About The Blog

Debate at the intersection of business, technology and culture in the world of digital money, both commercial and government, a blog born from the Digital Money Forum in London and sponsored by Consult Hyperion



  • Add to
Technorati Favorites


  • Creative Commons

    Attribution Non-Commercial Share Alike

    This work is licensed under a Creative Commons Attribution - Noncommercial - Share Alike 2.0 UK: England & Wales License.

    Please note that by replying in this Forum you agree to license your comments in the same way. Your comments may be edited and used but will always be attributed.

« Raising the Bar | Main | Scheitern durch technik »

The only thing you learn from the study of history

By Dave Birch posted Jan 6 2010 at 9:00 PM

[Dave Birch] Henry VIII is quite famous to many people, primarily because of his ground-breaking approach to marriage and his pioneering work on interfaith relationships, but he's famous to me because of his economic incompetence. Like a great many dictators throughout history, he mistakenly thought that the laws of supply and demand could be suspended in the case of money. Therefore, he abused the perogative of seigniorage.

Henry VIII, had been adulterating the English shilling, the basic coin of the realm, by replacing 40 percent of the silver in the coin with base metals — a clever way, so he thought, to increase the government’s income without raising taxes. It was, in short, a sneaky devaluation device; hopefully the people wouldn’t notice. Of course it was discovered and this “bad money” drove out the pure silver shillings then in circulation.

[From "Bad Money Drives Out Good"]

Henry VIII's "Great Debasement" began in 1542 and, as is so often the case on this sceptr'd isle, was initially undertaken for a good cause (war against France, of which I regard Elizabeth II as the rightful queen of, because Elizabeth I was forced to sign the Treaty of Cateau-Cambrésis under duress) but was economically illiterate and ultimately led to a collapse in commerce which was the real source of England's wealth.

Henry VIII told the Mint to add six ounces of copper to every 10 ounces of sterling silver it used to make pennies. A few months later, the amount of copper was increased to seven ounces per pound, then to ten, then to twelve and finally under Edward VI, to thirteen.

[From Box 4 from The Ecology of Money: Devaluations in Britain through the Ages]

The outcome was predictable: the "good" money disappeared from circulation and the "bad" money took over in the marketplace -- an episode that led Forum hero Sir Thomas Gresham to formulate his eponymous law -- thereby damaging commerce for many years until Good Queen Bess called in the debased coinage, melted it down, separated out the copper and reissued a pure silver coinage. This moved England into a new monetary age, with gold and silver in circulation. Unfortunately, since England couldn't control the price of gold or silver, this wasn't a particularly stable arrangement and led to a severe lack of silver coinage, which was needed for everyday transactions. England had an industrial revolution, but it didn't have industrial money.

Towards the end of the 17th century money the government gave up passing pointless laws (such as the 1660 act forbidding the export of bullion) and instead of asking investment bankers or celebrities for advice in the modern fashion, they decided to ask someone clever instead. Thus was the smartest man that ever lived, Sir Isaac Newton, then the Lucasian Professor or Mathematics at the University of Cambridge, appointed the Master of the Mint. Amongst other changes, he moved Britain on to a gold standard.

[Newton] advised that silver should be dropped and fixed a price for gold, to which the value of all other coins was to be related. His advice was taken and as Wilsher states: "Trade and society flourished as never before".

[From Box 4 from The Ecology of Money: Devaluations in Britain through the Ages]

A lesson for us all. Incidentally, Thomas Levenson from MIT, author of the utterly excellent "Newton and the Counterfeiter" will be giving one of the keynote talks at this year's Digital Money Forum in London on 10th-11th March, looking at innovation as a response to crisis. If you'd like to come along and listen to him, remember that the Forum will be limited to 100 places as always and book yourself an early-bird place before the end of January.

I'm sure that one point that Tom will make is that people seem to learn very little from history. This is true, for example, over in the Democratic People's Republic of North Korea, under the stewardship of the Korean Worker's Party and the divine tutelage of Kim Jong-il, the Dear Leader. The Dear Leader is famous for being the greatest golfer in history, but is also a top-notch economist.

Chaos reportedly erupted in North Korea on Tuesday after the government of Kim Jong Il revalued the country's currency, sharply restricting the amount of old bills that could be traded for new and wiping out personal savings.

[From North Korea revalues currency, destroying personal savings - washingtonpost.com]

The North Korean Won (KRW) has been revalued. As an aside, it's also been redesigned. If you're curious (!), the new currency has all sorts of symbolism associated with the banknotes and a spot of "kremlinology" is needed to decipher them.

The 50, 10 and 5 won bills show the people of North Korea. We notice that the Party (50 won) is valued higher than the military (10 won) and that the farmers are missing altogether; the 5 won bill honors the technical intelligentsia. Does this signal a return to the times when the Party was firmly in charge and the military was its instrument? No matter how we interpret this, there is certainly a lot of food for thought.

[From Symbolism of the New North Korean Currency: Heralding a Change of Power in North Korea?]

When the North Korean people are not eating tree bark to stay alive, they must surely have noticed that the revaluation of the unit of account hasn't made the slightest difference to the supply and demand for goods and services. It has made a difference to the market, though. The revaluation and exchange limits triggered panic, particularly among market traders with substantial hoards of old North Korean won -- much of which has apparently become worthless. Gresham's Law took immediate effect: the KRW disappeared from the marketplace and people began to use whatever hard currencies they could get their hands on. But the Dear Leader has now launched an attack on this as well.

Pyongyang banned foreigners as well as locals from directly using dollars or euros in mid-December. In the past, it had been possible to pay with foreign currencies at hotels or markets. Authorities have reportedly been urging people on nationwide TV to immediately report anybody using dollars directly. Rumor has it that the exchange value of dollars, which soared immediately after the currency reform, has now stabilized to some extent there.

[From Global Times - North Korea bans use of foreign currency]

It isn't only dictators who don't understand how money works, and I'm certainly not trying to imply that money cannot be debased under a democratic government as it was under Henry VIII, but I do want to draw attention to the point that the marketplace needs a circulating medium of exchange. No means of exchange, no market. In 17th century England, that was considered a bad thing. In 21st century North Korea, it's one of the Dear Leader's main goals.

These opinions are my own (I think) and presented solely in my capacity as an interested member of the general public [posted with ecto]


TrackBack URL for this entry:

Listed below are links to weblogs that reference The only thing you learn from the study of history:


Very impressive work. I liked your work. You did very well posting. Good luck with your work. ;)


The comments to this entry are closed.