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Archive for November 30th, 2010

What is money? The problem of the clipped english shilling

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Ignorance (of how money works) is bliss

This is a follow-up to our posting on Schiff’s book – How an Economy Grows and Why it Crashes

There were certain events in history, initiated by hooligans, that have tested the mettle of some of the greatest thinkers of the age.  One such event happened in England in the 1600’s and tested the mettle of the likes of John Locke, Issac Newton, the whole of the English Parliament, and others. 

Perhaps certain questions should not be asked (Ignorance is bliss).  But sometimes certain questions are forced upon us by the actions of others.  The question, the debate, the solution, and the consequence move history along its path.  Thank god for hooligans that can force philosophers, academics, kings, and potentates, to think about things that these folks would never have come up with by themselves.

English Shilling Coin + Chisel =  a difficult question

Some time around the 1600’s in England there appeared, quite unexpectedly,  “clipped Shillings”.  Someone found out that they could take a chisel and clip the sides off of a Shilling coin thus removing some of the silver and still pass the coin off as a Shilling.  Hmmm.  The clippings of silver from the coin could then be melted down and sold as silver bullion abroad.  What was discovered by these ingenious hooligans was that a  Shilling coin still had the same exchange value of  a Shilling coin even though  it was missing some (or much) of its silver content.  Imagine that!  Imagine the possibilities!  Clipped shillings got some people asking questions that, perhaps, should not be asked.  What’s the value of a coin and how exactly does a coin derive value?

What’s the value of a coin?

John Locke was one of the great philosophers of the time.  Here is what he thought about the chiseled and clipped coins –

Silver has a natural value that kings and lawmakers could not change.  There was only one source of value to a coin and that was its silver content.  Any change in its denomination (engraved value) would be a fruitless fraud.  Shillings were only silver in a different guise.  Coins only had the intrinsic value of the underlying precious metal from which it was minted.  No king, lawmaker, or monarch could create an additional value by turning silver metal into a coin.  Essentially, no king, lawmaker, or king could enhance the value of a natural element such as silver or gold by coinage.

Hundreds of influential people entered into the debate including the likes of  Issac Newton.  The issue was this.  Since the clipped Shillings were damaged they had to be collected.  Once collected, do we remint them at their original silver content or do we remint the coin at the lower silver content devalued by the chisel but still exchanged by people for the value of a shilling?

A new level of sophistication of understanding money

One the one side, as a practical matter, the facts were that people accepted the clipped Shillings at face value just as they would accept a Shilling that was not clipped.  This proved that the monarch under whose authority the coins were minted did add extrinsic value to the coin over and above the natural value of the silver content.  This was an understanding of money (coins) as a medium of exchange that was not necessarily tied to their intrinsic value in silver or gold.  Money as a medium of exchange could be separated from the value of precious metals.

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Written by frrl

November 30, 2010 at 7:32 pm

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