All Commentary
Monday, August 1, 1960

Henry VII Revisited

This article consists of excerpts reprinted from a 16-page review of currency depreciation and banking practices appearing under this same title in the January 1960 issue of Business Re­view published by the Federal Reserve Bank of Philadelphia, Philadelphia 1, Pa. Copies of that issue are available upon request to the bank’s Department of Research.

The year was 1544. A chilly au­tumn wind chased swirling fingers of fog through the stalls of Bil­lingsgate Square, the central fish-market of London. The old fish­monger smiled with satisfaction at the silver shilling he clutched in his hand. In its place just a moment before had been a string of plump, fresh herring. He had made the morning’s first sale while the shadows of night still lingered.

The raised edges of the shilling somehow made the old fishmonger feel warm and secure. What a pleasant sensation he felt as he ran his oily thumb over the em­bossed profile of Henry VIII. He tilted his head for a closer look at the coin in the first grey streaks of dawn.

It was then that the smile faded from his lips. For the first time he felt the chill of the morning. What once had been a splendid silver coin was now worn and blotched. Through a thin coating of silver, Henry VIII’s nose protruded in a dull relief of copper.

“Blimey,” he thought, “Old Cop­per Nose ‘as been at it again.”

“Old Copper Nose,” as King Henry was called, had indeed been at it again. Between 1526 and 1546, the silver content of the English shilling was reduced nearly 70 per cent. Henry melted the coins that his tax collectors brought into his mint and added base metal such as copper, there-by creating additional money to finance his spending programs….

Today, as in 1544, when money is created faster than goods can be produced, prices tend to rise. Here merge the past, the present, and the future. Whether the year is 1544, 1944, or 2044, prices rise.

Whether the government creating money is royal or republican, dictatorial or democratic, prices rise. Whether the money is created by melting and adding base metals or by turning on printing presses, prices rise. Whether the money is used to build castles, wage wars, construct dams, or speed economic growth, prices rise…

Sovereign Control over Money

For hundreds and hundreds of years the power to create money was solely the prerogative of kings, princes, and emperors. And this power came in very handy, for the sovereign was continually be­set by problems of fi­nance. He had to fi­nance wars, to pay the expenses of the court, and to meet the many other costs of state affairs.

The Silver Content Of Rome’s Currency And Why It Waned


Reign began A.D.)


Per- cent


Reason for debasing




Debauched the currency to extend Rome’s boundaries




Rimmed the empire with elaborate and expensive mili-

tary fortifications


Antoninus Pius


Great humanist but fiscal failure: lowered taxes; gave

to the poor; debased the currency


Marcus Aurelius


Fought costly defensive wars on all sides


Septimius Severus


Came to power and stayed there by lavishing expen-

sive favors on the legions




Pursued       pleasure with    all his  might and    all     Rome’s





Scourged empire brutally for personal gain




Financed the civil and foreign wars of a disintegrating





Battled contenders for the royal robes under the aegis

of a crumbling currency


Claudius Victorinus


Held invaders in check with strength of sword and

the melting pot of the imperial mint

Sources: Humphrey Michell, “The Edict of Diocletian,” Canadian Journal of Economics and Political Science, February 1947. Encyclopaedia Britannica.

To meet these expenses, the sovereign devised a number of plans. He taxed, borrowed, em­barked on elaborate programs of military conquest, operated state-owned industries for profit, and when revenues from these other sources were insufficient to cover expenses, he debased the currency. Indeed, for every king who main­tained monetary stability there were countless others who adul­terated the currency in as many different ways.

Like Henry VIII, some melted the coin of the realm and added base metals. This method was a favorite not only of medieval European monarchs, but also of the Roman emperors who came before them….

Money Creation during War

In one sense, wars in the twentieth century have been no dif­ferent from wars in the past. That sense: the supply of money and the extent of the sovereign’s role in money creation still tend to vary directly with external pres­sure on national borders.

So it was in Rome during the barbarian invasions; in France and England in the 100 Years’ War; in America during the Revolutionary War when the phrase “not worth a continental” described anything of little value, including the Continental currency created to finance the fighting. It was true in America during the Civil War when “greenbacks” de­preciated substantially as a result of overissue; in France during the Revolution when the assignats be­came bits of worthless paper; and in Germany during and after World War I, when at one time 300 paper mills worked at top speed to deliver note paper to the Reichsbank while 150 printing companies kept 2,000 note presses running night and day solely to print Reichsbank notes. In short, when borders are threatened the State reasserts its monetary pre­rogative.

And World War II was no ex­ception. It is estimated that total military expenditures of the com­batant nations surpassed $1 tril­lion, over 6 times those of World War I. Remembering that $1 bil­lion is a thousand million, and $1 trillion a thousand billion, one can readily realize the astronomical size of these expenditures. As in the past, this spending was fi­nanced in the established pattern: partly by taxing, partly by selling bonds to patriotic citizens, and partly by creating money.

Some of the belligerents created money just as Germany did during World War I, by turning on the printing presses. Others used a more sophisticated technique which became possible with de­velopment of modern deposit bank­ing and a broad securities market.

In A Modern Deposit Banking System Money Is Created In A Round-About Fashion…

1. When the central banker decides that the money supply should be increased… he buys government securities from a govern­ment securities dealer.

2. He enters his new as­set—the securities—in his books and credits the re­serve account of the com­mercial bank where the government securities dealer keeps his checking account, thus creating new bank reserves.

3. This commercial bank in turn enters the reserves in its books as an asset and credits the securities deal­er’s checking account.

4. With additional re­serves, the bank can make new loans. In lending, the bank simply credits the bor­rower’s checking account, thereby creating new de­mand deposit money.

A simplified illustration of the sophisticated system would run something like this. The central bank would buy government se­curities in the open market, pay­ing for them with newly created bank reserves as shown in the il­lustration (p. 25). The banking sys­tem could use these reserves to buy new issues of government se­curities. Some of these new securi­ties could be sold to the central bank, new reserves created, and so the cycle would begin anew..

Currency Debasement Still Spells Inflation

It has been said that history re­peats itself—that men do not learn from the errors of the past. Today, it is possible that we have reached an important juncture in the historical cycle of money crea­tion. This juncture involves a fundamental choice. Will we con­tinue to insulate the function of money creation from the day-to-day financial pressures that be­seech the sovereign? Or will we follow the lead of Henry VIII—Old Copper Nose revisited? These are the problems, and the temptations, of money creation.



Ideas onLiberty

Legal Plunder

I do not think that illegal plunder, such as theft or swindling—which the penal code defines, anticipates, and punishes—can be called socialism. It is not this kind of plunder that systematically threatens the foundations of society.

The war against illegal plunder has been fought since the begin­ning of the world. The law itself conducts this war, and it is my wish and opinion that the law should always maintain this attitude toward plunder.

But it does not always do this. Sometimes the law defends plunder and participates in it. Thus the beneficiaries are spared the shame, danger, and scruple which their acts would otherwise in­volve. Sometimes the law places the whole apparatus of judges, police, prisons, and gendarmes at the service of the plunderers, and treats the victim—when he defends himself—as a criminal. In short, there is a legal plunder.


The Law