Nuggests on how Roger Rabbit got his carat

July 21, 2000

More than a thousand years of British currency are covered by Nicholas Mayhew's popular study of sterling. Throughout this history, rulers have been tempted to fund their spending by increasing the volume of money in circulation. Yet sustained economic development has depended on a reliable medium of exchange that keeps a fairly stable value. Much of British monetary policy, from Henry I's mutilation of his "moneyers" in 1135 to the establishment of the Bank of England's Monetary Policy Committee in 1997, has been devoted to assuring the public that the state will not in fact devalue the currency, or equivalently, push up prices.

An "irrevocable" link to a precious metal was long an attractive way of maintaining this confidence. The pound sterling originated as a particular weight of silver of a specified fineness, perhaps as early as the 8th, and certainly by the 11th century. Problems arose when gold also entered European commerce on a substantial scale and sterling was defined in terms of both metals. In his 1695 report on the coinage, the secretary to the Treasury, William Lowndes, contended that silver coins had disappeared from circulation when, at the prevailing price of silver, they were worth more than their face value. He noted that in the later Middle Ages, an effective solution had proved to be a reduction in the silver weight of the coins and recommended a similar approach. Sterling became first a de facto and then a de jure gold standard because the philosopher John Locke's authority overruled Lowndes's advice. Locke asserted that the values of silver and gold were fixed by natural law, and could (and should) not be altered by king or Parliament. Silver coins remained more valuable as bullion, only gold circulated, and Britain entered the industrial revolution with such a shortage of smaller-value exchange media that private currencies became increasingly popular.

The "returns to gold" after the Napoleonic and first world wars were more appropriate applications of Locke's principles. They did not entail compensating for the changing relative price of gold and silver, but concerned the general price level; the relationship of a single monetary standard to the volume of national output. The policy question was whether sterling should adopt the old weight of gold, even though sterling prices had risen during hostilities while the precious metal link had been suspended. Keynes proposed a 10 per cent devaluation, against the principal gold standard currency, the US dollar. Orthodoxy, as represented by the committee chaired by former Bank of England governor Walter Cunliffe (who "looked like a farmer, (and) was definitely a bully"), followed Locke. Confidence in the determination of the authorities to maintain the value of sterling would be eroded if a lower gold value were adopted. Better to bear the cost of short-term adjustment now than the permanent loss of reputation for financial probity - with all the difficulties this would create for business and government.

With the abandonment of any precious metal underpinning, trust in sterling and monetary policy after the second world war was reflected in the foreign-exchange value, which fell from $4.03 to $1.70 by 1976, while inflation peaked at an annual rate of 26.9 per cent in August of the previous year. The "adjustable peg" regime of Bretton Woods only imperfectly constrained government policy, and the floating sterling exchange rate that followed provided even less discipline. Mayhew's concluding chapter catalogues the variety of tactics employed to create monetary stability since 1945, including shadowing the Deutschmark and monetary targeting. Ironically, one of the greater political humiliations for sterling, being forced out of the European Exchange Rate Mechanism in 1992, marked the beginning of the present convergence of the British economy to a stable non-inflationary growth path.

Although Sterling targets a more general audience than Milton Friedman and Anna Schwartz's famous Monetary History of the United States , it similarly adopts a "quantity theory of money" expository framework. Changes in the general level of prices are charted over the centuries, but the volume of money in more recent periods is not treated in detail - no use is made of the Forrest Capie's and Alan Weber's British monetary series. On the other hand, living standards are discussed, particularly the price of bread and wage rates. A young woman's suicide in Jerome K. Jerome's Three Men in a Boat (1889) is enlisted to show the poverty of the 19th century - "six shillings a week does not keep body and soul together very unitedly".

Individuals are never lost from sight, despite the broad sweep of Mayhew's narrative. We learn that the original 13th-century Roger Rabbit (Lapinus Roger), a Royal Mint official, was not killed like his predecessors under Henry I, but became extremely prosperous. Thomas Gresham did not originate his "law" ("bad money drives out good"), and his reputation owed more to luck and self-presentation than to judgement. Touches such as these, combining entertainment and information, ensure that Mayhew's study will reach a wide audience.

James Foreman-Peck is economic adviser, HM Treasury.

Sterling: The Rise and Fall of a Currency

Author - Nicholas Mayhew
ISBN - 0 713 99258 1
Publisher - Allen Lane The Penguin Press
Price - £25.00
Pages - 306

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