Most people suppose, without having thought much about it, that money must be provided by government. That belief comes in for a sound thrashing in University of Georgia professor George Selgin’s book Good Money, which tells the story of Britain’s experience with private coinage during the Industrial Revolution. Selgin’s research shows that the government had failed to produce enough money of small denominations, how private enterprise solved the problem, and finally how the government reasserted its monopoly to put an end to the nation’s free-market money episode.
Good Money has an intriguing origin. While reading a book by nineteenth-century British economist William Stanley Jevons, Selgin came across a passage taking issue with Herbert Spencer’s argument that the production of money could be entrusted to the free market. Jevons wrote that in his view “there is nothing less fit to be left to the action of competition than money,” adding that the nation’s experience with privately minted coins in the late eighteenth century “amply confirmed” his opinion. Selgin wanted to know just what that experience was and investigated: “What I discovered amazed me, not the least because, instead of confirming Jevons’s position, it did just the opposite.”
Among other great changes it brought, the Industrial Revolution caused a huge increase in the demand for money. In pre-industrial England relatively few workers were paid money wages. As industrialization increased, however, more workers left feudal agriculture for manufacturing employment, and business owners had to pay them in money. But because there was a shortage of small coins, factory owners had to devote a lot of time and effort to coming up with the money necessary to meet their payrolls. Furthermore, much of the money they were able to acquire was questionable because many coins were badly worn, had been clipped (some of the metal had been sheared away), or were counterfeit.
The Royal Mint was indifferent. Its job was to coin money—mostly gold—for the upper classes. It wasn’t averse to silver, but no silver had been coined for decades before 1775. The culprit was that favorite of economics professors, Gresham’s Law. The government’s official rate for silver was well below the market price elsewhere in Europe, so silver flowed out of the country. Selgin here performs a valuable service in explaining the true meaning of Gresham’s Law. It is not that “bad money drives out good money,” but rather that when government artificially overvalues one kind of money relative to another, people will spend the overvalued and hoard or export the undervalued.
What about copper coins for small transactions? The Royal Mint hadn’t bothered coining copper for years. Small change was regarded as “unworthy” of the highbrow mint since copper was merely money for the common folk.
In 1761 copper was discovered on Anglesey Island, off the coast of Wales, and within a few years over a thousand miners were employed there. Owner Thomas Williams faced the problem discussed above—how to come up with enough coins to pay his men.
Williams approached the government with a plan to collaborate in the production of new copper coins, but it wasn’t interested. So he began producing his own coins. They were exquisite, but the key thing was that they were accepted as payment by the workers, then in trade by merchants. Soon the coins were circulating on the mainland. Williams heightened demand for his product by stamping on them that they were promises to pay and setting up redemption offices in London and Liverpool. People’s confidence in this new money rapidly grew.
So great was his success in coinage that Williams soon opened another mint and employed experts to improve efficiency. Private enterprise brought the high technology of the day to the business of making money while the government continued using old-fashioned methods.
Eventually other coin producers entered the market, offering quite a variety of money. It wasn’t uniform, but businesses and workers adapted without difficulty. Almost 200 years before F. A. Hayek’s advocacy of choice in currency, the British had it.
The story, alas, has an unhappy ending. By 1812 Royal Mint officials wanted their monopoly back and Parliament obliged in 1813. The economy was thrown into a tailspin, yet the government dithered for three years before starting to supply more small coinage itself.
Good Money is a thought-provoking book. It’s also beautifully written and embellished with several glossy pages of illustrations of the coins, people, and buildings central to the story. Whether you use good money or bad, buy this wonderful book.