.
2.
Élie Brackenhofer was told in 1634 that the Fair of Lyons had been founded in
AD
172. See Braudel, 1992.
3.
See Spufford, 2002, p. 19 ff.
4.
Braudel, 1992, p. 91.
5.
The phrase is Braudel’s, quoted in Frankel, 1977, p. 15.
6.
Amis, 1984, pp. 119–20.
7.
De Rubys, 1604, Part IV, chapter 9, p. 499. The pound (
livre
) was the abstract money of account, whilst the
sou
was a coin of the French king.
8.
To be more precise, it had not worked as much as they would have liked. By the sixteenth century, the extreme debasements of the Middle Ages were a thing of the past and the Spanish and French sovereign currencies were comparatively speaking fairly stable—in the French case, partly as a result of pressure from taxpayers to limit seigniorage. See chapter 3 of Macdonald, 2006, for details.
9.
This is a description of how they achieve the transformation at its most generic, and one which is sufficient as it stands for private banks in the Middle Ages. As we shall see later in this chapter, and in
chapter 14
, modern banks benefit from a crucial element of external assistance in their business of transforming illiquid claims into liquid ones.
10.
Nor is it unique to banking: mutual funds, for example, also manage credit risk in the same three respects.
11.
The most important general characteristic of the liquidity risk that is managed by modern banks is the mismatch between the fact that a large part of their liabilities is made up of deposits available for withdrawal on demand, and the fact that their assets generally consist of loans or securities which do not mature and may not be otherwise realisable in the same time frame. Indeed, Walter Bagehot, in his foundational classic of the modern finance literature, identified this characteristic as the one which discriminated banking from other financial activities. “Messrs. Rothschild,” he wrote in
Lombard Street
, “are immense capitalists, having, doubtless, much borrowed money in their hands,” and “a foreigner would be apt to think that they are bankers if any one was.” But “[t]hey do not take 100
l
. payable on demand, and pay it back in cheques of 5
l
. each, and that is our English banking. The borrowed money they have is in large sums, borrowed for terms more or less long. English bankers deal with an aggregate of small sums, all of which are repayable on short notice, or on demand” (Bagehot, 1873, pp. 212–13). The distinctive business of a bank is in other words “maturity transformation,” in the technical jargon—in that they “transform” short-term liabilities to their depositors into long-term loans to their clients. Of course, this jargon is a euphemism. No transformation takes place—alchemy is as impossible in banking as in the natural sciences. Banks really do have a mismatch, which is sustained only so long as their
depositors remain confident in their creditworthiness and the liquidity of their liabilities. We will discover more about banking in
chapter 14
.
12.
Spufford, 2002, p. 38.
13.
Ibid
., pp. 38–9.
14.
Ibid
., p. 39.
15.
Johnson, 1956, p. 34.
16.
Spufford, 2002, p. 40.
17.
Huerta de Soto, 2006, p. 75.
18.
In essence: its full details were complicated. For a virtuoso overview of the system in all its complexity, see Boyer-Xambeu, Deleplace, and Gillard, 1994.
19.
Indeed, Boyer-Xambeu et al. (ibid.) argue that under the sovereign monetary policies that were obtained in the mid-sixteenth century, the profits to the exchange-bankers were essentially certain.
20.
See
ibid
., pp. 91–4 for further details on the protocols of the Lyons fair.
21.
Ibid
., p. xvi.
1.
R.H. Tawney’s Introduction to Wilson, 1925, p. 83. “[A]nd the third person of this inharmonious trinity,” Tawney added, “was perpetually at war with the two first.”
2.
Mayhew, 1999, p. 54.
3.
Hist. MSS. Comm., MSS. of the Marquis of Salisbury
, Pt. I, pp. 162–4, quoted in Tawney’s introduction to Wilson, 1925.
4.
Montesquieu,
Mes Pensées
, quoted in Hirschman, 1977, p. 74.
5.
Montesquieu,
Esprit des lois
, Book XXII, 13, quoted
ibid
., p. 74 (where it is accidentally attributed to Book XXII, 14).
6.
Montesquieu,
Esprit des lois
, Book XXI, 20, quoted
ibid
., pp. 72–3.
7.
Ibid
.
8.
James Carville, quoted in
Wall Street Journal
, 25 February 1993, p. A1.
9.
It was published in England in 1767, nine years before Adam Smith’s
An Inquiry into the Nature and Causes of the Wealth of Nations
.
10.
Steuart, 1966, Vol. 1, p. 278. Quoted in Hirschman, 1977, p. 85.
11.
Boyer-Xambeu et al., 1994, p. 30.
12.
The extent to which the development of finance in England lagged behind Continental Europe until the late seventeenth century is demonstrated by Thomas Mun’s treatment of standard Latin practices such as payments by transfer between bank accounts as unknown in England in his 1621
Discourse on Foreign Trade
. See also Clapham, 1944, Vol. I, p. 5.
13.
The king’s adviser Sydney Godolphin, seeking to borrow for the crown from William of Orange in 1680, offered 8 per cent for a loan “secured upon the King’s hereditary revenue.” This was meant to tempt his target away from lending in the Dutch credit markets, where “at this time no one gives more than 4 per cent for money.” See Macdonald, 2006, pp. 170–1.
14.
For a detailed discussion of the main Projects, see Horsefield, 1960, pp. 114–24.
15.
It was the brainchild of Thomas Neale, the Master of the Mint and a close adviser to the Treasury. Some years later, another larger lottery was held to raise even more money. It was called, imaginatively enough, “The Two Million Adventure.”
16.
Richards, 1958, pp. 112–13.
17.
Curiously enough, the Bank’s original charter—itself deliberately tucked away in a corner of a more general public finance bill—did not authorise note issue explicitly.
But explicit or not, more than £750,000-worth of notes had been issued by the time the Bank’s first public balance sheet had been drawn up in November 1696. See Clapham, 1944, p. 43, for details.
18.
Modern scholarship on the nature and significance of this Great Monetary Settlement, starting from the pioneering contribution of Dickson, 1967, is extensive, but it was Ingham, 2004, who first identified its importance as the moment in which the modern, public-private monetary system was born. See especially Ingham, 2004, pp. 128ff.
19.
Roseveare, 1991, pp. 14–15.
20.
Clarke
v.
Martin
1702
per Holt C. J
., quoted in Carswell, 1960, p. 18. Holt’s efforts to reverse the tide and outlaw the dangerous commercial practice of transferability were defeated by statute within two years. The Promissory Notes Act of 1704 made private credit notes legally transferable.
21.
Steuart, 1966, Vol. 2, p. 477.
22.
Smith, A., 1981, II.ii.85, p. 320.
23.
The 1709 regulation forbade partnerships with more than six members from issuing any kind of note of less than six months’ maturity payable on demand—the result of a concerted campaign by the Bank’s Directors to muzzle what was then its chief competitor, the Sword Blade Bank. The Bank of England did not receive a monopoly on issuance until the Bank Charter Act of 1844, however—and even then note-issuing banks already in existence were permitted to continue to do so until taken over by banks without the privilege. It was therefore not until the small Somerset partnership of Fox, Fowler & Co., which had received its charter in 1787, was absorbed into Lloyds Bank in 1921, that the last private English banknotes were removed from circulation.
24.
H.V. Bowen, “The Bank 1694–1820,” in Roberts and Kynaston, 1995, p. 10.
25.
Clapham, 1944, Vol. I, p. 102.
26.
Speech of 13 June 1781 in the Committee of Ways and Means, as reported by William Cobbett (1806–20)
Parliamentary History of England from 1066 to 1803
, Vol. XXII, cols 517–20, quoted in H.V. Bowen, “The Bank 1694–1820,” in Roberts and Kynaston, 1995, p. 3.
1.
The Mint price of silver—the tariff ordinance which specified the silver content of the sterling monetary units—had been 60d an ounce since 1601, except during the period 1604–26, when seigniorage had been half a penny more, and the Mint price therefore 59½d. Meanwhile, the market price of silver had rarely dropped below this, and in general had been between 62d and 64d an ounce. See Feavearyear, 1931, pp. 109–10.
2.
The Mint price was raised by the Act to 62d an ounce, in other words. See
ibid
., p. 110.
3.
By Lowndes, in his 1695 report to Parliament. See Mayhew, 1999, p. 97.
4.
Desmedt, L., “Les fondements monétaires de la ‘révolution financière’ anglaise: le tournant de 1696,” in Théret, B., ed., 2007,
La monnaie dévoilée par ses crises
, cited in Ormazabal, 2012, p. 158. The market price of silver reached 77d an ounce in 1695, according to William Lowndes’ report of that year.
5.
Lowndes, 1695, p. 56.
6.
For simplicity’s sake, I describe here the mechanics of a recoinage. Lowndes’ preferred solution was in fact to execute the official devaluation using the method
more frequently deployed throughout English history of “crying up” the tariffed, nominal value of the existing coinage, rather than going through the practically costly and administratively difficult business of re-minting. The equivalent of a 20 per cent reduction in the silver content would have been a roughly 25 per cent crying up of existing, full-weight coinage. See Lowndes, 1695, p. 123.
7.
Feavearyear, 1931, p. 122.
8.
Locke, 1695, pp. 1–2.
9.
Ibid
., p. 9.
10.
Ibid
., p. 12.
11.
See Feavearyear, 1931, p. 124.
12.
The full distributional arithmetic was more complex. The counterparty to these gains and losses was in the first place the Exchequer—since it was the Exchequer that was liable to subsidise the re-minting of the collected coins at full weight before the deadline, and the Exchequer that would no longer have to redeem light coins at full nominal value after the deadline. But the Exchequer would need to raise funds for the subsidy (it did so via a window tax), so what it gave with one hand it might take away with another a moment later.
13.
Feavearyear, 1931, pp. 129–30.
14.
Quoted in Mayhew, 1999, p. 101.
15.
Keynes, 1931, p. 394. The book was Hayek’s 1931
Prices and Production
.
16.
Barbon, N., 1696,
A Discourse Concerning Coining the New Money Lighter
, quoted in Magnusson, 1995.
17.
Liddell and Scott, 1996. Richard Seaford explains the etymology of the word
nomisma
as follows: it “comes from
nomisdein
(to acknowledge), is the object or consequence of
nomisdein
” (Seaford, 2004, p. 142).
Nomisdein
was the verb the Greeks used to denote cognitive commitments, such as belief in the gods, that were the result of convention rather than of active deliberation. To give a flavour of the connotations of
nomisma
, Seaford explains that “[t]he earliest surviving occurrence of
nomisma
is Alcaeus fr. 382 L-P: ‘truly she [Athena?] was bringing together a scattered army, inspiring them with
nomisma
.’
Nomisma
here, mysterious enough to be divinely inspired, is the collective confidence, based on custom, that can unite an army … Customary collective practice [
nomisma
]
, whether coinage or in battle
, depends on and objectifies the collective confidence of the community, for whom it introduces order into potential chaos” (
ibid
., p. 143).
18.
Plato,
Republic
, 2.371b.
19.
Aristotle,
Nicomachean Ethics
, 1113a. Similarly at 1133b: “There must therefore be some one standard, and this accepted by custom [
nomos
] (on account of which it is called a convention [
nomisma
]); for such a standard makes all things commensurable, since all things can be measured by money [
nomisma
].”
20.
Seaford, 2004, p. 146.
21.
Herodotus,
Histories
, 8.26.
22.
Aquinas,
Sententia Politica
, lib. 1, l. 7, n. 6.
23.
Aquinas,
Sententia Ethica
, lib. 5, l. 9, n. 12.
24.
Aquinas,
In Octo Libros Politicorum
, Vol. XXVI of
Omnia Opera
, 1: 7. Likewise at
Sententia Ethica
, lib. 5, l. 9, n. 5.
25.
See
chapters 1
and
4
. The tradition of Aquinas was by no means the only one in medieval monetary thought. In fact, significant parts of the legal tradition rejected monetary nominalism and developed an essentialist theory. For a fascinating, blow-by-blow survey of the medieval debate see Sargent and Velde, 2002, chapter 5.
26.
Briscoe, J., 1696,
A Discourse on Money
, p. 18, quoted in Appleby, 1976, p. 65.
27.
Feavearyear, 1931, p. 137.
28.
Mandeville, 1705.
29.
Mandeville, 1988 [1732], Vol. 1, p. 369.
30.
Smith, A., 1981, III.iv.4, p. 412.
31.
Ibid
., III.iv.10, p. 419.
32.
Ibid
., IV.ii.9, p. 456.
33.
Ibid
.
34.
Ibid
., III.iv.15, p. 421.