The inexorable lessons of currency debasement

Readers of the Telegraph blogs may have been intrigued by the title of a recent essay by Jeremy Warner, ‘Currency debasement never works — just ask Henry VIII’, only to discover - or fail to discover - any reference to King Henry at all. No doubt the Telegraph’s clientele is very discriminating and thus, without any necessary prompting from Mr Warner, knows all about the Tudor dynasty and the alternating ups-and-downs of sixteenth-century English finance. Alas, I am not one of that number; though, in my own defence, will plead a colonial education for my unpardonable ignorance. So, off to Wikipedia to redress my sins.

The ‘Great Debasement’ (1542-51), I was to learn, occurred during the reigns of Henry and his son, Edward VI, when the currency of the realm was debased in order to pay for foreign wars:

‘In March 1542 the value of the silver content of each English coin averaged 75 percent of each coin’s face value. By March 1545 the value of the silver content had fallen to 50 percent, and by March 1546 to 33.33 percent. The value of each coin in silver content fell to only 25 percent of face value by the time the debasement had run its course in 1551.’

‘Eventually the layer of silver had become so thin that it would wear off revealing the copper below,’ another online source notes. ‘This happened particularly on Henry VIII’s nose on his image on the coin, giving him the nickname “Old Coppernose”.’  Inflation ensued and people lost confidence in the coinage, resulting in an enervated economy. Now up to speed on the historical dimension, back to the Telegraph.

Warner’s column is in response to an essay by Adair Turner, former FSA chairman and current peer, on the massive debt in the public and private sectors that presents two immediate problems. First, debt repayment ‘depresses growth’, while ‘offsetting fiscal austerity with ultra-easy monetary policies risks fuelling a resurgence of private leverage in advanced economies’; second, debt is so high that its transgressors  - in both sectors - will never be able to repay. As one answer, Lord Turner proposes that ‘some combination of debt restructuring and permanent debt monetization (quantitative easing that is never reversed) will in some countries be unavoidable and appropriate.’ Warner replies:

‘Debt sharing [where debtor and creditor alike take a hit] via the route of currency debasement is never a good idea, if only because it becomes addictive. Once governments start it, they find it very hard to stop, so it ends up merely perpetuating and increasing the over leverage it is meant to address. Markets pretty soon work out what’s going on and hammer the perpetrators accordingly. Currency crisis, high inflation and high interest rates become inevitable.’

Ergo Henry and his ‘Great Debasement’ as a warning. Like-minded monarchists may cringe along with me that the Crown is associated with such money manipulations, but we can take comfort courtesy of Ludwig von Mises, who variously throughout his work denoted proponents of sound currency as ‘economic royalists’, who opposed the malinvestment and endured the market equilibration that inflationary cycles wrought.

History records that the Great Debasement was the brainchild of Henry’s chancellor, Cardinal Wolsey (which saddens this admirer no end), reminding me of a wonderful passage from the Shakespeare play: ‘Had I but serv’d my God with half the zeal / I serv’d my king, he would not in mine age / Have left me naked to mine enemies’ (Henry VIII, III.ii.534-36).

In his currency legerdemain, Wolsey abandoned the orderly ‘natural laws’ of economics in favour of the fiat demands of his insatiable monarch; his fall echoed the debasement he pursued - decline and inevitable loss of fortune. As Warner writes, ‘in the end there is no such thing as a free lunch, or any alternative to the hard slog of debt repayment and renegotiation.’

Hardly fair to blame Wolsey. He fell from power in 1529 and died a year later.

Someone has sharp eyes! While out walking — and after the post went on-line — I realised that my dates didn’t overlap and that Wolsey wasn’t directly responsible for the Great Debasement. Rather, his own involvement with manipulation dates from 1526, when an ‘impure’ gold coin replaced the silver standard.

Many historians credit Wolsey with several of Henry VIII’s excesses: e.g., the cardinal’s reverence for monarchy and his attempt to reform monastic abuses were later taken up by Henry, respectively, in naming himself head of the Church in England and in the dissolution of the monasteries.

In his biography of the cardinal, Mandell Creighton wrote, ‘Henry learned Wolsey’s methods’ — with the master often exceeding them and putting them to uses perhaps disapproved by the servant. In this way may Wolsey bear some responsibility for the spirit which underlay the Great Debasement.

That must have been very bad to have such a thin layer of silver until the extent of the copper undearneath it could be revealed upon a coin's daily wear and tear. I didn't know that they used to rely on the value of the coins to determine the amount of silver that will be embedded on every single one of them. However, I think the coins today are not produced according to that physical specifications anymore which is good in an extent. The coins are now made just nicely and not too thin and too thick anyway.

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