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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.

On the other side there people who sided with Locke’s position.  That the value of a coin is its intrinsic value and that government could no more affect the value of coins then it could halt rainstorms.  Economic relations were based on values in nature – not politics.

The resolution

John Locke probably had the worst argument but the greatest standing and influence in England.  After much debate, Parliament finally decided that Locke was right and the damage and clipped coins would be collected and reminted to their full silver content at the old standard of silver content.

Oops

The problem was that the price of silver bullion abroad was more than the melt value of the newly minted silver coins.  Therefore, people took the newly minted coins and melted them down into bullion and sent them abroad.  The reports are that England lost 1/2 of its coins to this process.  This caused a drastic deflation.  The english government had difficulty in paying its soldiers due to the loss of coins that were melted and sold abroad for more value  in silver value than the face value of the coin.

So maybe there is a negative unintended consequence of using something which has intrinsic value (like a precious metal coin) as money?  Nothing like learning things that hard way.  There will be much harder lessons to be learned about money when it only has extrinsic value.

On to paper currency

The empirical fact that a chiseled and clipped coin passed at face value even with 1/4 to 1/2 of the silver content missing got some people thinking.  Perhaps other things could be used for money?   If money’s status as legal tender counted most then it should be possible to find substitutes for precious metals of gold and silver.  Perhaps paper?  Fasten your seat belts.

The take

When the Romans needed more money (= coins of precious metals) they has to go out and conquer more territory or dig more metal out of the ground.  How inconvenient.  You can see how advanced we are now with paper money.  If we need more money we can just “print it”; we don’t have to dig it out of the ground or take it someone else.  The printing press has replaced mines and has replaced military conquest.

At one time the US printed money known as  “Silver Certificates”.  The Silver Certificates carried the engraving ” [denomination] … in Silver payable to the bearer on demand“.  Do you think you can get silver coins at the same face value for that note today?  Since 1968 these “Silver Certificates” are only redeemable as federal reserve notes (more paper ).  What was once the backing of printed money by precious metals hs been removed.  Paper money is backed now… –  by faith.

From Peter D Schiff in How an Economy Grows and Why it Crashes

Precious metals have all the qualities that make money valuable and useful: scarcity, desirability, uniformity, durability, and malleability. 

Even if people don’t want the metal for money, it still has value based on its other uses and relative scarcity.

In contrast, paper money has value as long as enough people agree to take it in exchange for goods and services.  But that makes its value completely subjective.  Since it can be produced at will, and has no intrinsic value itself, the paper can become worthless if enough people lose faith in it.

Although economists talk like they have seen it all before, the truth is humanity simply has no long-term precedent for universal economic activity based on irredeemable paper money.

But now we are in a “through the looking-glass” world where, for the past 40 years, no country issues real money.  This is the biggest monetary experiment event conducted. 

No one knows how or when it will end.  But rest assured, it will.

Resources

Karl Marx on chisels and clipped Shillings and the economic arguments of John Locke
Theories of the Standards of Money – Karl Marx –
http://www.marxists.org/archive/marx/works/1859/critique-pol-economy/ch02b.htm

Excerpt:

1. Locke says inter alia: “…call that a Crown now, which before … was but a part of a Crown … wherein an equal quantity of Silver is always the same Value with an equal quantity of Silver…. For if the abating 1/20 of the quantity of Silver of any Coin does not lessen its Value, the abating 19/20 of the quantity of the Silver of any Coin will not abate its Value. And so … a single Penny, being called a Crown, will buy as much Spice, or Silk, or any other Commodity, as a Crown-Piece, which contains [20 or] 60 times as much Silver.”

All you can do is to raise “your Money, … giving a less quantity of Silver the Stamp and Denomination of a greater”, but “’tis Silver and not Names that pay Debts and purchase Commodities”. “The raising being but giving of names at pleasure to aliquot parts of any piece, viz. that now the sixtieth part of an ounce still be called a penny, may be done with what increase you please.”

In reply to Lowndes’s arguments, Locke declares that the rise of the market-price above the mint-price was not brought about by an increase in the value of silver, but by a decrease in the weight of coins. Seventy-seven clipped shillings did not weigh more than 62 shillings of standard weight. Finally Locke is quite correct in emphasising that, irrespective of the loss of silver suffered by the coins in circulation, a certain rise in the market-price of silver bullion over the mint-price might occur in England, because the export of silver bullion was permitted whereas that of silver coin was prohibited (see op. cit., pp. 54-116 passim).

Locke takes good care to avoid the vital issue of the National Debt, just as he equally prudently refrains from discussing another ticklish economic problem, i.e., that according to the evidence of both the exchange rate and the ratio of silver bullion to silver coin, the depreciation of the money in circulation was by no means proportional to the amount of silver it lost.

Find out the melt value is of your coins
Melt value – http://www.coinflation.com/coins/silver_coin_calculator.html

More info about coins
http://coinflation.com/

US Silver Certificates – http://en.wikipedia.org/wiki/Silver_Certificate

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Written by frrl

November 30, 2010 at 7:32 pm

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