From Correspondence with Chris Waller

By Chris Waller
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The origin of the pound can be traced back to King Offa, he of dyke fame, who introduced the silver penny, of which there were 240 to a pound of silver; in doing this he was copying the recent introduction of a currency system by Charlemagne. Offa's silver penny rapidly spread throughout what was later to become England.

Offa's coins were made from 100 % silver (or as near as metal refining then permitted), but in the reign of Henry II, actually in 1158, the percentage of silver was reduced to 92.5 percent by adding another metal; this was done in order to make the coins more durable since pure silver is rather soft.

This was known as sterling silver. English coinage was exclusively silver until 1344 when the gold 'noble' was introduced but silver remained the legal basis of coinage until 1816.

In the reign of Henry IV, the penny was reduced in weight to 15 grains of silver, with a further reduction to 12 grains in 1464. So, even then there was an evident need to reduce the weight of silver in the coinage to make it go further.

During the reigns of Henry VIII and Edward VI, the silver coinage was further debased, to the point where by 1544, a silver coinage was issued containing just one third silver and two thirds copper.

In 1552, a new silver coinage was introduced, struck in sterling silver.

However, the penny's weight was reduced to 8 grains, meaning that 1 troy pound of sterling silver produced 720 pennies.

It was this that prompted Gresham to warn Elizabeth I about the state of the currency she had inherited and to state his now famous law, "Bad money drives out good."

This silver standard was known as the "60-shilling standard" and lasted until 1601.

It was not until 1694 that the Bank of England was formed and began issuing bank notes and based their value on gold, though it was not until 1816 that the gold standard was officially adopted. This enabled world trade to develop since all major currencies were referred to gold and thus exchange rates could be determined.

So, after a brief history of sterling, where does that leave us?

We go back to David Hume's statement that "wealth consists in goods, not money", but that still leaves us with the problem of having something which represents wealth, that is, it can stand in the stead of real, physical wealth. Gold and silver were chosen because they were relatively rare and their production and distribution could be controlled by the king or whoever and thus their worth validated. Even then, gold and silver were only useful as currencies as long as everybody agreed they were. A currency is what people accept as such; in prisons cigarettes are currency.

But, as the legend of King Midas reminds us, we can neither eat gold, nor drink it, nor live in it and it will not cure disease. Any currency can only have value while there is something real it can buy.

There is another function of money and that is that it permits loans to be granted in anticipation of future returns. If we go back to my 'bean economy' we see that it can only expand slowly since any increase in production has to be founded on current production.

If I wish to expand production I must forgo consumption now in order to leave more beans for planting next year.

Thus, if we take the example of the massive railway boom of the 1840s-1860s, this could not have happened without the issuing of credit.

Steel had to be produced to lay track and build locomotives and rolling-stock; earthworks had to be completed and ballast laid, signalling installed and so forth, long before a single train could run and begin earning revenue. Once the trains began to run and revenues began to roll in, then further track building could be paid for from those revenues. One of the reasons that economic growth was so slow in past millenia is that it relied on very small increments in production compounding over decades and centuries.

We have, to all intents and purposes, now reached the cashless society.

We are paid by a few bytes whizzing along a telephone cable; we buy things using a plastic card with a chip in it and confirm our right to use that card by knowing the PIN number. This is, in many respects, a more secure money.

Money is now no more than bytes, either resident on a bank's hard-drives or chasing along wires and fibre-optic cables. Our medieval ancestors would be mystified and perhaps horrified that we pay for goods without using coin stamped with the king's head.

So, to answer part of your question, I think we have already reached the stage where money has metamorphosed from ounces of silver to a few electrons or magnetic domains.

Digital money cannot be debased in the same way that silver coinage could be but there is an aspect of Gresham's Law at work here.

We cannot know if the money that someone has is the result of morally desirable activity or whether it is the result of morally dubious activity such as drug dealing.

However, it is evident that in some parts of the world an economy underpinned by cocaine or heroin has subverted the mainstream economy, confirming Gresham's assertion that "bad money drives out good".

There is no doubt in my mind that tighter regulation is needed in light of the current financial travails afflicting the world, but even these could only limit the worst excesses of world finance.

I would argue that there is clearly a need for the reintroduction of the liquidity ratios and reserve requirements in order to try to reconnect money to real wealth, but I suspect that any such move would be fought tooth and nail by the banks.

To draw another analogy, we have a situation here much like the medieval church in which a priesthood, using an arcane language accessible only to its own, wields enormous power.

I would argue that the current financial priesthood needs to be challenged and dissolved just as Henry VIII dissolved the priesthood of his day and destroyed its citadels.

Smith argued vehemently against concentrations of power in an economy, noting that whenever merchants came together they soon conspired against the customers' interests in seeking to set up cartels and monopolies, yet today the very medium of commerce is in the hands of a tiny clique.

Over the years that I have studied philosophy I have come to the conclusion that fundamental to all of it is philosophy of mind, that is, first we need to understand the thing that does the thinking.

In economics, I believe that we need first and foremost to reach a deep understanding of money.

Chris Waller - Permission granted to freely distribute this article for non-commercial purposes if attributed to Chris Waller, unedited and copied in full, including this notice.

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