A Monetary Revolution: John Locke and the Creation of England’s Fixed Exchange Rate Regime

J. A. Morrison Middlebury College

October 2008

The decision by Parliament in the winter of 1696 to repair its deteriorated coinage

at its original weight—rather than to devalue the new coins—marked the first step

towards the creation of the international gold standard. In the four preceding centuries,

the official weight of the English shilling alone had been adjusted more than a dozen

times. The number of grains of silver in newly minted shillings was steadily reduced

from a high of 264 in the fourteenth century to just 86 in the seventeenth.1 As far back as

the records indicated, England had maintained an exchange rate regime that was

recognized as adjustable. All contemporaries agreed, the Royal Mint could and did

regularly adjust England’s exchange rate.2

In January of 1696, however, English policymakers elected to restore the clipped

coins to their original weights. The “Great Recoinage” of 1696-1700 followed in which

the bulk of English coin was reminted according to the weight and standard that had been

in place since the reign of Elizabeth I a century before. In choosing to restore the coins,

English policymakers consciously abandoned the adjustable exchange rate of the past in

favor of a new commitment to a fixed exchange rate regime. Restoring the coin, however,

would create considerable transition costs, particularly given that much of the public

expected—and had even counted on—devaluation. English policymakers recognized,

however, that maintaining the standard in the face of such short-term costs would both set

a precedent for future policy and send a strong signal of their firm resolve to maintain the

exchange rate in all circumstances.

1 John Locke, Further Considerations Concerning Raising the Value of Money, ed. P. H. Kelly, Locke on Money (Oxford: Clarendon Press, 1991), 459. 2 William Lowndes, A Report Containing an Essay for the Amendment of the Silver Coins (London: 1695), 56.

The precedent stuck. For the next two and a half centuries, the Bank of England

made maintaining the fixed exchange rate its top priority.3 After some early struggles to

gain control over the market rate of exchange—including the exchange rate between gold

and silver—the Bank enjoyed remarkable success at stabilizing the gold value of the

pound. Between 1723 and 1931, the price of gold in London remained within a tight band

around £3.8 per ounce. The only two exceptions were during and immediately following

the Napoleonic Wars (1800-1815) and the First World War (1914-1925), when the gold

convertibility of the pound was suspended and the price of gold artificially constrained by

direct regulation.4 In both cases, however, the exceptions were only temporary, and

3 As CR Fay put it, “the Bank of England…by 1700, after some initial uncertainties and mistakes, had settled down to be the steady custodian of sterling.” C. R. Fay, "Locke Versus Lowndes," The Cambridge Historical Journal IV, no. 2 (1932): 152. 4 See Figure 2.

Figure 1. London Gold Price, 1723-2001. Source: “CMGCGBW”, Global Financial Data.

convertibility to the pre-war parity was fully restored shortly after hostilities ended.5 The

restoration of the pre-war parity in these cases conveyed a clear message: the

convertibility of Britain’s exchange rate is only suspended in the gravest of conditions,

and such disruption is only temporary.

Thus, the infamous “Locke-Lowndes debate” in the 1690s on whether to restore

the light coins to their official weights or to “raise the coins” by diminishing their weight

was a watershed moment in the history of British monetary policy.6 Up to that point,

English monetary policy had been built around an adjustable exchange rate regime.

Beginning in 1696, however, England adopted an unwavering commitment to

maintaining a fixed exchange rate regime. This commitment became the touchstone of

British monetary policy until the middle of the twentieth century.

This chapter attempts to explain England’s abrupt shift in its exchange rate regime

at the end of the seventeenth century. It begins by reviewing the dominant explanations

found in the literature. It then presents the context of the policy change in greater detail.

The bulk of the chapter is dedicated to constructing an analytic narrative of the

development, adoption, and implementation of the new policymaking framework. It

argues that the two preeminent alternative frameworks were developed through a process

of both collaboration between intellectuals and policymakers and polemical interchanges

5 In the case of the Napoleonic Wars, convertibility was restored in 1819. After the First World War, convertibility was restored in 1925. The latter decision is discussed extensively below. 6 Recent scholars have challenged the received wisdom that the policy debate was actually between Locke and Lowndes and that their arguments were motivated by positions in a transcendent debate about exchange rate regimes. Kelly, for instance, argues that “the famous Locke-Lowndes controversy turns out to have been little more than a myth, and serves, moreover, to obscure a serious conflict between the ministers and experts believed to have been in agreement over the maintenance of the existing monetary standard.” P. H. Kelly, "Introduction," in Locke on Money, ed. P. H. Kelly (Oxford: Clarendon Press, 1991), 23. Richard Kleer stresses the role of economic interests in the formation of Lowndes’ and Locke’s positions in the debate. Richard Kleer, "'the Ruine of Their Diana': Lowndes, Locke, and the Bankers," History of Political Economy 36, no. 3 (2004): 552-53. This thesis returns to the more traditional understanding on both counts.

between competing intellectuals. Comparing the models developed by Locke and

Lowndes to our standard model, it finds that Locke’s model was more robust than the

model used by Lowndes. It explains Locke’s success in the controversy by highlighting

his ability to expose the intellectual weaknesses of his rivals’ proposals. It then details the

manner in which policymakers devised policies that maximized the interests they sought

to secure within Locke’s framework even while they set aside some of his specific policy

advice. A conclusion follows the analytic narrative.

THE ENGLISH MONETARY SYSTEM AT THE END OF THE 17TH CENTURY

Before we attempt to understand the reasons for the dramatic shift in exchange

rate regimes, it is crucial to develop the context in which that shift was undertaken. This

section highlights the key components of the English economy at the end of the

seventeenth century and the questions that would be raised when considering an

alteration of England’s exchange rate regime. It organizes those components using the

theoretical framework developed in Chapter 3.

A number of scholars have attempted to explain—and some to justify—England’s

mercantilist policy in the seventeenth century by suggesting that the global economy

worked essentially differently in the “early modern” period than it does in the “modern”

age.7 Such analyses overstate the substantive differences in the structure of the English

financial system over the last several centuries. In fact, many of the components of a 7 This debate emerged between Eli Heckscher and Charles Wilson in the Economic History Review between 1949 and 1951. It was renewed the following decade by J. Sperling and Rudolph Blitz. Charles Wilson, "Treasure and Trade Balances: The Mercantilist Problem," Economic History Review 2, no. 2 (1949). Eli F. Heckscher, "Multilateralism, Baltic Trade, and the Mercantilists," Economic History Review 3, no. 2 (1950). Charles Wilson, "Treasure and Trade Balances: Further Evidence," Economic History Review 4, no. 2 (1951). J. Sperling, "The International Payments Mechanism in the Seventeenth and Eighteenth," Economic History Review 14, no. 3 (1962). Rudolph C. Blitz, "Mercantilist Policies and the Pattern of World Trade, 1500-1750," The Journal of Economic History 27, no. 1 (1967).

“modern” financial system were in place in England and elsewhere as early as the

seventeenth century. The differences that distinguish the early modern English economy

from the modern are principally differences in the degree to which various mechanisms

worked rather than differences in the type of mechanisms at work.

The Dutch led early modern states in the development of credit markets.

Beginning with goldsmiths, bankers began to extend credit against their deposits,

initiating the practice of fractional reserve banking. The Bank of England was founded

upon this basis in 1694. By the 1690s, an increasing amount of international exchange

was carried on through bills of exchange that circulated through massive multilateral

clearing mechanisms centered in London, Paris, and Amsterdam.

Similarly, England’s exchange rate regime in the seventeenth century functioned

according to the same principles as “fixed but adjustable” exchange rate regimes do

today. All English currency in this period was either minted precious metal

(predominantly silver) coins, was redeemable in precious metal, or was fixed to a certain

quantity of precious metal. England could thus be said to have had a hybrid system

combining a “commodity currency,” a currency board, and a pegged exchange rate

system. Just as in these systems, the quantity of currency in England was regulated

largely according to the ability of the monetary authority to secure the precious metals

out of which the currency was minted and/or to which the currency was fixed. Prior to the

eighteenth century, however, the exchange rate was adjustable; and the Royal Mint

changed the weight of the coins it produced, along with their official valuation, with

considerable frequency.

There were, however, two crucial features of the English monetary system in the

seventeenth century that distinguished it from its later, more “modern,” incarnations. The

first distinction centered on England’s policy of bimetallism—the simultaneous use of

two metals as legal tender. Under this system, the English mint minted coins out of both

gold and silver, setting an official rate of exchange between the two. This rate specified

both the rate at which the mint would exchange coins of one metal for coins of the other

and the “official” rate at which coins of one type would be valued in terms of the other in

the marketplace.

In theory, monetizing more than one metal would increase the supply of currency

circulating in the economy by increasing the total stock of raw material from which

currency could be minted. Mints, however, had great difficulty keeping their “mint” rate

in line with the market rate of exchange between the metals. Naturally, those holding

precious metals had an incentive to take the metal wherever it would secure the best rate.

The contrived mint rate created unnecessary arbitrage opportunities, attracting the metal

that was overvalued vis-à-vis the market rate and driving away the metal that was

undervalued vis-à-vis the market rate. The result was that the mint—and eventually the

local economy over which it held sway—was left with only the overvalued currency. In

practice, then, de jure bimetallism typically became de facto monometallism.

Minting coins from just one metal from the start would have saved England the

productive labor needlessly expended to profit from the mint’s mistake. It would not,

however, have completely eliminated England’s monetary troubles.

The second and more significant feature distinguishing the early modern English

monetary system followed from England’s heavy reliance on the use of minted precious

metal coins (specie) as the principle circulating medium. By using specie, the intrinsic

value of each coin—the value of the coins’ constituent materials when used for non-

monetary purposes—typically remained close to the exchange value of the coins—their

value when used as money in exchange. This proved costly to the English in two ways.

First, the closeness of the intrinsic value to the exchange value of the coins increased the

frequency with which whole coins were melted down to be used as precious metals. As

discussed above, the quantity of currency is regulated by the incentives to convert raw

material into currency and currency into raw material. These incentives turn on the

difference between the exchange and intrinsic values and the costs of conversion between

currency and raw material. By using high-value metals as the raw material for currency

and keeping the cost of conversion low, the English monetary system narrowed the gap

between the currency’s exchange value and its intrinsic value. By increasing the

frequency of conversion, the use of specie increased the cost of operating the mint.

The use of specie as a circulating medium also created a second problem. The

softness of the precious metals made maintaining the coins at their original weight a

perennial challenge. In addition to the inadvertent wear inflicted on coins in normal use,

mints also struggled to curb the deliberate defacement of the coins. The high relative

value of coins’ intrinsic material ensured that even a small portion of a coin’s gold or

silver content was considerably valuable. This created incentives for individuals to shave

or clip the edges off of coins, melt down these clippings for sale on the bullion market,

and pass the “clipped” coins off at full value. As the number of clipped coins increased,

the incentives to clip the remaining coins also increased as part of a vicious circle. Early

modern European mints implemented a number of techniques to discourage clipping

including limiting the export of bullion, increasing the intricacy of the minting process,

and, of course, raising the penalties for clipping itself. It was not, however, until

monetary authorities embraced the circulation of token currencies—currencies

redeemable in precious metals—in place of specie that mints were able to maintain the

integrity of their monetary units.

LOCKE AND THE POLITICAL SCENE IN THE 1690S

Seventeenth century England was ruled by a small group of elites. Connections

and pedigree did matter; but these elites were far from insulated. They faced threats from

abroad and riots, rebellions, and revolutions from within. The English state was not yet

fully developed, and its borders were not yet clearly defined. The various regimes that

held the reins of power were always in a tenuous position. English policymakers knew

that they could not afford to implement policies willy-nilly, but making effective policy

was difficult. These policymakers turned to intellectuals to help them develop good

models of the constraints and opportunities they faced.

In the late seventeenth century, John Locke emerged as foremost among that

group of policymakers’ leading lights. Locke had been connected to policymakers at very

high levels since he was invited to join the household of Anthony Ashley Cooper, first

Baron Ashley, later the First Earl of Shaftesbury, in 1667. Ashley, the sometime Member

of Parliament, “had always been staunchly nationalist or patriotic.” In one assessment, he

was “the spokesman for commercial imperialism.”8 Patrick Kelly has made a similar

assessment of Ashley’s skill in economic matters, suggesting that “his experience was at

least as great as that of any other statesman of his rank,” not the least because of his own

8 Kelly, "Introduction," 5.

connections in the colonial trade.9 Ashley pushed Locke to study the relationship between

politics and economics. The result was Locke’s first major tract on economic policy: his

Some of the Consequences that are likely to follow upon Lessening of Interest to 4 per

Cent (1668).10

In the spring of 1672 Ashley was created earl of Shaftesbury. The following

November, he was appointed Lord Chancellor. Locke followed Ashley’s ascent. Locke

was appointed as the secretary to the newly reestablished Council of Trade and

Plantations, on which Locke’s patron sat. More than just a sinecure or administrative

post, Locke’s position both granted him an opportunity to learn about England’s overseas

trade and to influence the policy governing it. Thus, the fit between Locke and

Shaftesbury was a solid one. Shaftesbury served as Locke’s entrée to the elite circles of

English policymakers, and Locke brought his considerable perspicuity to the issues

Shaftesbury raised. This was a symbiotic relationship that would play out with others like

Shaftesbury throughout the rest of Locke’s life.11

Shaftesbury had several such equivalents in the 1690s. Edward Clarke, a lawyer

and Member of Parliament, was an old friend and, by marriage, a relation.12 John Freke,

whom Locke had met while he was in Holland, was a barrister with his finger on the

pulse of politics and friends in high places. Freke introduced Locke to his most influential

contact: Sir John Somers, the Solicitor General, Lord Keeper, and eventually Lord

Chancellor. In February of 1695—in the midst of the recoinage controversy—Locke

9 Maurice William Cranston, John Locke, a Biography (London: Longmans, Green and Co Ltd, 1966), 119. 10 While recognizing the likely influence Ashley bore upon Locke’s tract, Kelly has questioned whether Ashley specifically directed Locke to author the tract. See Ibid., 118. 11 J. R. Milton, "Locke, John (1632-1704)," in Oxford Dictionary of National Biography, ed. H. C. G. Matthew and Brian Harrison (Oxford: Oxford University Press, 2004). 12 David Hayton, Eveline Cruickshanks, and Stuart Handley, The House of Commons, 1690-1715 (Cambridge: Cambridge University Press, 2002), 577.

began addressing letters intended for Clarke and Freke jointly to the “Colledg.” Locke’s

College became a regularly constituted political action group, channeling questions and

concerns to Locke and responses and ideas from Locke to key policymakers. Several

other Members of Parliament became associated with the College: Sir Walter Yonge, Sir

Francis Masham (Locke’s landlord in Essex), and Lord Ashley (grandson to the first Earl

of Shaftesbury and Locke’s former pupil). Locke’s contacts in the House of Lords

additionally included Lord Pembroke and Lord Monmouth.13

Beginning with Shaftesbury, much of the political and economic papers Locke

drafted were written at the request of policymakers and with an intention to influence

policy on specific issues. There was generally symmetry around these debates, and Locke

garnered both proponents and opponents from the ranks of policymakers, merchants and

lobbyists, and intellectuals working in a similar capacity. Locke’s tracts directly engaged

and were directly engaged by Members of Parliament, high-level civil servants, and

cabinet officials. Locke attracted both praise and vituperation from the leading men in

commerce and finance. While Locke found himself aligned with William Patterson (the

founder of the Bank of England) and Daniel Defoe at points, he butted heads with Isaac

Newton several times.14

Locke’s influence and renown grew throughout the 1690s. In 1691, Locke

anonymously published his Some Considerations. By 1695, however, Locke was

universally associated with the recoinage debate. This was so much the case that Sir John

13 Raymond A. Anselment, "Freke, John (1652-1717)," in Oxford Dictionary of National Biography, ed. H. C. G. Matthew and Brian Harrison (Oxford: Oxford University Press, 2004). Kelly, "Introduction," 14-15. 14 See the above note for the affinity between Locke and Defoe. In 1696, Patterson published a tract in defense of Locke’s position in the recoinage debate. William Patterson, A Review of the Universal Remedy for All Diseases Incident to Coin, with Application to Our Present Circumstances. In a Letter to Mr. Locke. (London: Churchill, 1696). For Locke’s disagreement with Newton, see Kelly, "Introduction," 29.

Somers insisted Locke write a detailed refutation of Lowndes’ proposal in his own name.

When Locke requested that it only be circulated among a small number of key

policymakers, Somers ignored him, sending it to the printer without Locke’s permission.

The Lord Keeper Sir John Somers understood that the future of England’s exchange rate

regime turned on the response Locke mounted to Lowndes.15

THE CRISIS COMES TO A HEAD

As both Locke and Neale recognized in 1690-1 “light” shillings had been

circulating alongside “full-bodied” shillings without a problem for decades. As long as

only a small portion of the coins were clipped a small amount, the risk of losing value

remained small. Under such circumstances, the clipped coins were generally valued by

tale—i.e. as a “shilling”—and exchanged for unclipped coins at par.

In 1694, however, things changed. The shift may have been sparked by rumors

that the Exchequer would begin accepting coins based only on their weight. Or, perhaps

the deterioration had reached a tipping point: the light coins were so significantly clipped

and so widespread that the risk that they would later be valued by weight was too great to

accept them at par now. Regardless of the cause, merchants throughout England began to

discount the light coins, valuing all coins based on their weight (their “intrinsic” value)

rather than by their tale (their “extrinsic” value). Fear begat fear, powering a spiral of

panic. In just a few months time, the widespread acceptance of even the lightest clipped

coins had ceased; and, throughout England, coins circulated based solely on their

weight.16

15 Kelly, "Introduction," 15. 16 Ibid., 20.

Figure 3. English Monetary Stock, 1693-1698. Source: Kelly, 1991: 112-113.

As the exchange value of silver shillings in circulation plummeted—and

uncertainty about their future value grew—the market began dumping shillings in favor

of the unclipped gold guineas. This drove up the local price of gold in terms of silver well

beyond the world price, which allowed the English to purchase some gold but at a dear

price. The quantity of gold in circulation increased but not nearly enough to offset the

loss of silver. The English market’s rush to gold thus further diminished the country’s

money supply.17

The valuation of coins based on their weight created an effective inflation of the

nominal price level.18 The quantity of units of currency (e.g. shillings), however, had

been reduced due to England’s negative balance of trade and the rush to gold. This

combined with general uncertainty about the future exchange value of the coinage in its

17 Ibid., 22. 18 The best account of the price movements in the 1690s is found in Horsefield. See especially Chapter 1. Kleer criticized Horsefield’s data as having been “thin.” Kleer, "Lowndes, Locke, and the Bankers," 544.

various states to reduce purchasing and payments, slowing the economy almost to a halt.

By Christmas of 1694, the English economy was on the brink of collapse.

1. The Scobell Committee

Parliament took action in early January. But rather than proposing a bill to

Parliament and then attempting to push it through with the support of corroborating

pamphlets, the devaluationists changed their tactics. Charles Montague, who had been

appointed Chancellor of the Exchequer the previous May, pushed for the creation of a

committee that would “receive Proposals how to prevent clipping of the Coin of this

Kingdom for the future; and the Exportation of Silver.”19 Chaired by Francis Scobell, the

committee entertained proposals from merchants, goldsmiths, and civil servants for the

better part of two months. John Locke was sure to make himself among those

intellectuals considered.20

2. Locke’s Short Observations

Locke used the convening of the Scobell committee as an opportunity to put forth

some ideas on which he had been working since Neale attacked him two years earlier.

With the express purpose of influencing the committee, Locke made some updates—

although not all that he might have—to his response and published them as Short

Observations on a Printed Paper, Intituled, For encouraging the Coining Silver Money in

England, and after for Keeping it here in late February of 1695.21

19 Stuart Handley, "Montagu, Charles, Earl of Halifax (1661-1715)," in Oxford Dictionary of National Biography, ed. H. C. G. Matthew and Brian Harrison (Oxford: Oxford University Press, 2004). House of Commons, Journal of the House of Commons (1802), xi: 200. 20 Kelly, "Introduction," 20-21. 21 Ibid., 136-37.

As its title implies, Locke’s tract was a direct response to the challenges Neale

had raised. Locke spent the first several pages responding to Neale’s critique of the

model he used in the Some Considerations. Locke then turned to the Neale’s responses to

the five potential “objections” to his proposed adjustment of the exchange rate.

As we saw, Neale ended his For Encouraging by directly challenging Locke’s

model. Neale categorically rejected Locke’s suggestion that “an Ounce of Silver…is and

always eternally will be of equal Value to any other Ounce of Silver, under what Stamp

or Denomination soever.” Insisting that, as a practical matter, “an ounce of Silver

uncoined being of 2d. more value then after it is coined it will be,” Neale argued that the

stamp of the Royal Mint actually decreased the value of silver in England.22

Locke’s initial response was to restate, in broad terms, his model. Locke insisted

that Neale’s proposition was “impossible to be so.” He postulated, “the Stamp neither

does nor can take away any of the intrinsic value of the Silver, and therefore an Ounce of

Coin’d standard Silver, must necessarily be of equal value to an Ounce of uncoin’d

standard Silver.” Predictably, Locke then invoked England’s negative balance of trade as

the real explanation for the melting and export of English coin. Locke reasoned that even

if the stamp did cause silver to lose value, merely decreeing that it should not (by

devaluing the coin) would not stop it from doing so. A devaluation, however, would cost

the King revenue, would hurt those dependant on fixed agreements, and would disrupt

trade generally. Of course, the real explanation for the mint’s continued insistence on

devaluation was that the mint stood to benefit from the increase in work it would bring to

22 Thomas Neale, For Encouraging the Coining of Silver Money in England, and after for Keeping It Here, ed. P. H. Kelly, Locke on Money (Oxford: Clarendon Press, 1991), 615-16.

the mint. All of these were moves that Locke had already made in Some

Considerations.23

Locke did, however, make several refinements to his model and its application.

First, Locke developed a richer appreciation of the factors that influence the cost of

conversion. Locke acknowledged that there was some cost to exporting and/or melting

coin since it was illegal and there always some risk of getting caught (however small).

The result was that “if [one] could have Bullion for 5 s. 2 d. per Ounce, or a little dearer,

‘tis like he would always rather chuse to exchange Coin for Bullion, with some little loss,

rather than run the risque of melting it down, or Exportation.” Locke expected, however,

that the premium one would be willing to pay for bullion was rather small. It was

certainly not large enough to explain the 2d. (3.5%) premium that bullion currently

enjoyed over specie in the market.24

This led Locke to his second innovation, namely an explanation for the high

premium offered on bullion in England. Directly addressing for the first time the “fact” of

which Neale had made so much, Locke explained that the “premium” really was not a

premium at all. Instead, the nominal price of bullion had risen because the average weight

of the units in circulation had fallen. Rather than melting light coins that wanted 20% of

their weight, those with foreign balances to settle were better off paying a “premium” (up

to 20%) for bullion. By doing so, they would actually get more silver to send abroad than

they would if they had melted their light coins. Clipping, then, explained the “fact” of the 23 Locke seems to have taken exception to Neale’s sharp criticism of him. Locke returned the favor, writing, “But this Paper, For encouraging the Coining, &c. would fain have the Mill at work, though there be no Grist to be had, unless you will grind over again what is ground already, and pay Toll for it a second time; a Proposition fit only for the Miller himself to make; for the meanest Housewife in the Country would laugh at it as soon as propos’d.” John Locke, Short Observations on a Printed Paper, Intitled, for Encouraging the Coining of Silver Money in England, and after for Keeping It Here, ed. P. H. Kelly, Locke on Money (Oxford: Clarendon Press, 1991), 346-50. 24 Ibid., 349.

high (nominal) price of bullion in England. Bullion cost more in terms of nominal units

because the nominal units had come to represent less silver.25

The first two potential objections to which Neale responded centered on empirics,

on the experience of the Royal Mint and the recent devaluations in Spain and Portugal.

Neale had insisted that the Royal Mint had, since Edward III, adjusted England’s

exchange rate to keep pace with changes in the value of silver. Locke rejected this

explanation for the devaluations on the grounds that the devaluations were out of scale

and out of sync with the changes in the price of silver. The more parsimonious

explanation, in Locke’s view, was that the mint “raised” and “lowered” the coin

(generally the former) simply to increase its work and thus its revenue.

The disagreement between Neale and Locke about Spain and Portugal turned on a

crucial difference in the two theorists’ models. Neale insisted that the problem with those

countries’ devaluations was that they attempted to “raise” the coin above its value in

bullion, which his scheme would not do. As we saw, Neale oddly thought that minting

coins lowered their exchange value. The corrective for this was to subsequently “raise”

their extrinsic value. Thus, Neale assumed that changes in the extrinsic (denominative)

value of coins could drive changes in their exchange value up to the coins’ intrinsic

value.

Locke, of course, rejected this model. Minting silver into coins generally raised its

value; and, whenever the demand for bullion rose above the demand for specie, these

coins could be converted back to bullion again at low cost. Locke went beyond this,

however, to once again demonstrate the futility of Neale’s proposal. Analyzing the

empirical record of the two countries, Locke observed that the scheme “has not brought 25 Ibid.

one Penny more to the Mint there, nor kept their Money or Silver from Exportation since,

tho’ forfeiture and death be the Penalties join’d in aid to this trick of raising to keep it in.”

Again, devaluation would only defraud and disturb.26

As discussed above, Neale’s three other “objections” directly related to arguments

Locke had made in the Some Considerations. For the most part, they solicited a mere

restatement of the principal elements of Locke’s model: the low cost of conversion

ensures that the exchange value of English coins is kept close to their intrinsic values;

conversion (in either direction) depends on the balance of trade; and the high nominal

price of bullion was caused by the decline in the average weight of English silver coin,

which was exogenously caused by clipping. Locke, however, did unpack his previous

claims that devaluation would bring English commerce to a halt. Devaluation, he

suggested, would prompt the rapid melting of all coins containing more silver than the

new standard. The amount of silver in the new, lower standard would then be recoined

with the balance being kept as profit. On the other side of things, devaluation would also

demonetize all coins below the standard weight. Little currency, Locke suggested, would

remain to drive commerce. These were innovations on which Locke would build as the

controversy continued to unfold.27

3. The Scobell Committee’s Fourteen Resolutions

Despite trouncing Neale once again in the pamphlet war, Locke’s Short

Observations was unable to hijack the direction of the Scobell Committee as Locke had

hoped. Locke’s contacts on the committee (including Edward Clarke and Sir Francis

Masham) no doubt pressed Locke’s case. These monetary matters, however, were 26 Ibid., 353. 27 Ibid., 353-59.

complex, and Locke was trying to convince his contemporaries that they should abandon

their age-old policy of flexible exchange rates in favor of adopting a new-fangled fixed

exchange rate regime. In Locke’s mind, this necessitated making a positive, affirmative

commitment to maintaining a fixed exchange rate regime. To Locke’s contemporaries,

however, Locke likely appeared to only reject the recoinage and devaluation (albeit with

convincing arguments). With the state of the currency the way it was—and with the

universal expectation that it would only get worse—policymakers wanted to do

something to address the problem, and Locke, up to this point, had given them few

positive prescriptions for change. Locke, in other words, was perceived at this point as

being theoretically right but not practically useful.

In late February, Locke’s “Colledg” in Parliament (as he had recently come to call

it) reported that “those that make most adoe about it will not be brought to understand

your Treatise and are still puzling themselves about methods that will rather increase than

cure the evill.” Freke lamented that most MPs were either financially interested or

intellectually uninterested in the matter. There was little of the disinterested pursuit of

truth so valued by Locke and his contemporaries.28

In mid-March the Scobell committee submitted fourteen resolutions to the

Commons. The committee proposed recoining all English currency using the new mill

press along with increasing the penalties for clipping and, following Neale’s original

formulation, the illegal export of “English bullion.” While all of the coins would be

minted at the standard weight and fineness, the rating of the Crown Piece would be raised

6d. from 5s. to 5s. 6d., amounting to a devaluation of roughly 9%. All of the coin would

28 John Freke and Edward Clarke to Locke, 28 February [1695]. John Locke, The Correspondence of John Locke, ed. E.S. De Beer, 8 vols. (Oxford: Clarendon Press, 1976-1989), v: 278.

be called into the mint and weighed, with their owners receiving “Weight for Weight, and

the Overplus by a Bill or Ticket, at per Cent. on a Fund, to be appropriated for that

Purpose.” The policy, in other words, promised that those bringing coins to the mint

would receive the same amount of silver in new coins plus a certain amount of additional

silver provided at the public’s expense, which was estimated at £1 million.29

While one recent scholar has treated the question of compensation as an integral

part of the proposal for devaluation, the two were, in fact, independent decisions.30 The

“loss” created by recoinage concerned the management of the currency, not the nature of

the exchange rate regime. This loss was entirely a product of clipping. By reducing the

weight of coins, clipping was supposed to have reduced their market value. Even if the

loss were not realized immediately, the bulk of Locke’s contemporaries (including

William Lowndes and the Scobell committee) expected that this loss would eventually

fall upon someone. The question was: who ought to bear the burden of this theft?

Proponents of “compensation,” like Lowndes and the Scobell committee, suggested that

the public (through a general tax) ought to compensate the holders of clipped coins. In

other words, the public ought to reimburse those “particulars” who had been robbed of

some of the value of their coins by the clippers. Opponents of compensation, like Locke,

feared the moral hazard that would be created by such a public bailout.

The question of compensation, then, was entirely a question of distribution and

not of the exchange rate regime. Indeed, it was just as possible to offer compensation to

the holders of clipped coins and maintain the standard (as was the combination eventually

29 House of Commons, Journal, 265-66. 30 Patrick Kelly describes the compensation offered as distributing the “enhanced face-value.” Kelly, "Introduction," 21. In fact, the fund “to make good the Deficiency of the present clipped Coin” was to be raised to compensate the holders of coins lighter than the new standard. All coins with at least the weight in the new coins would not require such compensation. See the discussion above bearing out this theory.

adopted by Parliament) as it was to adjust the standard and yet make those with “light”

coins suffer the burden of the loss.

The tug of war in Parliament over these issues began immediately after the

Fourteen Resolutions were submitted by the Scobell committee. The first decision

concerned the standard and the nature of the exchange rate regime. At the end of March,

the Commons voted against devaluation by a narrow margin of eleven votes. The

Commons then considered the distributive implications of the recoinage. On April 12th,

they voted to compensate the holders of clipped coins, as the Scobell committee had

recommended. In the end, however, the Resolutions were rejected; and, in the spring,

Parliament adopted instead a bill merely to increase the penalties on clipping, effectively

postponing the decision on the exchange rate regime.31

THE SUMMER OF 1695

The summer of 1695 brought a temporary lull in the official discussion of the

recoinage crisis. Parliament had been prorogued in early May, and King William traveled

to France to oversee the war effort. In his absence, the council of the Lords Justices

(composed of cabinet members and high ranking lords) ruled as regents. The two

burgeoning factions in the debate on the currency used this break as an opportunity to

refine their positions and build their cases.

By this point, Locke had clearly earned a reputation among policymakers as an

expert on matters of the currency. So, when Sir William Trumbull was appointed as the

Secretary of State in early May, it was natural that he should turn to his old acquaintance

31 House of Commons, Journal, xi: 302. 6 & 7 Wm. III, c. 17.

and seek his perspective on the currency crisis.32 In July, Trumbull wrote to Locke asking

him to comment on a pamphlet on the currency crisis.33 In early August, Trumbull sent

along a report he received on the price of guineas, asking Locke to comment on that as

well. “Having troubled you so often about the lamentable condition of our mony, and

having just now read a paper sent from the Treasury (in my absence) to the Lords

Justices,” Trumbull wrote, “I take the liberty to give you a sight of it; in order to the

receiving your thoughts upon it.” Trumbull was clearly eager to have Locke’s

perspective: “I have so great a desire to understand this matter fully, and to contribute my

part towards some Cure of this great Evill, that I depend upon your goodnesse, both to

instruct and forgive me, in the quality of.”34

1. Locke Proposed that Coins go by Weight

Locke complied with Trumbull’s request almost immediately. By the end of July

he had drafted a short paper on the high price of guineas, which he delivered to the

Secretary of State. Locke’s short essay reflected an important step forward in the

evolution of his thought. Previously, Locke had explained the circulation of light coins

alongside heavy coins by citing the ease with which the former are traded for the latter. In

the summer of 1695, however, few heavy coins could be had, and, yet, the exchange

values of clipped coins (despite that they had fallen some) still hovered above their

intrinsic values. “But how comes it that 3 ounces of clipd money should purchase almost

5 ounces of Bullion?” Locke queried. Locke’s response was innovative: “this imaginary 32 Locke had had dealt with Trumbull previously when he was a Commissioner of the Treasury. 33 The pamphlet was most likely Sir Phillip Meadows’ “Reflections upon the Coyn or Money of England.” 1927. Sir William Trumbull to Locke, 19 July 1695. Locke, Correspondence, v: 414. 34 A paper entitled “Representation of the Right Honourable the Lords Commissioners of the Treasury to their Excellencies the Lords Justices of England concerning the price of Guineas,” dated 3 July 1695, is among Locke’s papers together with his reply. 1929. Sir William Trumbull to Locke, 5 August 1695. Ibid., v: 415.

value is kept up by the Exchequers takeing it again for his Taxes and so as it were

authorizing or at least allowing it at that rate.” While the application was novel, it really

only required a slight stretching of Locke’s model. Essentially, by accepting a large

number of coins by tale regardless of their weight, the exchequer increased the chance

that a light coin could be redeemed at face value. This increased probability buoyed the

exchange value of the clipped coins above their intrinsic value, just as if the probability

were high that they could be exchanged for full-bodied coins on demand.35

Locke saw the exchequer’s acceptance of coins at face value as the worst possible

policy response to the crisis. The increase in probability that a given light coin would be

accepted by tale was not enough to keep the coin’s exchange value equal to where it had

been before it had been lightened. Such indiscriminate acceptance confused the market,

making it more difficult to calculate the exchange value of any given coin. Locke

proposed a simple solution instead, namely that “the Exchequer not any longer to

authorize this imaginary value i.e. not to receive any silver money but according to its

weight and for the publique authority to prohibit clipd money to pass for more than its

weight.” This prescription was entirely consistent with his view that economic

transactions were ultimately based on the intrinsic value of the currency. It brought little

theoretical innovation, but it was Locke’s first practical proposal. While it was only a

slender one, this was a policy that could be adopted and implemented.36

2. Locke’s Attack on Devaluation

Locke’s report on guineas was only a short response to the issues at hand. He

spent the better part of August drafting a more complete assessment of the proposed 35 John Locke, "Guineas," in Locke on Money, ed. P. H. Kelly (Oxford: Clarendon Press, 1991), 364. 36 Ibid.

devaluation. He delivered this paper to Trumbull in September—just around the time that

Lowndes was finishing his Report.

Locke’s paper attacked devaluation on both practical and normative grounds. The

stronger of Locke’s two criticisms was that the current schemes for devaluation were

wholly impractical and thus doomed to failure. No scheme, Locke suggested, could be

successful in restoring the coinage without also stopping coin-clipping. Merely reminting

the coins and increasing the penalties on clipping would be insufficient. Clipping was

simply too profitable and too clandestine for punishments to have much deterrent effect.

And domestic clipping was only one source of the problem. The interim since the

publication of the Some Considerations had only increased Locke’s doubts about the

possibility of achieving international comity. Locke insisted to Trumbull that England’s

foreign rivals had driven much of the counterfeiting and clipping that plagued the English

currency.37

Far from stemming the crisis of clipping, Locke argued that the proposals in

Parliament to compensate the holders of clipped coins increased the incentive for further

clipping. Because the coins would be accepted regardless of their weight, clippers would

actually be encouraged to clip the coins further. Parliament, Locke reasoned, would have

to set a minimum weight for each of the coins, otherwise “a peice of silver that was

stampd for half a Crown must be received at the mint for half a Crown though it weigh

but six pence.” Whatever minimum weight Parliament set, however, “you may make sure

the currant money will all be brought presently to that size the clippers being carefull not

37 Locke explained, “But if the penalties of our Laws could restrain domestick Clippers, How shall they hinder a yet greater mischeif from forreiners who are not so blind or dull as not to be at worke when coyning and importing light money upon us offers them the gain of 10.20.30.40.50. per Cent?” John Locke, "A Paper Given to Sir William Trumbull Which Was Written at His Request," in Locke on Money, ed. P. H. Kelly (Oxford: Clarendon Press, 1991), 365-66, 68.

to loose the benefit which the Parliament in their wisdom shall thinke fit to propose for

the encouragement of their industry.” Choosing a specific minimum weight also brought

challenges. Lowering the minimum increases the cost of carrying out the recoinage. If the

minimum were set too high, however, “this will not be a cure for what it is designed the

greatest part of your running Cash being already clipd beyond that degree.”38

These incentives were further encouraged by the process by which the recoinage

was expected to be undertaken. The proposals planned to spend two years recoining the

clipped currency. But if the damaged currency were taken in and the new coins released

on an ongoing basis, profiteers could cycle the same metal through the recoinage process

several times, all at the mint’s expense. Locke feared that rogues might melt down the

new milled coins, hammer the metal in the old style, clip these coins to the lightest

possible weight, and proceed as before selling the clippings on the bullion market and

cashing the clipped coins into the mint. “Clipping and Coining our Money,” Locke

explained, “is now a Trade amongst us and ‘tis beleived amongst our neighbours too. All

the Tools are ready.”39

Locke argued that the alternatives to releasing the new coin on an ongoing basis

were equally impractical. Removing the clipped coin without replacing it “stops all Trade

at once by leaveing no money for the market or Exchange.” Leaving the coin in

circulation but simply taking account of it would be a mammoth administrative task,

particularly if every single clipped coin had to be weighed and recorded. It would also

allow those in charge of recording “to make large allowances if he be inclinable to favour

his friends or relations.” Even if such government agents were honest, members of the

38 Ibid., 366-67. 39 Ibid., 367-69.

public might not be. Passing the same clipped money among themselves, the populace

might register the same coins several times over. Both forms of cheating would

undermine the recoinage. Locke roundly concluded,

“whatever puts a stop to the goeing of clipd mony all at once of a suddain puts a stop to all trade and commerce and the provideing of necessarys. Whatsoever leaves a time for clipd money to goe whilst weighty is coining allows a time for melting and cliping the new coin as it comes abroad and soe of increaseing and continueing the clipd mony.”40

Locke’s second critique of the proposals was that they were unjust. Locke worried

that “cunning money jobbers” would take advantage of the “pore Countryman at a

distance from London.” Those in the country who were either ignorant of the provisions

made or were unable to travel to the capital to enjoy the benefit the government offered

might be forced to sell their light coins at a discount to the savvy clippers who would

certainly secure every conceivable benefit.41 “It seems unreasonable,” Locke posited,

“that the Country should out of their pockets by a Tax make those yet richer who have

got vast Estates by engrosseing and handling the Money of the Nation.”42

As in his paper on guineas from the previous July, Locke insisted that the best

way to handle the coinage crisis was to insist that coins go only by weight and to remint

the damaged coins gradually. Locke argued that making coins go only by their weight

was far more practical than any of the previous plans proposed to Parliament. First, it

would cause clipping to cease. If coins were valued by their weight, then the value of a

clipping was subtracted from the value of the coin, eliminating the profit. Given that there 40 Ibid., 372. 41 “By this rule of takeing it at half weight It is sure all your money will be brought to that weight and the pore Countryman at a distance from London that has any Money clipd beyond that will be forced to sell it for its weight to the cunning money jobbers who will be sure to 25 tell him that no money of which above half is clipd is to be received into the mint and so the remedie proposd will not reach the honest Countryman who is pretended to be taken care of but will turn to the profit only of crafty fellows who prey upon them.” Ibid., 371. 42 Ibid., 366.

was a greater hassle in using clipped coins and some risk (although quite small) in

clipping the coin, clipping would at last become a costly enterprise. Second, it would

ensure that coins of all weights continued to circulate. Whereas under the plans in

Parliament only those coins above the minimum would continue to be useful as money,

all coins would remain legal tender in Locke’s plan. Both weighty and light coins would

reenter circulation without any further clipping or melting.43

Locke also insisted that making coins go by weight was more just than any of the

alternatives. Locke felt little pity for those who held clipped coins but had accepted them

based on their tale. The law, Locke explained, did not merely authorize men and women

to refuse to accept clipped coins, but it actually forbade these coins’ circulation

altogether.44 Locke also reasoned that anyone who did accept clipped coins did so

because it was advantageous for them to do so. In his mind, it was not the government’s

responsibility to compensate that person for the lightness of the shillings members of the

public accepted in free contracts.45

LOWNDES’ REPORT

The proponents of devaluation, notably Chancellor Montague, also took

advantage of the summer interim to gather their forces. In August of 1695, the Treasury

ordered its new secretary, William Lowndes, to draft a report proposing devaluation. The

result was Lowndes’ celebrated Report Containing an Essay for the Amendment of the

Silver Coins, completed in mid-September but not published until that November.

43 Ibid., 369. 44 Ibid. 45 Ibid., 373.

Led by Patrick Kelly, scholars have recently revised their traditional view that

William Lowndes was the architect of the plan. In January of 1695, Lowndes had

criticized a proposal by “Monsieur Gervaise” to raise the coin by one-third. (Of course,

Lowndes’ apprehension over the plan may have just as easily been over the excessive size

of the devaluation as much as over the proposal of a devaluation at all.) Kelly has

additionally suggested that “the plan in the Report is very largely the same as that

propounded by the Scobell committee in March 1694/5.” Kelly speculates that Lowndes

may have been the unwitting agent merely carrying out the will of his superior, Charles

Montague.46

For our purposes, resolving who the actual author of Lowndes’ Report was

matters less than recognizing the considerable intellectual innovation that went into

strengthening and defending the devaluation scheme. As Kelly suggests, Lowndes’

Report did reissue the Scobell committee’s call for devaluation and proposal that the

public bear some large portion of the “loss” involved in carrying out the recoinage. But

the Report went far beyond this. As we saw in his papers prepared for Secretary

Trumbull, Locke demonstrated the impracticality of undertaking the recoinage according

to the scheme proposed by the Scobell committee. Lowndes was either aware of this

argument (which was entirely possible) or anticipated this criticism, and he took

measures to revise the scheme in response to it. By authorizing the receipts to circulate as

currency—and by granting them interest to ensure that they would—the recoinage could

be undertaken without absorbing all of England’s circulating medium, as Locke feared it

would. Perhaps more important, Lowndes considerably reworked Neale’s economic

46 Kelly, "Introduction," 106-09.

model. Noting England’s negative balance of trade, Lowndes developed a much more

robust model with which to explain and justify the proposed devaluation.

Thus, regardless of the identity of the real intellectual force behind Lowndes’

Report—whether it were Montague, Lowndes, or someone else entirely—the arguments

deployed in that report in favor of devaluation were the strongest yet. Responding to

them would force Locke to advance his model and proposals yet further. It is to that

report that we now turn.

1. The Need for Action

By the time William Lowndes took up his pen in August of 1695, policymakers

were desperate to resolve the coinage crisis. What action—and what amount of action—

were required on the part of policymakers, however, remained open questions. Up to this

point, Locke’s public proposals had all largely been negative: he challenged the need and

efficacy of a recoinage. His proposal had triumphed repeatedly throughout the first half

of the decade; and just as Locke seemed to prescribe, the monetary authority made no

adjustments to its exchange rate regime.

Lowndes thus dedicated a portion of his tract to insisting on the necessity of

taking decisive, invasive action to resolve the crisis. He outlined three deleterious effects

created by the poor quality of the English shillings. First, the unreliability and lack of

uniformity of the shillings had caused the English to flee from the silver coins to gold

guineas, driving up the market price of gold in England well above its world price. This,

Lowndes explained, allowed foreigners to profit at the expense of the English who were

essentially overpaying for the privilege of using gold.47 Second, the poor shape of the

47 Lowndes, Report, 111-12.

majority of the shillings had driven those that had as yet escaped the clippers’ shears out

of circulation. Anticipating a devaluation, those holding relatively heavy coins were

“Hoarded by the particular Persons Possessed thereof, in prospect that the Silver

contained in those Weighty Pieces will be Raised to a Value suitable to the Bullion

thereof if Melted, which they may think will turn more to their Profit than Lending at

Interest, Purchasing or Trading therewith in the mean time.” The result was that England

was robbed of yet more of its circulating medium.48 Lowndes’ gravest concern was that

the poor state of the shillings had created uncertainty, consternation, and upset in the

economy—“which lessens Trade in general.”49

In response to Locke’s seeming aversion to taking decisive action, Lowndes’

message was clear. England’s currency problems would not resolve themselves.

Policymakers needed to take decisive action to restore the currency.

2. The Cause of England’s Troubles

Lowndes’ perception of the best course of action, naturally, turned on his

perception of the nature of the problem England was facing. His overwhelming

conclusion was that England’s economic difficulties were all ultimately caused by the

“Important and Expensive War” with France.50 Lowndes returned to the “fact” cited by

Temple and Neale that silver was more valuable in England than in France. “[B]y Daily

Experience,” Lowndes wrote, “Nineteen Peny Weight and Three Tenths of a Peny

Weight in Sterling Silver (equal to the Weight of a Crown Piece) in England, doth, and

will Purchase more Coined Money than Five Shillings by Tale, (though the latter be

48 Ibid., 113-14. 49 Ibid., 115. 50 Ibid., 90-91, 109.

delivered bona fide in Unclipt Shillings, or in a good Bill).”51 In a formulation that seems

to have come directly from Neale, Lowndes explained “it is most plain, that he now

Melts down…a Crown Piece, which whilst it retains the Image and Superscription of His

Majesty…runs only for Five Shillings, can immediately sell the Silver of it here for Six

Shillings and Two Pence Half-peny.” The profit margin was even higher when

“Exporting it into Foreign Parts.”52

Lowndes, however, made a significant innovation on Neale’s argument by

developing a more robust model to explain this “fact” of “daily experience.” Whereas

Neale variously suggested that England had a positive balance of trade and/or that the

balance of trade was irrelevant, Lowndes made England’s negative balance of trade the

centerpiece of his model. He argued that England’s negative balance of trade was the

prime cause of the separation between the currency’s exchange and intrinsic values.

According to Lowndes, the demand for bullion to settle the imbalance had caused its

price to rise 20% above the parity level, meaning that the intrinsic value of coins was

one-fifth greater than their exchange value as English currency. Elsewhere, Lowndes

explained the persistence of the premium offered on bullion by insinuating that the

profiteers melting coins were unable to keep up with the inflated price of bullion.53

Lowndes also attributed coin clipping to the war-induced trade imbalance. In a short but

telling passage, Lowndes equated clippings with the bullion exported “to answer this

51 Ibid., 68, 77-78. 52 Ibid., 70-71. 53 Lowndes considered the possibility that “that Silver in Bullion will always, during this War, be dearer than Silver in Coin, because of the necessity to Export it for the Foreign Expence of the War, and to answer the Ballance of Trade.” He offered several responses, but at no point did he suggest that melting would serve to maintain the price of bullion at a level close to the price of specie. Ibid., 71-82.

Ballance of Trade,” suggesting that the negative balance of trade itself may have been

driving coin clipping.54

Lowndes naturally believed that the chief way to stop the melting and encourage

minting was to turn England’s negative balance of trade. By raising the demand for

English currency, Lowndes argued that achieving a positive balance of trade would lower

the demand for bullion for export and draw instead bullion from abroad to be minted as

English currency. To accomplish this, Lowndes recommended intervention designed to

achieve “such a Protection of our Trade, as will render our Exportations as large as they

used to be in times of Peace.”55 He went so far as to suggest that “there is no reason to

expect that Silver will decline in its Price or Value here, till it be made more plentiful, by

turning the Ballance of Trade to our Advantage.”56 Later in the Report, however,

Lowndes insisted that the coins be repaired before the imbalance of trade was addressed,

fearing that “any Proposal which supposes the Ballance of Trade must be Rectified

before our Coins be Amended…does but postpone the Cure of a Disease which may

destroy us before such a Remedy can take effect.”57

3. Lowndes’ Proposal

Short of correcting England’s imbalance of trade, Lowndes suggested that the

English could regain control over the exchange value of their currency by manipulating

its extrinsic denomination. Here, Lowndes leaned on the model Neale had refined in his

discussion of Spain and Portugal. There, Neale had argued that an upward adjustment of

54 Ibid., 76. 55 Ibid., 78. Elsewhere, Lowndes praised “some good Designs now on Foot” to turn England’s negative balance of trade with the Dutch. Lowndes, Report, 72-73, 90-91. 56 Lowndes, Report, 77-78. 57 Ibid., 90-91.

the extrinsic value of the coin could drive an increase in its exchange value up to the

intrinsic value of the coin but not beyond it. At various points, Lowndes suggested that he

was using the same model that Neale had articulated; but in his actual proposal, Lowndes

went one step further. Lowndes proposed “raising” the extrinsic value of the English

currency 20% to more than match the supposed premium attached to bullion (i.e. to the

intrinsic content of specie).58 By raising the Crown to 6s. 3d., Lowndes expected that

there would be a premium of one half-penny on silver in coin over silver in bullion. This,

Lowndes suggested, would “give…an Encouragement to those that have English Silver

or Plate, and particularly to the Retailers of Wine, Beer, Ale and other Liquors, (whose

Tankards and other Vessels are herein after Propos’d to be brought in) and generally to

all those that have or can have Silver Imported, to carry the same to the Mint to be

Coin’d.”59

The second component of Lowndes’ proposal concerned the “loss” that would be

created by such a recoinage. As Kelly has observed, Lowndes closely followed the

Scobell committee’s recommendation regarding the “loss” inflicted by the recoinage,

suggesting “That the loss, or the greatest part of it ought to be born by the Publick, and

not by Particulars.”60

Lowndes, however, did made a considerable, important innovation in the means

he proposed for undertaking the recoinage. As we saw, Locke elegantly demonstrated to

Secretary of State Trumbull that the Scobell committee’s recoinage scheme was entirely

impractical. Locke had argued that undertaking a recoinage all at once would bring

58 Ibid., 61-62. As a practical matter, Lowndes’ proposal involved both reducing the intrinsic content of some of the nominal units and proclaiming that others were legally worth more raw material in exchange. 59 Ibid. 60 Ibid., 119.

commerce to a halt but that recoining slowly would give the clippers ample opportunity

to melt, counterfeit, and reclip the new coins, preventing the mint from ever putting a

decisive stop to the coin-clip-recoin cycle. Lowndes had either been made aware of

Locke’s criticisms or he anticipated them. Nonetheless, his Report reflected an

innovation that would have greatly reduced the practical challenges to carrying out a

recoinage.

Lowndes proposed that the “tickets” issued by the mint be allowed to circulate as

a currency during the period of the recoinage. “And the better to Encourage the Currancy

of these Bills,” Lowndes suggested, “it is Proposed, That they bear an Interest after the

Rate of Five Pounds per Centum per Annum from the Date thereof…until its full

Satisfaction.” When the bills came due, the bearers thereof could cash them into the mint

for the newly minted currency and the promised interest. By making the bills bear

interest, Lowndes hoped that they would better compete with the bills issued by private

banks and goldsmiths. These bills, Lowndes suggested, would stand in the place of the

currency removed for recoining. Thus, Lowndes’ plan would have been able to avoid

several of the practical problems raised by Locke: the light coins could be removed in

relatively short order and slowly recoined without England’s commerce suffering in the

meantime.61

4. Lowndes’ Model

Lowndes’ model was a simple form of the standard model developed in Chapter

3. He recognized that coins have several values: intrinsic, extrinsic, and exchange. The

intrinsic value of a unit of currency is the value of that unit’s raw material when not used

61 Ibid., 144-45, 52-53.

as currency. In the case of specie, the intrinsic value of a coin is the market value of that

coin’s metallic content as bullion. The currency’s extrinsic “value” is its denomination

(e.g. shilling, guinea, pence, &c.) as determined by the stamp placed on it by the

monetary authority. The currency’s exchange value is its market value when used as

money.

According to Lowndes, the currency’s exchange value is at least partly dependent

on its intrinsic content. In foreign trade, that dependency is complete: “all Foreigners that

deal with us, regard the Intrinsick Value more than the Extrinsick Denomination, and

Exchange with us accordingly.”62 In domestic transactions, however, it is possible for the

exchange value of a currency to become detached from its intrinsic value. Lowndes

posited that a devaluation of the currency would affect its exchange value domestically

less than its exchange value abroad.63

The detachment of the currency’s exchange value from its intrinsic value was the

source of some considerable concern for Lowndes. He insisted that the two values ought

to be kept equal. He said roundly,

That there can never be propos’d any just or reasonable Foot upon which the Coins should be Currant, save only the very Price of the Silver thereof, in case it be Molten in the same Place where the Coins are made Currant, or an Extrinsick Denomination very near that Price: It being most evident, That if the Value of the Silver in the Coins should (by any Extrinsick Denomination) be Raised above the Value, or Market Price of the same Silver, reduced to Bullion, the Subject would be proportionably Injured and Defrauded.64

62 Ibid., 32. 63 “These Gentlemen consider only the use of our Coin in England, as it hath Relation to Foreign Exchanges or Remittances, whereas it serves principally the Inland Commerce, and supplies many other occasions, which will be advantaged by the Rise and Plenty thereof.” Ibid., 74. 64 Ibid., 78-79.

At another point, Lowndes defended his proposal on the ground that his new currency

“will actually contain more real and Intrinsick Value of Silver by a great deal, than is in

the Currant Moneys now commonly Applied to the Payment of the said Rents, Revenues

and Debts.”65

Lowndes argued that conversion between raw material and currency depends on

the relative values of a currency used as money and its intrinsic content. He suggested

that “if the Value of the Silver in the Coins be less than the Value or Market Price of the

same Silver reduced to Bullion, then the Coins are always Melted down for Lucre.”66 On

the other side of things, bullion would only be taken to the mint to be coined if the

exchange value of the currency were higher than its intrinsic value.67

5. Lowndes’ Rhetoric

In proposing a devaluation, Lowndes had the force of history on his side; and he

was sure to use it to his advantage. He posited that “for above Four hundred Years

past…it doth evidently appear, That it has been a Policy constantly Practised in the Mints

of England (the like having indeed been done in all Foreign Mints belonging to other

Governments) to Raise the Value of the Coin in its Extrinsick Denomination, from time

to time, as any Exigence or Occasion required.” Lowndes further insisted that “this

Method of Raising the Extrinsick Value of the Gold and Silver…as it hath been constant

almost in the Reign of every King, so no Inconvenience, Disgrace or Mischief…has ever

accrued by the doing thereof at any time, when a Just, Necessary or Reasonable Cause

gave Occasion thereunto.” Beyond appealing to historical precedent, Lowndes also

65 Ibid., 81. 66 Ibid., 68, 79. 67 Ibid., 82-83.

argued on the grounds of principle that it was the sovereign’s right to make such

adjustments.68

Lowndes suggested that his proposals would do more than merely mend the

currency. He suggested that devaluation would increase the total stock of currency in the

economy, which would increase England’s commerce. He also pointed out that his plan

would allow England to continue using the same nominal units, which would help to

“avoid Confusion and Uncertainty in Payments.”69

THE RECEPTION OF LOWNDES’ REPORT

Even before Lowndes submitted his plan to the Lords Justices (the council

appointed by William to rule in regency in his absence) on September 26th and 27th, the

opposition began to stir.70 Lord Keeper Sir John Somers had resisted devaluation at least

since the early 1690s. Indeed, Locke may have even conferred with Somers when he

constructed his Some Considerations.71 So, when Somers realized that Lowndes intended

to try to press the Lords Justices to support devaluation, Somers turned to Locke. On the

24th of September, Somers dashed a note off to Locke: “I have got an abstract of Mr

Lownds’s paper, which will shew you what he aims at, tho his reasoning does not

appear.” He then asked Locke to meet with him in person to discuss it further.72

When it was released in full, Lowndes’ Report was not well received. While the

Lords Justices were impressed with his erudition, they were unconvinced of the wisdom

of his proposals. They quickly solicited the opinion of eleven outside experts, including,

68 Ibid., 56, 58-59. 69 Ibid., 83-84. 70 Kelly, "Introduction," 25. 71 Ibid., 18. 72 1949. Sir John Somers (later Baron Somers) to Locke [24 September 1695]. Locke, Correspondence, v: 442-43.

among others, Isaac Newton, Sir Christopher Wren, Sir John Houblon (younger brother

to James Houblon), and, of course, John Locke.73

Determining how to resolve the currency crisis was no simple matter, but for the

controversialists speed had become essential. Policymakers were desperate to take action

and the window in which they could be persuaded to adopt one course or the other was

shrinking. Locke’s supporters in the College recognized this. Freke wrote to Locke the 8th

of October pressing him to “hasten what you can the sending the Lords Justices the paper

they desired of you.” As if to prod him further, Freke also informed Locke that Lowndes’

report would be published, “not for sale but to be given about to such as shall be thought

worthy of it.”74

In mid-October, King William returned from France. Soon thereafter, he issued

writs for a new Parliament to be assembled the 22nd of November. William, however, did

not wait for Parliament to assemble before he took up the matter of the coinage. At a

cabinet meeting the 16th of October, the King weighed in decisively on the controversy.

Fearful of the effect a devaluation would have on the real value of the treasury’s

holdings, William insisted that the standard not be altered unless it were absolutely

necessary, which did not seem to him to be the case. This bought Locke some time.75

1. Locke’s “Propositions Sent to the Lords Justices”

Despite the King’s return, the Lords Justices nonetheless continued to convene.

Locke complied with their request within a manner of weeks, submitting his report to

them the 23rd of October. Locke’s “Propositions sent to the Lords Justices” was a short—

73 Kelly, "Introduction," 25. 74 1956. John Freke to Locke, 8 October 1695. Locke, Correspondence, v: 448-49. 75 Kelly, "Introduction," 27.

almost curt—exposition of the Lockean model of the English monetary system. Perhaps

Locke had heard about the King siding with his position and felt a detailed consideration

of Lowndes’ report was unnecessary.

Locke’s “Propositions” included all of the components of his previous arguments

in their most refined iterations. “Silver is the instrument and measure of Commerce in all

the Civilized and Trading parts of the world.” It serves these functions by its

“intrinsique” value. The nature of silver is such that “it follows that an equal quantity of

silver is always equal in value to an equal quantity of silver,” with the usual caveats

concerning conversion costs, which, in the case of England, were minimal.76

Silver is coined as a convenience, to provide the public good of facilitating

commerce by rendering easy the summation of quantities of silver. Individuals contract

and make exchanges for quantities of silver despite that they find it more convenient to

deal in terms of nominal units. The responsibility of the sovereign to uphold contracts

extends to preserving the intrinsic content of the currency used in the economy. Clipping

autonomously debases the standard; and devaluation does the same by public authority.77

On the matter of shouldering the loss, Locke insisted that “[n]o one has a claime

to reparation from the publique for the clipd money which shall be found in his

possession.” All Englishmen are authorized (and perhaps even required) to refuse to

accept clipped coins. Those with counterfeit coins enjoy a greater claim to reimbursement

from the public because such coins are harder to spot.78

76 John Locke, "Propositions Sent to the Lords Justices," in Locke on Money, ed. P. H. Kelly (Oxford: Clarendon Press, 1991), 374. 77 Ibid., 375-76. 78 Ibid., 376.

Locke argued that devaluation would not stop clipping. Clipping can only be

stopped by “making it unprofitable.” Because penalties have proven ineffective, the

better option is to insist that coins go only by weight. Nor would devaluation encourage

coin to be brought to the mint. “The only way to bring Bullion into England that may stay

by us and increase our Money,” Locke explained, “is a right regulation of our Trade. All

other ways are but projects that will faile us.”79

Locke agreed with Lowndes, Neale, and others that increasing England’s supply

of money was a necessity. England needed an absolute quantity of currency on which to

carry commerce; but, as Locke went to pains to make clear, “Money also is necessary to

us in a certain proportion to the plenty of it amongst our neighbours.” Locke argued that

having a large relative stock of currency was necessary for both security and economic

reasons. National security required treasure to ensure access to the troops and supplies

required to fight foreign conflicts. Locke also reasoned, however, that relatively richer

neighbors could “tempt away our people to serve them by Land or Sea or to worke for

them by greater wages” and “command the Markets and so breake our Trade and make us

poorer.” This reasoning, discussed further below, reveals Locke’s understanding of the

importance of monetary policy autonomy.80

Locke closed by offering several practical proposals. He rejected bimetallism on

the usual grounds. And he recommended that a “sufficient quantity” of small

79 Ibid., 376-77. 80 Ibid., 379.

denomination coins be minted so as to ensure that small transactions could continue to

occur in “Market and Retaile Trade.”81

2. Locke’s Answers to Somers

Somers was not satisfied with Locke’s brief propositions. He knew all too well

the arguments levied by the devaluationists, and he knew that Locke’s position could not

carry the day without offering clear, direct responses to several specific issues. Somers

wanted to see Locke take on Lowndes explicitly point by point. Somers issued a list of

six queries based on Lowndes’ Report and pressed Locke to respond to each in turn.

None of the queries Somers issued raised issues with which Locke had not dealt.

Thus, none of them challenged Locke to make many innovations in his model or his

proposal. He was able to complete a reply to Somers within just a few days, delivering

his response the 30th of October.

Somers first raised Neale’s empirical fact, the high nominal price of silver in

bullion. Locke’s explanation here was the same as it had been in his Short Observations.

Locke argued that only the nominal price had risen as a result of the deterioration of the

average weight of English coins due to clipping. Silver in England is scarce because of

the negative balance of trade, but this could not allow the nominal price of bullion to rise

as high as it had.82

Somers’ second query addressed the claim made by Neale and Lowndes that the

premium offered on bullion had been the cause of the melting of English coin. Here,

81 Ibid., 379-80. Locke understood the “cash in advance” constraint, the need for small denomination currency to allow for small transactions. See Thomas J. Sargent and François R. Velde, The Big Problem of Small Change (Princeton: Princeton University Press, 2003), 9-10. 82 John Locke, "Answer to My Lord Keepers Queries," in Locke on Money, ed. P. H. Kelly (Oxford: Clarendon Press, 1991), 381-86.

Locke returned to the position he had issued since the beginning. Locke agreed entirely

with the principle that whenever the price of bullion rises above the exchange value of

the coin plus the cost of conversion, the coin will be converted into bullion. He

suggested, however, that theorists like Neale and Lowndes had failed to properly assess

the conversion costs that prevailed in England. The cost of melting (including the risk of

getting caught) was considerably lower than the premium currently offered on bullion.

Coins would have been melted long before the demand for bullion for export had risen to

the rate suggested by Neale and Lowndes. Again, the rise in the nominal price of bullion

was caused by the decline in the average weight of circulating coins.83

Somers’ third and fourth queries centered on the contention that England’s current

exchange rate drove the international movement and minting of precious metal. Locke

responded by suggesting that adjustment in England’s exchange rate could not affect its

balance of trade. Locke assumed that nominal prices would merely adjust in response to

any exchange rate adjustments. Exchange rate adjustment was not, for Locke, a useful

tool to manipulate the balance of trade. “In short,” Locke argued, “exportation of our

Money depends wholy upon our consumption of forain commoditys and the Ballance of

trade depending thereon. If our trade has the over ballance we shall bring home money If

forrain trade has the over-ballance of us we must export money.”84

Somers’ then pressed Locke to address Lowndes’ claim that raising the coin

above the value of the silver in bullion would create a premium that would encourage

silver plate to be brought to the mint to be coined. Locke first emphasized that such a

policy concerned only the maintenance of the currency and was entirely independent of

83 Ibid., 386-88. 84 Ibid., 388-90.

the exchange rate regime: “the same praemium may be given whether you recoin your

money upon the old or a new foot.” He then rejected the proposal on the practical

grounds. He insisted that any premium that was large enough to attract new silver to the

mint was also large enough to encourage coins to be melted and returned to the mint

repeatedly. “[T]his half penny an ounce will either not be profit enough to bring any

Bullion to the Mint to be coind,” Locke argued, “or if it does it will be prejudicial, by

makeing the mint worke not only gratis but by a charge laid on the Crown makeing the

Mint give more silver out when it has been at the pains to fashon and stamp it…” Locke

followed this with his typical insistence that “The true and only good reason that brings

bullion to the Mint to be coind is the same that brings it to England to stay here viz the

gain we make by an overbalance of Trade.”85

Somers’ final query centered on Lowndes’ claim that raising the coin would

increase the money supply and stimulate the economy. Once again, Locke insisted that

prices would adjust in response to any such adjustment of the exchange rate, creating

uncertainty but stimulating the economy little or none. “The increase of denomination

does or can do nothing in the case,” Locke argued, “for ‘tis silver by its quantity and not

denomination that is the measure of commerce and ‘tis the weight of the silver in it and

not the name of the peice that men estimate commoditys by.” Merely increasing the

quantity of denominations was chimerical. Wealth can only be increased by increasing

the quantity of goods and services available. Money, after all, was only valuable as a

means to secure real wealth.86

85 Ibid., 390-92. 86 Ibid., 393-97. John Locke, Second Treatise, ed. Peter Laslett, 2nd ed., Two Treatises of Government (London: Cambridge University Press, 1967), § 47.

3. The Council’s Recommended Combination

The Council read Locke’s paper the 31st of October, 1695. The meeting was

attended by three Treasury Commissioners who were known to support devaluation:

Godolphin, Fox, and Montague. Archbishop Tenison, Somers, Pembroke, Devonshire,

and Trumbull were also in attendance. Locke’s proposal—with the endorsement of the

King—carried the day. The Treasury ordered Secretary Lowndes to draft a new plan

based on Locke’s proposals. Lowndes submitted a new plan the 4th of November, going

most of the way toward embracing Locke’s principles. Locke, Lowndes, and the Scobell

committee had all previously argued that the government ought to value clipped coins by

their weight. The new Lowndes plan continued in that same vein, proclaiming that

clipped coins accepted in payment of taxes ought to be valued by weight. The new

Lowndes plan, however, eschewed a public bailout in favor of shifting the burden of the

loss of the clipped money onto the holders of clipped coins, as Locke had recommended.

Lowndes did, however, slide in his old suggestion of a ½d. per ounce premium on

clipped money. In his original report, Lowndes had recommended a devaluation greater

than the premium offered on bullion over coin at the time. This difference of one half-

penny, Lowndes suggested, would serve as a bounty to encourage the bringing of metal

to the mint. Locke argued forcefully against any such premium in his answers to Somers’

queries, but Lowndes nonetheless attempted to reintroduce it in this other guise.87

Discussion continued, however, on the distributive implications of shifting the

loss onto the holders of clipped money. King William was particularly concerned about

the potential for riots if the state failed to provide compensation. Even if Locke were

87 Kelly, by contrast, paints Lowndes as a dutiful civil servant willing to follow whatever directives he is issued. Kelly, "Introduction," 29-30.

correct that much of the compensation would be captured by devious coin clippers, there

was still the potential for panic if the populace at large thought that the value of their

currency would fall precipitously. After the King suggested that the ministry effect the

policy unilaterally, Godolphin and Devonshire warned that Parliament would revolt as

this perceived usurpation of their prerogative. The two Lords’ concerns were justified,

given the political climate of the time. It is also possible, however, that Godolphin, who

strongly supported devaluation, may have used this as a convenient excuse to move the

decision into another forum. After all, there was nothing to lose: if the King were allowed

to make the decision, the standard would certainly be maintained; if, however, Parliament

were given authority over this crucial issue, there may yet be hope that devaluation would

carry the day.88

In the end, the King and Council agreed to recommend a particular combination

of policies to Parliament. The major components of the bundle were those ultimately

adopted by Parliament: the standard would be maintained, clipped coins would be

demonetized gradually, and the public would compensate the holders of clipped coins.

Perhaps just as important, Somers agreed to push for the bundle in the House of Lords,

while Montague would handle things in the House of Commons.89

Thus, Locke enjoyed a major achievement in the autumn of 1695. He had

previously been able to fight off the earlier proposals for devaluation, but those victories

may have merely delayed an eventual adjustment of the standard. In each of those

instances, the proposals for devaluation merely languished. At no point did English

policymakers make an affirmative commitment to maintain the exchange rate. Instead,

88 Ibid., 30. 89 Ibid.

they merely elected not to make any adjustments at those points. November 12, 1695

marked an important step forward for Locke. On that day, England’s executive stood

united with one voice in support of embracing a fixed exchange rate regime as the

cornerstone of their monetary policymaking framework. They did not embrace the

specific means Locke recommended—making coins go by weight immediately—or the

implementation of it from the standpoint of its distributional consequences—not offering

compensation—but they adopted Locke’s exchange rate regime. They made the

maintenance of a fixed exchange rate their priority, even if they choose to implement it

differently and allowed it to affect the distribution of wealth differently than Locke had

recommended.

LOCKE’S REACTION TO THE PUBLICATION OF LOWNDES’ REPORT

The decision to allow the final decision to be made in Parliament, however, left

open the possibility that the executive’s recommendation might be ignored and the

exchange rate altered after all. Locke and his College had made too much progress to

allow the caprice of Parliamentary politics to undermine their efforts. Matters were

complicated by the publication and wide distribution of Lowndes’ Report in mid-

November—which may have been a tactic by the devaluationists to reignite the issue

before Parliament decided the matter. Locke’s Further Considerations Concerning

Raising the Value of Money, published in late December of 1695, constituted Locke’s

attempt to steer Parliament toward his proposal.

1. A Reluctant Reply?

In the Preface to his Further Considerations, Locke described his relationship

with Lowndes and detailed the circumstances under which he drafted his reply to

Lowndes’ Report. There, Locke painted a picture of two disinterested, dispassionate

intellectuals working almost collaboratively towards the ideal solution to England’s

crisis. Locke recounted how Lowndes had invited him to discuss a manuscript of the

Report with him, how the two had discussed matters as fully as time allowed, and how

Lowndes had honored Locke by giving the book to him before anyone else.90

In the Postscript to his Report, Lowndes had suggested that “any Persons who

have considered an Affair of this nature, may (if they please) communicate their

Thoughts for rendring the Design here aimed at, more perfect, or more agreeable to the

publick Service.” Locke suggested that he was complemented by “the great Civilities

[Lowndes] had shewn [him]” and remained content that, despite their continued

disagreement, Lowndes intended to serve the public as well as he could. “In this

Disposition,” Locke wrote, “my Pen rested.” According to Locke, he only took up his pen

with great reluctance, and only after “some reproaches of my backwardness, made me

see, that the World concern’d me particularly in Mr. Lowndes’s Postscript, and expected

something from me on that occasion.” Locke was quite clear on his point: Lowndes did

not intend to single him out and provoke him; the world had decided that he ought to

reply to Lowndes.91

Locke’s portrayal of himself as a dispassionate writer reluctantly offering a few

pages to illuminate his minor points of disagreements with an expert for whom he had

great admiration, however, was entirely a fiction. The text of the Further Considerations

is a full-bore, systematic attack on Lowndes’ Report. After developing his alternative

model in careful detail, Locke considered each of Lowndes’ points in turn. Locke issued

90 Locke, Further Considerations, 405-06. 91 Lowndes, Report, 160. Locke, Further Considerations, 406.

every conceivable type of challenge to Lowndes. He insisted that Lowndes had

misunderstood and misused empirical evidence. He pointed to crucial facts that Lowndes

had ignored. He similarly identified instances where Lowndes merely issued empirical

observations without integrating them into his analysis or framework. Locke suggested

that Lowndes was self-contradictory, illogical, and unrealistic. And where Lowndes did

get things right, Locke criticized him for offering inefficient, incomplete solutions to the

problems he identified.

Developing this critique was no easy feat. As Locke’s correspondence with the

College in November bears out, he spent considerable time and energy developing his

assault on Lowndes’ Report. Indeed, the point of difference between Locke and the

College seems not to have been whether Locke would produce a reply but when.92 Locke

wanted as much time as possible to offer a robust critique. The College, however,

recognized that their window of opportunity to influence Parliament was narrow.

Lowndes’ Report was in print in mid-November, and Parliament was eager to make a

decision. Somers and company needed ammunition from Locke, and they needed it

immediately.

2. Publishing the Reply

When Locke received a printed copy of Lowndes’ Report on or around the 15th of

November, he was likely surprised to see it published and prepared for wide distribution.

In October, Freke had suggested to Locke that the report might be printed “not for sale

92 This characterization cuts against that offered by Kelly. Kelly took Locke at his word and assumed that he was reluctant to reply to Lowndes. Kelly, "Introduction," 30-32. Both Locke’s correspondence and the caliber of the reply he offered suggest that he planned to issue such a response much earlier than Kelly suggests.

but to be given about to such as shall be thought worthy of it.”93 Also, the Treasury had

supposedly agreed just a few days before to support the adoption of the fixed exchange

rate.94 Lowndes’ Report was entirely designed to propose and justify a devaluation of the

standard. The report that was published, of course, was not the only report the Treasury

had produced. Lowndes had (under orders) submitted an alternative plan the 4th of

November along the lines of Locke’s proposals. In fact, there was no reason to publish

any report at this point. The King and his Council had spoken with one voice in favor of a

particular combination of policies. In the absence of new information, Parliament was

likely to have accepted their recommendation. If they proved otherwise, a new defense

could always be drafted then.

Yet, a report was published and widely circulated within days of the decision by

the King to allow Parliament to resolve the issue. And this paper was none other than

Lowndes’ original proposal, the version that built on Thomas Neale’s model to

unabashedly advance the case of devaluation. Locke and the College could only have

interpreted the publication of this report as a surreptitious defection on the part of the

Treasury. After the King had openly committed to embracing a fixed exchange rate, it

was unlikely that Montague, Godolphin, or the other high-ranking devaluationists would

risk publicly challenging the King. But they could—and it appears they did—do

everything in their power to transfer the issue to another forum (i.e. Parliament) and to

steer that forum towards adopting devaluation in the end. Needless to say, Locke and the

93 1956. John Freke to Locke, 8 October 1695. Locke, Correspondence, v: 448-49. 94 See above.

College knew they could not rely on Montague to “handle” things in the Commons as he

had promised.95

As soon as Somers saw Lowndes’ book in circulation, he dashed a note off to

Locke. Somers and Locke had apparently been conferring previously—plotting as well

perhaps to also break their agreement with Montague by pressing that coins circulate only

by weight. Somers confirmed a suspicion Locke had that this work would be published:

“you were in the right when you said the alteration of the Standard was the thing aimd

at.” Contrary to the rendering Locke would later give in the Preface to this Further

Considerations, Somers suggested that Lowndes’ Postscript “is in some sort directed at

you.” Somers listed the criticisms made by Lowndes. “These, (as I remember) were the

objections made use of,” he wrote, “and I doubt not but you will without great difficulty

help us with some expedients for them.”96

Two weeks later, Freke wrote to Locke to encourage him to go beyond merely

offering a reply to Lowndes. He wanted Locke to come to London to personally present

his case to key policymakers: “Your influence is needed to make the business of the Coin

to be taken into consideration and to be considerd rightly.” Freke assumed that a formal

reply to Lowndes would be forthcoming: “in this you might in your absence be further

serviceable than you have been already by what you have publisht by sending up your

95 This might help to explain the apparent contradiction between Montague’s staunch support of devaluation and his drafting of the bill to maintain the standard. Kelly has tried to resolve this contradiction by positing that “Montague was probably prepared to make the best of a bad job, hoping perhaps that the official scheme might be defeated in Parliament.” Kelly, "Introduction," 109. The rendering here, however, suggests that Montague and the devaluationists may have worked to transfer the issue to Parliament for the express purpose of continuing the fight there. Montague likely authored the bill to save face with the King even while working desperately to build a coalition against it. All of Montague’s actions before and after December of 1695 suggest that he was willing and able to work behind the scenes to drive through a devaluation even while paying lip service to the imperatives issued by the King. 96 1964. Sir John Somers, later Baron Somers, to Locke, [c. 15 November 1695]. Locke, Correspondence, v: 461-62.

thoughts on Mr L ds Book to be made publick as I have dayly expected you would and

not onely I have expected it but all your other friends great and little along the same

lines.” But he insisted that Locke’s presence in London would be just as valuable to their

cause, if not more so.97

Freke relayed the details of the events in Parliament. The College had hoped “to

have got [an] a Address to make Clipt Mony goe by weight.” Edward Clarke, however,

“was deserted tho the Night before the K[ing] had Commanded the Courtiers to press that

matter and if possible carry it and very frankly and publickly declared that his opinion

and his inclinations were right in that matter.” Clarke, in other words, had been

“deserted” by one of the King’s courtiers—likely Montague, who had previously

committed to help Clarke push their compromise through the House of Commons. Freke

lamented that even the King’s directive was insufficient to keep his ministers from

defecting. Freke insisted that only Locke’s perspicuity could advance their cause: “I’m

sure if your thoughts on Mr L ds book were publick before the motion they would

contribute much to the obtaining our End for really the Country Gentlemen can hardly be

made understand this business.” Timing, however, was key. Freke needed Locke’s

response in short order.98

Freke had been hopeful that Locke’s reply would be available by Monday, the 2nd

of December. Locke, however, was not nearly finished drafting his reply by then and

wrote that day to Freke and Clarke. He confirmed that he had already been working on

the reply and insisted that his time was better spent drafting his formal response to

Lowndes. “I am soe bad a solicitor and have acquaintance with soe few members,” Locke

97 1971. John Freke and Edward Clarke to Locke, 30 November 1695. Ibid., v: 469-70. 98 Ibid.

wrote, “that I imagin my presence in town would that way be very little serviceable to my

Country and only wast the time I now spend in writeing what you desire.” Locke

explained that his poor health—a “cough and tooth ach which have greivously tormented

[him]”—and some pressing personal business had prevented him from completing the

reply as quickly as he might have.99

These, however, were likely excuses for the delay. In reality, Locke resisted

publishing his response because he did not think it was ready. The pressure to get his

works in print had previously allowed errors to slip through. There were several printing

errors with the Some Considerations, and the Short Observations had not been fully

updated before it was published.100 Locke was likely still feeling the sting of Neale’s

closing remark, where he, referring to Locke, wrote “he that so grosly mistakes in so

material points of what he would assert, ‘tis plain is not free from mistakes.”101

Thus, Locke wanted things to be right in this published reply; but he also did not

feel the same sense of urgency that the College evidently felt. Referring back to Freke’s

characterization of the poor initial reception of Locke’s Short Observations, Locke wrote,

“I have been the lesse forward to print on this occasion because I remember I was told

when I was goeing once to print some thing on this subject, that was better not, in regard

of the Parliament, for that arguments that were in print were quite lost when made use of

in the house and signified noething.” Locke also suggested that if the Treasury seemed

determined to continue to fight for devaluation, the premature publication of his thoughts

99 1972. Locke to John Freke and Edward Clarke, 2 December 1695. v: 417-472. 100 John Locke, Some Considerations of the Consequences of Lowering the Interest and the Raising the Value of Money, ed. P. H. Kelly, Locke on Money (Oxford: Clarendon Press, 1991), 329n. Kelly, "Introduction," 132-34, 36-37. Locke complained of these errors in correspondence to Freke and Clarke. Locke, Correspondence, v: 288-89. 101 Neale, For Encouraging, 616.

would do little good in waging the larger fight. “Things doe not come about without some

influence. and the Squires being deserted as you tell me gives me further doubt.” Locke

continued, “If that point be caried all may goe well but my papers could not possibly be

publique before that motion and after it I hope will come time enough for what will

remain.” He assured Freke, “I make what hast I can.” “In the meane time,” Locke

suggested, “you have my papers on that subject which you may communicate or give

copys of to all those, who would be serviceable in the debate…” Locke closed by

signaling his intention to dedicate the work to Somers.102

Freke replied to Locke three days later. Freke insisted that Locke “needed not

have been a sollicitor had [he] been in Town.” He assured Locke, “There are very many

gentlemen who would have sought to you to have been set right in their Notions what is

fit to be done at this time with respect to the Coin.” Freke was particularly concerned

about the “Country Gentlemen” who “come up very raw in this matter.” “[T]he Monyers

are soe busie buzzing hard words and unintelligible cant in their heads and then

threatening them with I know not what dreadfull Consequences that not onely the

Country Gentlemen but even men that have been once right in their notions are (or for

some private reasons seem to be) confounded.”103

Freke pointed in particular to “the Gentleman whose visit you had not time to

return” and whom Locke and Clarke had met the previous summer. The “gentleman” was

not explicitly named, but it is likely that Freke was referring to Chancellor to the

Exchequer Montague, who was emerging as a persistent opponent of adopting the fixed

102 1972. Locke to John Freke and Edward Clarke, 2 December 1695. Locke, Correspondence, v: 471-72. 103 1974. John Freke to Locke, 5 December 1695. Ibid., v: 475-76.

exchange rate regime.104 This fellow, like Montague, had apparently been won over to

Locke’s side “but now he publickly talks otherwise and is full of fears of I know not what

dangers may ensue if one could not with a clipt shilling pay a Coach man.” “[N]ow I dare

say,” Clarke wrote, “had you been in Town you would have cured him of all his fears and

made him a usefull instrument for the obtaining what is necessary to be done speedily if it

be thought necessary that this Government should subsist three months longer.”105

Freke recounted that the Commons had just voted in favor of a recoinage while

the Lords had voted to instantly demonetize the clipped coins. Freke wrote that “[Clarke]

has not yet seen Sir William Honywood but has spoken to Major Beak and he says

nothing can be done till you come to Town and I believe they know not what to doe

without you.” Turning to the matter of the dedication, Freke insisted that Locke not stand

on ceremony, waiting for Somers’ consent. Freke pleaded with Locke to finish the work

as quickly as possible. “I dare give you licence for [Somers] to make the dedication as

you desire but let me entreat you earnestly to make what haste you can in p[er]fecting

that work which the season calls soe earnestly for and the sooner it appears [the gr]eater

will be its grace and usefullness.”106

Meanwhile, in Parliament, things went predictably on the issue of compensation.

On the 6th of December 1695, the Commons voted to authorize the committee discussing

the coinage issue to investigate raising funds “to make good the Deficiency of the clipped

Money.”107

104 2017. Edward Clarke to Locke, 15 February 1696. Ibid., v: 542-43. 105 1974. John Freke to Locke, 5 December 1695. Ibid., v: 475-76. 106 1974. John Freke to Locke, 5 December 1695. Ibid. 107 House of Commons, Journal, xi: 356.

At just about the same time, Locke sent his reply to Lowndes down to London. In

a postscript to a letter to Freke the 8th of December, however, Locke apparently “recalld

[his] orders for publishing them.” Regrettably, Locke’s letter has not survived, which has

left some question as to the nature of Locke’s statement in the postscript. PH Kelly has

suggested that Locke recalled his permission for publishing the book outright. It seems

more likely, however, that Locke simply asked for yet more time to make additional

revisions.108

Whatever Locke’s plea, the College was unsympathetic. They were desperate to

get something in print. Lord Keeper Somers originally intended to read through Locke’s

pages before having them printed, but quickly changed his mind. Freke quoted him as

saying, “noe let them be printed as soon as possible I will read them then which I have

not leisure to doe now and I would not have them kept an hour from the Press.” Freke

dutifully followed Somers’ command to have the manuscript brought to the printer.109

Locke apparently had inquired for a list of those other Members of Parliament

who might support Clarke. Freke, however, reported that there were few senior, skilled

Members who could be relied on to gather support for their cause. Instead, the battle fell

largely onto Clarke’s own shoulders. Nonetheless, Clarke was largely successful; and the

Commons voted 225 to 114 in favor of maintaining the standard. Freke also reported that

the government had elected to demonetize all clipped coins.110

Thus, Locke’s Further Considerations was sent to the printer about the same time

that the House of Commons voted in favor of adopting a fixed exchange rate regime. As

108 Kelly, "Introduction," 31. 1976. John Freke and Edward Clarke to Locke, 10 December 1695. Locke, Correspondence, v: 477-79. 109 1976. John Freke and Edward Clarke to Locke, 10 December 1695. Locke, Correspondence, v: 477-79. 110 1976. John Freke and Edward Clarke to Locke, 10 December 1695. Ibid.

Locke had anticipated, however, the debate was far from resolved. The policy bundle still

had to make it through the House of Lords, and, just as important, it had to be fully

implemented by the Treasury.

The disagreement between Locke and his college in Parliament over the timing of

his reply reflected their different time horizons. Freke, Clarke, and Somers wanted Locke

to sit down with key policymakers (particularly Montague) and convince them to make

particular votes on certain motions. Locke, however, wanted to issue a robust response to

Lowndes—one that would carry weight not just with the current policymakers but also

with those in the future. In the end, Locke’s presence in London and his reply to Lowndes

were not necessary to persuade the Commons to reject devaluation. But carrying the day

in the House of Commons in December 1695 was only the first step in implementing the

fixed exchange rate regime. Locke’s tract would become the touchstone for the debate

that followed. It is to that tract that we now turn.

LOCKE’S FURTHER CONSIDERATIONS

Locke’s Further Considerations, published at the end of December 1695, was a

robust assault on Lowndes’ Report. At upwards of 40,000 words, Locke’s tract left few

issues unaddressed. As in his previous tracts, Locke first deployed his model and then

considered Lowndes’ argument point by point.

1. Locke’s Proposal

The first portion of Locke’s Further Considerations presented his proposal in its

clearest form yet. There, Locke covered two of the three major components of his

recommendation. He presented and defended the mercantilist framework and he

recommended the most efficient policies compatible with it. He did not consider in this

portion the question of compensation and the distributive implications it would have.

The most important component of Locke’s proposal was the model on which he

built the mercantilist policymaking framework. Silver (and silver alone) is the money of

the world and that for which individuals trade, coining is a convenience that (because of

its low cost) ensures that the exchange value of coined silver can only ever rise slightly

higher than the exchange value of uncoined silver, and the quantity of currency in an

economy in these circumstances depends on the balance of trade. Locke also argued that

states need control over their money supplies. His framework turned on two assumptions:

adjustments to the exchange rate were fruitless (since they would be met by price

adjustments) and costly; and only careful management of the balance of trade would

allow the state to enjoy monetary policy autonomy. While a large number of distributive

outcomes and policies to secure them were compatible with these assumptions, Locke

insisted that policymakers, at a minimum, recognize the truth of this—the mercantilist—

framework.

Locke, however, went beyond defending the robustness of his framework to

advocate a number of policies, which he defended on the grounds of efficiency. Locke

recommended that gold ought to be coined like silver but that the determination of its

price in terms of silver be left to the market or at least set below the market price (which

would accomplish the same). Any attempt to fix an official price above the market price

would drive out the undervalued coin at the expense of the public. Locke also

recommended that clipping be stopped by making light coins go by weight. Calling in the

light coin at once would stop trade and reminting it on an ongoing basis would allow

clippers to melt, counterfeit, and reclip the newly minted coins.

None of the ideas Locke deployed here differed significantly from those he had

developed previously. This material was no doubt invaluable to those who were as yet

unfamiliar with Locke’s work. From our perspective, though, Locke’s real innovation

was to offer the clearest rendering yet of his ideas. Responding perhaps to Freke’s

suggestion that the devaluationists were deliberately trying to confuse policymakers and

to scare them into adopting their proposals, Locke made clarity an explicit standard for

the tracts in the debate.111 Towards that end, Locke carefully defined each of his terms

and went so far as to recapitulate his model in a succinct list of ten specific points, which

he enumerated before turning to a consideration of Lowndes’ Report.112

2. Locke on the High Price of Silver

Locke considered each of Lowndes’ justifications for devaluation in turn. Just as

Lowndes’ had spent a disproportionate amount of space on the first reason, so too did

Locke. Lowndes had argued that “The Value of the Silver in the Coin ought to be Raised

to the Foot of Six Shillings Three Pence in every Crown, because the Price of Standard

Silver in Bullion is Risen (from divers necessary and unnecessary Causes, producing at

great length a great scarcity thereof in England) to Six Shilings Five Pence an Ounce.”113

Lowndes, however, had also argued that the currency’s exchange value ought to

remain as close to its intrinsic value as possible.114 Lowndes did not suggest—as some

111 1974. John Freke to Locke, 5 December 1695. Ibid., v: 475-76. Locke made this clear in the Dedication to Somers. Locke, Further Considerations, 402-03. 112 Locke, Further Considerations, 410-24. The list appears on pp 423-24. 113 Lowndes, Report, 68. 114 Ibid., 78.

later commentators have claimed—that a coin’s exchange value was or should be

independent of its intrinsic value. Lowndes insisted on just the opposite, on both counts.

Indeed, he premised his proposal on the grounds that increasing the denomination of

coins would allow their exchange values to become realigned with their intrinsic values.

Locke picked up on this, writing, “It remains therefore only to shew, that the Market-

price of Standard Bullion is not One fifth above our Coin that is to be raised, and then we

have Mr. Lowndes of our side too against its raising.” Locke thus set about trying to bear

out this point, first by considering Lowndes’ theory and then by taking the empirics head

on.115

Locke insisted that Lowndes’ theory was not wrong as much as it was critically

incomplete. Locke broadly agreed with Lowndes’ “axiom” “That whensoever the

Extrinsick Value of Silver in the Coin hath been, or shall be less than the price of Silver

in Bullion, the Coin hath been, and will be Melted down.”116 He followed Lowndes in

asserting differences in the relative values of silver as coin and as bullion could drive

melting, but he added several crucial nuances.117 First, Locke took the costs of conversion

into account. It was not free to convert metal between these two states, and these costs

influenced the range of values coin and bullion might take with respect to one another.118

Second, Locke recognized that the conversion of metal between these two states would

serve as a self-equilibrating mechanism. The costs of converting bullion into specie and

specie into bullion determined the lower and upper bounds (respectively) around parity

115 Locke, Further Considerations, 444. 116 Lowndes, Report, 68. 117 In fact, Locke was even more thorough than this. He also developed those cases where irregularities in the weight of coins prompt profiteers to cull out and melt down the overweight coins. Locke, Further Considerations, 431. 118 Here, Locke offered his clearest rendering of the workings of these conversion costs. Ibid., 446-47.

with the price of bullion. The price of bullion might fluctuate within that band depending

on the relative quantity of each (specie and bullion); but the price could never move

beyond those conversion (i.e. “specie”) points. Whenever the price of bullion rose above

parity plus the cost of melting, specie would be converted into bullion. Whenever the

price of bullion fell below parity minus the cost of minting, bullion would be minted into

coin. Conversion would thus regulate the supply of each, keeping the price within the

“specie band.”119

Locke agreed with Lowndes’ “maxim” concerning melting (barring the cost of

conversion), but pointed out “yet [that] serves not at all to his purpose of lessening the

Coin.” The reason for this was that, as a practical matter, the costs of conversion (in both

directions) were all low in England at that time. Melting, Locke insisted, would have

begun as soon as bullion had risen just a few percent above parity. Certainly, the specie

band could never be so broad so as to allow bullion to rise 20% above parity, as Lowndes

had suggested.120

Locke further bore out this case by appealing to simple hypothetical examples. He

queried whether stamping a disc of metal really could diminish the value of that disc

20%, as Lowndes suggested. Locke also queried whether changing the extrinsic

denomination of a coin would actually increase its exchange value. “Call [a mill’d Crown

Piece] 60 pence, and it will not [buy an ounce of Bullion.] The very next moment call it

75 pence, and it will.” Locke continued, “I am afraid no body can think change of

denomination has such a power.” Given the low costs of conversion, the exchange value

119 Ibid., 424-27. 120 Ibid.

of specie in England is closely tethered to the coins’ intrinsic value (i.e. to the exchange

value of bullion).121

Locke then turned to the actual empirics. Lowndes had famously referred to

“daily experience” in which “Nineteen Peny Weight and Three Tenths of a Peny Weight

in Sterling Silver (equal to the Weight of a Crown Piece) in England, doth, and will

Purchase more Coined Money than Five Shillings by Tale, (though the latter be delivered

bona fide in Unclipt Shillings, or in a good Bill).” Lowndes, in other words, clearly

asserted that the premium on bullion was on full-bodied money, not clipped coins.122

Locke categorically rejected Lowndes’ rendering of empirical reality. “I wish he

had told us where this daily experience he speaks of is to be found,” Locke wrote, “For I

dare say no body hath seen a Sum of unclip’d Shillings paid for Bullion any where this

twelve months, to go no further back.”123 The nature of the rise in price, Locke suggested,

was just the opposite of that which Lowndes suggested: it was a rise in the nominal price

only, and it was caused by the decline in the average weight of English coins. Silver was

not, as an empirical matter, 20% more valuable as bullion than as specie. The price of

bullion had risen 20% just as the price of most other goods and services had risen 20%

because the silver content in coins had decreased 20%. Individuals in the English market

were still paying close to parity for bullion; but, to get a pound of silver, they had to

combine more coins since there was less silver in each of them. Locke explained that,

“we have now no lawful Silver Money current among us: And therefore cannot talk nor

judge right, by our present uncertain clip’d Money, of the value and price of things, in

121 Ibid., 428. 122 Lowndes, Report, 77. 123 Locke, Further Considerations, 438.

reference to our lawful regular Coin, adjusted and kept to the unvarying Standard of the

Mint.”124

The empirical record also confirmed Locke’s theory of the determinants’ of coins

value. Because bullion actually did trade close to parity for specie, Locke insisted that his

model was accurate. The exchange value of coins was closely tethered to their intrinsic

value: “This instance therefore of the present price of Bullion, proves nothing but that the

quantity of Silver in Money governs the value of it, and not the denomination; as appears

when clip’d Money is brought to buy Bullion.”125

3. Increasing England’s Money Supply

Lowndes’ second and third reasons for “raising the coin” turned on increasing

England’s money supply. Lowndes argued that devaluation would both attract bullion to

the mint and increase the quantity of currency in the economy. Locke’s response to both

turned on the model he developed earlier.

Locke rejected the proposition that devaluation would drive more bullion to the

mint. Changing the extrinsic value of the coin would not increase its value. And silver

will only be minted if a positive balance of trade drives England’s exchange rate above

parity plus the cost of minting.126

Locke offered a more creative challenge to Lowndes’ suggestion that devaluation

would increase the quantity of currency in the economy. Locke restated his principle that

124 Ibid., 429-30. Feavearyear admits that Locke was right in his supposition that the price of all goods had risen in response to the decline in the weight of the shilling. He unfairly suggests, however, that Locke operated as if the old standard were still meaningful. Sir Albert Feavearyear, The Pound Sterling: A History of English Money, ed. E. Victor Morgan, Second ed. (Oxford: Clarendon Press, 1963), 146-49. The statement quoted here shows Locke’s keen awareness of the situation at hand. In fact, it appears that Lowndes based his calculations on nonexistent full-bodied coins. 125 Locke, Further Considerations, 429. 126 Ibid., 448-50.

silver was that for which men and women traded, not “denominations.” Locke wrote,

“For ‘tis Silver by its quantity, and not Denomination, that is the price of things, and

measure of Commerce; and ‘tis the weight of Silver in it, and not the name of the piece

that Men estimate Commodities by, and exchange them for.”127

Locke, however, went farther than this. He asked rhetorically: if increasing the

denomination of coins would increase England’s purchasing power, why only increase it

one-fifth? Of course Thomas Neale had also recommended increasing the extrinsic value

of silver; but, referring to Spain and Portugal, Neale had been careful to restrict the

increase to the intrinsic value of silver. Beyond that, Neale accepted that raising the

extrinsic value of silver would prove disastrous. Locke could—and did—only challenge

Neale on whether that upper limit was as high as Neale suggested.128

Lowndes, however, had gone further. As we saw, he suggested raising the

extrinsic value of silver slightly above that which he thought was the price of bullion in

the market. By doing so, Lowndes opened himself to the all-important question of where

the limit was. Why not raise the coin one hundred times? Lowndes provided no

framework for justifying his particular increase. In this case, Lowndes actually took a

step back from Neale’s proposal. Locke saw this, and seized on the weakness.129

Lowndes’ move here, however, faced Locke with a difficult decision about how

to structure his argument. Lowndes’ argument was so confused and contradictory here

that Locke scarcely knew where to begin. His suggestion that the coin be raised slightly

above the price of bullion lay in stark contradiction to his maxim that the exchange value

127 Ibid., 453. 128 See above. 129 Lowndes, Report, 83. Locke, Further Considerations, 453-58.

of a currency ought to be kept as close as possible to its intrinsic value.130 This

contradiction is even more glaring when Lowndes’ proposal is contrasted with the

admonition Neale made about attempts to raise the exchange value of a coin above its

intrinsic value. This, however, was just one of the several contradictions that Locke

uncovered in Lowndes’ Report. Locke, however, chose not to present it as such. Instead,

he sought to secure maximum rhetorical effect by taking each component on its terms.

Locke chose to hold Lowndes to the standard he espoused: the exchange value ought to

be kept close to the intrinsic value. And, on the other hand, Locke challenged Lowndes

for recommending raising the coin above its intrinsic value without specifying a rubric

for the optimum rate above the intrinsic value.

4. Appeals to History

Like Neale, Lowndes had attempted to justify his proposed devaluation by

pointing to England’s long reliance on an adjustable exchange rate standard. Neale had

suggested that adjustments were necessary to keep pace with the changing value of silver.

Locke, however, retorted that the irregularity of the timing, size, and direction of the

adjustments indicated that changes in the standard were motivated by other—more

selfish—concerns.

Still hoping to marshal this historical precedent, Lowndes, however, attempted to

avoid this criticism by issuing an alternative explanation for the virtues of an adjustable

exchange rate. Lowndes tied his explanation to his earlier justification for raising the coin

in the first place: policymakers had chosen “to Raise the Value of the Coin in its

130 Lowndes, Report, 83.

Extrinsick Denomination, from time to time, as any Exigence or Occasion required; and

more especially to Encourage the bringing of Bullion into the Realm to be Coined.”131

Locke’s assault on Lowndes was every bit as devastating as was his attack on

Neale. Locke bracketed his earlier rejection of this point as a theoretical possibility and

took the history on its own terms. Locke criticized Lowndes for merely referring to this

history without detailing “the Exigences and Occasions that produced the raising of the

Coin, and what effects it had.” Locke also wondered why alterations had occurred

relatively infrequently and why some raised while others lowered the standard. “If

therefore the raising the Denomination did in reality bring Silver into the Realm,” Locke

posited, “it cannot be thought that they would at any time sink the Denomination, which

by the Rule of contraries should be at least suspected to drive, or keep it out.” Once

again, the simplest explanation remained: the masters of the mint have so frequently

attempted to beguile policymakers into altering the standard because it benefits the mint

workers personally.132

5. Preventing Clipping

As we have seen, Locke and Lowndes had different notions about the causes and

consequences of coin clipping. Whereas Lowndes seemed to imply that clipping was

driven by the negative balance of trade, Locke suggested that the forces driving clipping

were independent of the relative price of bullion. If coins could be clipped without the

coins losing exchange value, they would be clipped. Both writers agreed that the

deterioration of England’s silver coins had inflated the price of gold guineas and driven

heavy coins out of circulation, all to the country’s detriment. Locke, however, attributed 131 Ibid., 56. 132 Locke, Further Considerations, 458-63.

an additional consequence to the rampant coin clipping: the deterioration of coins had

pushed up nominal prices on most goods and services, including bullion.133

This difference became the source of further disagreement about how to prevent

clipping. Lowndes insisted “It is difficult to Conceive, how any Design of Amending the

Clipt Moneys can be compassed, without Raising the Value of the Silver remaining in

them.” Locke’s reply was blunt. “‘Tis no Difficulty to conceive, that clip’d Money, being

not lawful Money, should be prohibited to pass for more than its Weight.” He continued,

“Next, it is no Difficulty to conceive, that clip’d Money, passing for no more than its

Weight, and so being in the state of Standard Bullion, which cannot be exported, should

be brought to the Mint, and there exchanged for weighty Money.” This was Locke’s tried

and true formulation that making coins go by weight would eliminate the profitability of

clipping.134

Locke expected that most of the domestic economy had already begun to value

light coins based solely on their weight. Many fixed arrangements, however, could not

adjust, which is why the state must maintain the standard at the rate at which those

relationships were negotiated. Perhaps more significant, however, was the acceptance by

the exchequer of coins by tale rather than weight. Locke insisted that by increasing the

demand for coins at this inflated rate, the exchequer buoyed the exchange value of coins

above their intrinsic value, providing incentives for further clipping. Locke’s prescription

was simple: “how Clipping can be stop’d, but by an immediate positive total Prohibition,

133 Lowndes’ fourth, eight, and ninth reasons all concern stopping clipped money. 134 Locke, Further Considerations, 466-67.

whereby all clip’d Money shall be forbid to pass in any Payment whatsoever, or to pass

for more than its weight, I would be glad to learn.”135

Locke was insistent that the state value coins based on their weight. His

insistence, however, was directed more at the current policy of the exchequer than the

proposal developed by Lowndes. Both the Scobell committee’s Fourteen Resolutions and

Lowndes’ Report proposed that light coins be accepted by the state based on their weight.

Locke was in accord with their plans. His frustration was that the exchequer had not yet

adopted this policy.

6. Locke on Compensation

The paper Locke drafted for Secretary Trumbull the previous September was

entirely focused on the issue of compensation. The Scobell committee and Lowndes had

both recommended that the public compensate the holders of clipped coins. Locke had

challenged both the practicality and justice of these plans.

Locke’s treatment of this issue in the Further Considerations, however, is

surprisingly mild. Covering just two pages of the 112-page text, Locke’s position was

almost agnostic. He attacked Lowndes’ assertion that the loss “ought to be born by the

Publick, and not by Particulars.”136 He replied that “A Tax given to make good the defect

of Silver in clip’d Money, will be paid by particulars; and so the loss will be born by

particular men.” Locke stated that he was “not for hindring those who have clip’d Money

from any recompence which can be provided and made them.” He merely cautioned that

“Most of those ways I have heard proposed to make Reparation to every particular man

for the clip’d Money shall be found in his hands, do so delay the remedy, if not entail 135 Ibid., 469-73. 136 Lowndes, Report, 119.

Clipping upon us, that I fear such a care of particulars in-dangers the whole.” Locke

explained that the crucial issue was preventing further clipping; and he was content to let

policymakers distribute the loss as they wished provided clipping were effectually

stopped.137

There might be several explanations for Locke’s comparatively slender, passive

treatment of the issue of compensation in the Further Considerations. He may have toned

down his criticism pursuant to fulfilling the restorers’ end of the bargain that Somers and

Montague had reached in the autumn. Despite Montague’s subsequent defection, Locke

may have remained committed to allowing compensation to pass. Alternatively,

Lowndes, by developing a plan to circulate paper credit in the interim, may have

successfully rebutted Locke’s criticism of the impracticality of the previous

compensation plans. That would explain Locke’s characterization that “most” of the

proposals seemed inadequate. Lastly, Locke may have simply chosen to focus his energy

on the more important matter of establishing his framework. By advocating a given

distributional outcome—particularly a progressive one—Locke only stood to lose

support. He may have strategically chosen to focus on positive issues to avoid muddying

the waters. Regardless, Locke’s decision not to debate the proposal for compensation is a

conspicuous innovation in his Further Considerations.

7. Locke’s Attacks on Lowndes’ Logic

Locke’s additional attacks turned on revealing the inconsistencies in Lowndes’

proposals and argument. He revealed both instances of self-contradiction and places

where Lowndes drew conclusions that did not follow from his premises.

137 Locke, Further Considerations, 476-77.

Locke’s first attack centered on Lowndes’ linkage between devaluation and the

balance of trade. Locke agreed with Lowndes that England’s negative balance of trade

had caused much of the melting that diminished the nation’s stock of currency. Lowndes

suggested, however, that raising the extrinsic value of England’s coins would somehow

stop melting and may even amend England’s negative balance of trade. Locke did not

understand how Lowndes could arrive at this conclusion based on his earlier maxims that

the balance of trade determines the quantity of currency in the economy and that coins

are valued (particularly by foreigners) by weight. He praised Lowndes’ hope that

England’s balance of trade could be turned positive but did not hesitate to highlight

Lowndes’ failure to connect that hope with his policy recommendation. Locke wrote,

“the Coining our Money in bigger or less pieces under the same or different

denominations, or on the present or proposed Foot, in it self neither increasing those

Debts, nor the Expences that make them, can neither augment nor diminish the

Exportation of our Money.”138

Locke’s critique here was based on his expectation that any adjustment of the

standard would be met by a corresponding adjustment of prices. This was true of both

foreign and domestic markets. Those locked into fixed, nominal relationships would gain

and lose, but “Commodities (as is natural) shall be raised in proportion to the lessening of

the Money.”139

As Locke pointed out, Lowndes contradicted himself on this crucial issue. In an

effort to assuage creditors who would lose 1/5th of the real value of their loans, Lowndes

insisted that the value of silver had risen, meaning that they could enjoy the same

138 Ibid., 435. 139 Ibid., 439-41.

purchasing power despite receiving less silver. Locke cited Lowndes, however, as saying

elsewhere that all prices had risen. This left open a significant question: did Lowndes

hold that the devalued currency would purchase more, less, or the same as a restored

currency? Unlike Lowndes, Locke was decisive: “Creditors, and Landlords, and all those

who are to receive Money upon Bargains made before the proposed change of our Coin,

will unavoidably lose Twenty per Cent.”140

Elsewhere, Locke faulted Lowndes for compromising on his principles. Lowndes

recognized the loss that would befall creditors from a devaluation but tried to assuage

them by suggesting that the new, devalued coins would “actually contain more real and

Intrinsick Value of Silver by a great deal, than is in the Currant Moneys now commonly

Applied to the Payment of the said Rents, Revenues and Debts.”141 Locke’s reply was

short but direct. Why is imposing a loss of twenty percent by law tolerable just because

the state failed to maintain the coinage when it is possible to restore the coin to its full

value?142

Locke’s response to Lowndes’ fifth and sixth reasons for his plan coin took a

similar form. Lowndes had argued that his scheme would be convenient since it retained

the familiar units of pounds, shillings, and pence. Locke’s reply was simple: how would

changing the established values between nominal units better obviate “Perplexity among

the common People” than simply retaining the coins’ traditional values?143

Locke’s most damning rhetorical moves were those that revealed Lowndes as

making arguments that actually cut against his proposals. The most salient example of

140 Ibid., 441-42. 141 Lowndes, Report, 81. 142 Locke, Further Considerations, 448. 143 Ibid., 463-65.

these is found in Lowndes’ argument that the “standard” of the coins ought to be

maintained. In his Report, Lowndes distinguished between the total weight of a coin and

its “standard,” meaning the ratio of precious metal to alloy. Lowndes insisted that the

“standard” be maintained but proposed changing the weight of the coins. Lowndes was

correct to suggest that differences in weight were more readily detected than differences

in the “standard.”144

Lowndes did himself no favors, however, when he argued in favor of maintaining

the standard. He gave several reasons for maintain the standard, including: (1) it was

long-established; (2) making such adjustments could necessitate further, costly

adjustments without achieving much good; (3) such adjustment would dishonor and

embarrass the present government; (4) debasement would upset fixed relationships; and

(5) adjusting the standard would create confusion and unnecessary adjustment costs.145

Locke was merciless in exploiting Lowndes’ misstep. Insisting that only the

quantity of silver in a coin mattered (and not its ratio to alloy), Locke argued that

Lowndes’ distinction between adjusting the weight and adjusting the “standard” was, as a

practical matter, a false one. Regardless, Locke pointed out that Lowndes’ reasons for

maintaining the “standard” just as strongly supported maintaining the weight of coins.146

LOCKE VERSUS LOWNDES

For modern scholars, the divergence between Locke and Lowndes is ultimately

reducible to a single point of disagreement. As Horsefield put it, Locke and Lowndes

“were at variance on the basic monetary question—what was the standard? For Locke it

144 Lowndes, Report, 13-14. 145 Ibid., 29-32. 146 Locke, Further Considerations, 467.

was at all times a fixed weight of silver. For Lowndes the standard was not a fixed one at

all; it was the current shilling, liable to change its weight if the currency deteriorated.”147

In other words, what determined the exchange value of a currency—its stamp or its

intrinsic content?

Locke is variously characterized as believing that the value of silver is constant at

all times and in all places, that the sovereign’s stamp conveys no added value to currency,

and that the price level would remain steady if the coins were adjusted to their previous

values. He is faulted for maintaining these “bullionist” presuppositions in the face of

contradictory evidence. He is blamed for recommending a deflationary monetary policy

and beggar-thy-neighbor trade policies.148

Lowndes, however, emerges as a visionary who recognized that coins circulate

based on their tale rather than their “commodity values.” He is lionized for suggesting

that the government break free from the shackles of a fixed exchange rate regime and

regulate the value of the currency directly so as to maintain a stable price level.149

Both sets of characterizations, however, turn on gross misunderstandings of these

theorists’ models, perceptions, and even their policy recommendations. In fact, Locke’s

model was more sophisticated, his understanding of reality was keener, and his

recommendations were far more “practical” than those of Lowndes.

147 J. Keith Horsefield, British Monetary Experiments, 1650-1710 (Cambridge, MA: Harvard University Press, 1960), 60. 148 Joyce Appleby, Economic Thought and Ideology in Seventeenth-Century England (Princeton: Princeton University Press, 1978), 202-03. Vickers blamed Locke for failing to anticipate the deflationary consequences of his policy proposals. Douglas Vickers, Studies in the Theory of Money, 1690-1776 (Philadelphia: Chilton Company, 1959), 70-71. 149 A number of scholars seem to read the arguments of another contemporary, Nicholas Barbon, into Lowndes. The thrust of Locke’s rebuttal to Lowndes is equally applicable to Barbon: the costs of physical conversion determine the upper and lower limits above and below the intrinsic value of the exchange value of a currency.

1. The Models

Both Locke and Lowndes insisted that the exchange value of currency was

tethered to its intrinsic value. Both agreed that whenever the exchange value of a

currency rose above or fell below particular (“specie”) points, conversion would occur.

Both relied on a version of what would later be called the “price-specie-flow”

mechanism: imbalances of trade cause exchange rate adjustments, which stimulates the

movement and conversion of currency in response to relative price differences.

The debate between Locke and Lowndes was not about whether coins go by

weight or by tale, as has generally been understood. Their debate centered on the location

of the “specie points” and the size the “specie band.” The question was whether the costs

of conversion in England at the time were such that it was possible for bullion to

appreciate 20% vis-à-vis specie. Lowndes assumed that they were; and Locke insisted

(correctly) that they were not.

Thus, if Locke were a “metallist,” Lowndes was a metallist as well. The

difference, however, was that Lowndes was a simple metallist while Locke was a

metallist with as rich an understanding as would ever be developed of specie bands and

the “price-specie-flow” mechanism.

2. Perceptions of Reality

Sargent and Velde have suggested that after 1688, England likely possessed the

three things required to implement the “standard formula” and implement a “modern”

monetary system. In 1661, the master of the mint Sir Henry Slingsby had proposed the

right theoretical prescription: the government ought to monopolize the production of

token coins and commit to converting them on demand. The mill press, introduced one

year later, would likely have given the government a technological advantage over

domestic counterfeiters. Finally, the Revolution of 1688 had brought a government that

could credibly commit not to abuse its monetary sovereignty.150

Sargent and Velde argue that Locke relied on a misguided understanding of

monetary theory and a poor understanding of contemporary circumstances. Despite this,

he was able to convince policymakers to abandon the wisdom of Slingby’s insight and

return instead to the “medieval” commodity money system in which the ratio of

denominations was dependent on the ratio of their intrinsic values. In their assessment,

Lowndes was a visionary who sadly failed to carry the day.151

There are, however, two problems with this characterization. First, as we have

seen, the debate between Locke and Lowndes was not about the virtue of token

currencies or about resolving “the big problem of small change.” Lowndes’ devaluation

was designed to devalue all of the denominations equally. Critically, Lowndes followed

Locke in insisting that the state’s policy ought to be designed to keep the coins’ exchange

values equal to their intrinsic values. Lowndes’ was no closer to the modern monetary

system described by Sargent and Velde than Locke.

Indeed, Lowndes was likely a good deal further from it, which broaches the

second problem with Sargent & Velde’s characterization. With a rich appreciation of the

workings of “specie bands” and “specie points,” Locke’s model was actually more

sophisticated than was that of William Lowndes. Locke recognized the value of using

token currency but feared that the want of an international norm respecting monetary

sovereignty would provoke foreign mints to steal England’s seigniorage and ultimately

150 Sargent and Velde, The Big Problem of Small Change, 268, 72. 151 Ibid., 285-90.

drive the tokens’ exchange values down to their intrinsic values. When seen in this light,

Locke’s analysis emerges closer to the ideal developed by Sargent and Velde than they

recognized.

Simply put, Locke’s analysis took better account of the circumstances in which he

and Lowndes wrote. He began with a richer model and better understood the forces at

work in the economy in England in the 1690s. Locke is simply not the disconnected,

abstract theorist he has so often been portrayed to be.

3. The Proposals

On the basis of their different models, the Locke and Lowndes writers came to

different conclusions about the best way to resolve the woes of clipping, the negative

balance of trade, and England’s slowing economy. Both, however, agreed that England’s

trade required active management, and that the balance of trade was a crucial determinant

of the stock of currency in the economy. It might be worth noting that despite advocating

devaluation and hoping to secure a positive balance of trade, William Lowndes did not

deploy the standard trade-centric argument for devaluation. In other words, he did not

advocate devaluation on the grounds that it would lower the price of exports and raise the

cost of imports.

Lowndes explicitly insisted that the exchange value of coins be kept equal to their

intrinsic value. Locke’s proposal here was more nuanced and more practical. He

appreciated the role an expanded “specie band” could play in at least lessening the

frequency with which coins were converted. While he did not go as far as JM Keynes

would 250 years later, Locke’s sophisticated discussion of the insulating effect of

widened specie bands opened the door for innovative proposals by later theorists.152

THE ADOPTION OF MERCANTILISM

The publication of the Further Considerations at the end of December 1695

catalyzed the adoption of the fixed exchange rate regime. Whereas the publication of

Lowndes’ Report in mid-November had begun to precipitate a slide in Parliament back

toward devaluation, Locke’s sound rebuttal of Lowndes reestablished the momentum in

favor maintaining the standard.

The House of Commons passed the Act for Remedying the Ill State of the Coin

on January 17, 1696. The bill received the Royal Assent January 21, 1696. The statute

largely followed the agreement worked out between Montague and Somers the previous

autumn. The currency would be recoined, but it would be recoined at the old standard.

Clipped coins would be adopted by tale for the payment of taxes until May 4 and for

loans to the government until June 24. Compensation would thus come by way of

accepting coins at full value for a limited period of time. A £1.2 million fund was

established by a new (progressive) tax on windows to make up the loss of silver in the

light coins.153

Thus, Locke emerged from the controversy largely victorious. Most importantly,

the government had embraced his framework. English policymakers would now draft

policies to maintain a fixed price between the pound and the price of silver (but later 152 John Maynard Keynes, A Treatise on Money, ed. The Royal Economic Society, 30 vols., vol. VI, The Collected Writings of John Maynard Keynes (Cambridge: St. Martin's Press, 1973), Ch 36, Pt III. 153 7 & 8 Wm. III, c. i. Ming-Hsun Li, The Great Recoinage of 1696 to 1699 (London: Weidenfeld and Nicolson, 1963), 116-19. Because the tax was based on the number of windows in each taxpayer’s house, it was a progressive tax, affecting the landed gentry (with their country mansions) the most heavily. This further undermines the contention of those like Appleby that the decision to restore the standard was secured as a handout to the upper classes.

gold). They would pursue monetary policy autonomy by managing England’s trade

towards the end of securing a positive balance of trade and monetary inflows.

The issue of compensation—of who would bear the cost of the clipping—was less

important to Locke. Locke was likely very disappointed, however, with the means the

government chose to affect this policy. By accepting all coins at face value for a limited

period of time, the government would have the worst of both worlds. Compensation

would only redound to those who paid considerable quantities of tax and who could

afford to lend money to the government. And, after the window closed, all clipped coins

would be demonetized. The policy left things ripe for additional clipping and for “money

jobbers” to prey on the weak. Locke likely thought that both the plans proposed by the

Scobell committee and by Lowndes were preferable. At least they recognized that the

government ought to value coins by their weight and not their tale.

As Locke well knew, however, the policies policymakers craft within a

framework are not always the fairest or the most efficient. The government, however, had

embraced mercantilism. And this was a major victory for which Locke had been working

tirelessly.

IMPLEMENTING MERCANTILISM

Locke and the College knew that the formal adoption of the mercantilist

framework was only a first step. The possibility that the government would yet revert to

adjusting the exchange rate at will remained. Additionally, it was one thing to embrace

the management of trade. It was quite another to effectively manage it, and thus

demonstrate the veracity of the framework. Locke and the College thus focused on

ensuring that the exchange rate actually remained fixed and managing England’s trade

and commerce.

1. Protecting the Fixed Exchange Rate

Despite that Parliament had joined the King and elected to maintain the standard,

the Treasury remained as committed to devaluation as ever. Defiant even in the face of

defeat, Chancellor Montague continued to work behind the scenes yet again to achieve

his policy goals. Unable to persuade policymakers to officially force down the value of

silver, Montague began to use his power over the Treasury to maintain gold at an

artificially inflated level. By overvaluing gold at the Treasury, the market price of silver

coins would drop, effectively pushing through a de facto devaluation of the English silver

coin.

By February of 1696, it was clear that Montague—whom Locke and the College

had begun to refer to as “the Monkey”—had maintained the official price of the guinea

(which was made of gold) at 28s. In March, the market price of guineas fell to 23s., but,

instead of lowering their official price, the Treasury refused to exchange guineas for less

than 26s. At the same time, a proposal was issued in Parliament, which may have been

backed by the Treasury, to “raise” the crown piece from 5s. to 6s.154

Locke and the College were well aware of this new threat to the standard. If

Montague were allowed to keep the silver price of guineas well above their market value,

he would make gold the de facto standard—and give himself the power to directly dictate

the purchasing power of English currency. In a letter to Clarke in February, Locke

recapitulated his position on bimetallism: “You may as well regulate the price of wheat as

154 Kelly, "Introduction," 33-34.

gold. Silver alone is our mony.” Locke insisted that either gold have no official price or

that, if there were one, it ought to remain below the market price, to preserve the value of

silver, on which the English economy turned.155

After more than a little consternation, Locke and the College prevailed once more.

In March, the King took a strong stand against the Treasury, and Parliament voted to

reduce guineas to 22s. All further talk of devaluation was finally put to rest in October of

1696 when the Commons resolved once more that the standard would be maintained.156

2. The Board of Trade

The acceptance of Locke’s framework brought to the fore the issue of England’s

negative balance of trade. By embracing the fixed exchange rate regime, English

policymakers knew they were relinquishing direct control over monetary policy and that

monetary policy autonomy could only be enjoyed by securing capital inflows. Thus, the

creation of a Board of Trade and Locke’s appointment to it were natural corollaries to the

adoption of a fixed exchange rate regime.

Even before the recoinage issue was fully resolved, the College began pressing

the King to reestablish a Board of Trade and to appoint Locke to it. Freke wrote to Locke

in early December with the good news: “I must tell you I believe this night a Comission

will be resolved on to settle a Councill of Trade in which you will be named together

with 5 or 6 other persons…and this my Lord K bid me intimate to you that you may

prepare for it in case he summon you up about it as he belives he shall next post.”157 A

few days later, the Commons voted to create such a board. While there was some

155 2018. Locke to Clarke, 17 Feb. 1696. Locke, Correspondence, v: 543-44. 156 Kelly, "Introduction," 32-34. 157 1976. John Freke and Edward Clarke to Locke, 10 December 1695. Locke, Correspondence, 477-79.

controversy over whether the King or Parliament would create the Board, it was certain

the Board would be created and that Locke would be on it.158 Within the week, Somers

and Trumbull were writing to Locke to congratulate him on his high-profile, important

appointment.159

There is no evidence that Locke sought this post. Indeed, he had proven dilatory

on the previous occasions the College pressed him to come to London to get more

directly involved in policymaking. The College—and Somers in particular—however,

did not seem to care whether Locke preferred to say in the country. And they certainly

did not ask him for his permission. Once again, Somers took matters into his own hands.

Somers wrote, “leaving it till the time wee meet to make Excuses for using your name

without your expresse consent I give you the trouble of this only to beg your coming to

Town may be as soon as your occasions will allow.” In Somers’ mind, Locke needed to

be on this Board; and he knew that, if appointed, Locke’s commitment to public service

would oblige him to fulfill the commitment.160

Locke did take up his position on the Board. Despite poor health and a growing

disdain for city life, Locke worked assiduously as a member of the Board. Naturally, he

continued his involvement with matters on the currency, but he also took seriously the

management of England’s trade and commerce. He helped to author the infamous

Navigation Acts—the very cornerstone of English mercantilism—and did his best to steer

England’s imperial expansion. Locke also authored legislation to reform England’s poor

law. Concerned as ever about unemployment, Locke issued radical proposals to set the

158 1978. John Freke and Edward Clarke to Locke, 14 December 1695. Ibid., 481-84. 159 1979. Sir John Somers (later Baron Somers) to Locke, [16 December 1695]. 1980. Sir William Trumbull to Locke, 17 [December] 1695. Ibid., 484-85. 160 1979. Sir John Somers (later Baron Somers) to Locke, [16 December 1695]. Ibid., 484.

poor to work, including the establishment of state-sponsored industrial workhouses,

draconian laws to press the unemployed into work, and training programs to help laborers

develop skills.

CONCLUSION

We have seen in considerable detail Locke’s relentless argumentation against the

devaluationists. Locke was able to vividly detail the missteps of his opponents, from

Neale’s self-contradictions and vagaries to Lowndes’ reliance on “daily experience” that,

in fact, ran counter to daily experience. Some arguments and analyses are clearly better

than others. Locke’s analyses were of this caliber. His contemporaries had little trouble

seeing both that his arguments were more forceful than those of his opponents and that

his model seemed to explain the world with greater accuracy. Clarke was not offering

idle flattery when he reported “that all that have read the [Some Considerations] are

cleerely of opinion, the Arguments therein are abundantly suffitient to distroy [Neale’s]

Byll and all future Attempts of the like Kind.”161 Thus, while Macaulay and Laslett did

not entirely bear out their claims, both Trinity College historians were correct to conclude

that Locke came to enjoy considerable sway over the opinions of his contemporaries.

By dint of his considerable intellectual labor, Locke was able to persuade English

policymakers to adopt the mercantilist framework. Their commitment to the fixed

exchange rate regime persisted for more than two centuries, with Locke’s lucid

arguments frequently invoked in its defense. Their belief in the power of active

management of trade and commerce to secure monetary policy autonomy persisted for

close to a century. This second component became Adam Smith’s principal target.

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