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A History of Money, Part 9

By Edited Aug 26, 2015 0 0

Over the hundred year period between 1540 to 1640, Europe endured a period of high inflation known as the "Price Revolution." One reason for the rapidly rising prices was the steady stream of gold and silver pouring in from enterprises in the New World, resulting in a large sum of money being spent on roughly the same amount of goods and services. Earlier surges in silver production in central Europe had also contributed to rising prices, as had increasing population growth. 

Food prices were notably affected. The labor shortages following the Black Death had raised the price of labor considerably, prompting landowners to convert large amounts of former farmland into pastureland for farming livestock. This resulted in less total land being used to produce food, causing food prices to rise. Urbanization and increasing trade throughout Europe also resulted in rising prices for a number of reasons. Many landowners in the 1500s began demanding that their tenants' rents be paid in cash rather than in farm produce. This initially made the landowners richer, but as other prices rose their rent payments (which were virtually impossible to raise) were worth less. Many of them began engaging in highly unpopular measures, such as enclosing pastureland that had formerly been common land for public use.

Tenants who could not pay increased rents were forced to leave their farms, increasing the number of impoverished peasants seeking employment in the cities and towns. Higher vagrancy also led to an increase in highway robbery, as well as more crime within the urban areas. Many of the poor had also suffered from Henry VIII's dissolution of the monasteries, since the open religious houses had once provided some forms of assistance to the destitute. The increasingly apparent problem of poverty among the lower classes eventually lead to the introduction of the first English "Poor Laws" at the turn of the century, providing a system for protestant parishes to assist the needy. 

Meanwhile, despite having obtained huge sums of money and wealth from the Dissolution of Monasteries, Henry VIII's extravagant foreign wars had made him desperate for even more revenue. After selling off much of the recently acquired assets, Henry also debased the English coinage by minting new coins with copper and other base metals. This produced new coins with the same face value, but a lower quantity of precious metals. The debasement undertaken by Henry VII became known as "The Great Debasement," and added to the ongoing Price Revolution.

Debasing currencies was a fairly common practice among monarchs (and still is among modern financial authorities), who could effectively impose a covert tax on the masses without having to consult institutions like Parliament. Since the Crown held the exclusive right to coin money, the debasing of the coinage allowed Henry to earn a profit through the process known as "seigniorage," in which the face value of the new coin exceeds the cost of the metals used, as well as the production cost. The difference is the seigniorage, or profit. By the time the Great Debasement ended in the early 1550s, the value of the silver content had fallen to 25% of the face value of the coin.

The famed astronomer Copernicus had written a treatise in 1526 on the debasement of coinage, arguing that the value of a coin should reflect its precious metal content, and he had also described the economic process known as "Gresham's Law," which was brought into play once again during the Great Debasement. (The process was also described even earlier by Oresme, in his medieval treatise on money.) As the law predicted, issuing debased coins resulted in people hoarding the coins with higher precious metal content and using the inferior coins to pay expenses and debts, so that the superior coinage was increasingly driven out of circulation.

Another highly controversial decision by Henry VIII was his legalization of interest-based money lending, which was formerly allowed following the passage of the 1545 "Acte Agaynst Usurie," with the provision that the interest rate charged be no higher than ten percent per annum. Henry died several years after this action, and after the interim reign of Queen Mary I, Henry's daughter Elizabeth I became Queen of England in 1558. 

Elizabeth was advised by the noted merchant and financier Thomas Gresham, after whom Gresham's Law was named (despite its earlier formulation by Oresme and Copernicus). Gresham had previously been an agent of Henry VIII and other English royals. He was noted for his use of ingenious (though arguably unscrupulous) tactics to restore the value of the pound sterling and assist Edward VI in discharging his debts, as well as his skillful money and arms smuggling operations in support of Queen Mary. 

Gresham urged Queen Elizabeth to retire the debased currency and institute a new currency whose face value corresponded to its gold and silver content. Following his advice, the Crown began by outlawing the foreign exportation of good coinage, setting deadlines for the termination of debased coins. After the designated dates had passed, the debased coins were recalled and melted down, separating the base metal from the precious metals, and a new sound currency was issued in their place. The recoinage was completed by 1561.

Another of Gresham's notable contributions to the history of money and commerce in England was the foundation of the Royal Exchange in 1566. Gresham offered to construct the exchange at his own expense provided that the city alderman arrange for the purchase of the needed land. The City of London Corporation and the Worshipful Company of Mercers provided the site, and Gresham had the exchange built based on the design of an exchange in Antwerp. The Royal Exchange became an important center of commerce and foreign exchange trading in London, and Gresham himself received a large rental income from leasing its upper floors to merchants. After his death, Gresham's will arranged for the foundation of Gresham College, the first institution of higher learning in London, financed by the rents from the Royal Exchange.

A History of Money will continue in Part X, examining the rise of Mercantilism that motivated the conquest and colonization of the New World, many European wars, and also gave rise to the first joint-stock companies that preceded the modern corporation...

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