Just how familiar are Mark Carney and the rest of the Bank of England’s Monetary Policy Committee with Tudor history – and, in particular, the reign of King Henry VIII? The thought originally occurred to me one day this summer as I was wandering with the family around Hampton Court Palace but it has only grown stronger in the months since.
For well-documented reasons that ranged from martial to marital, Henry had a hugely expensive lifestyle, which my Hampton Court visit taught me he funded in a variety of ways. As monarch, he was obviously very wealthy in his own right and he was also not shy about taxing his subjects or, on occasion, taking their homes – Hampton Court had originally belonged to his chief minister Cardinal Thomas Wolsey.
As the numbers of wars and wives stacked up, however, Henry needed even more cash and so he instituted a policy of ‘monetary debasement’. A trick pioneered by the Roman Empire, this involves scaling back the amount of precious metal used in each coin of the realm so the difference between its face value and what it is actually worth – the state’s profit or ‘seigniorage’ – becomes ever greater.
With Henry, this debasement began gradually enough but eventually span out of control. In March 1542, for example, the value of the silver content of each English coin averaged about three-quarters of its face value. By March 1545, the value of the silver content had fallen to half a coin’s face value and then, 12 months later, to just a third.
Indeed, the process was so malign – or perhaps just so seductively easy for those in charge – that it continued past Henry’s death in 1547, with the silver content finally hitting a low of a quarter in 1551, four years into the brief reign of his son Edward VI. It was only in 1561, during the reign of Elizabeth I, that the problem was solved – the debased currency being ‘retired’ and replaced with coins with the appropriate silver content.
This was, however, easier said than done. As a currency becomes increasingly debased, people instinctively start to hoard the older, higher-value coins and use the debased ones to pay off debts. In addition, the higher-value currency will tend to find its way abroad as the real exchange rate changes to reflect the debasement. This idea of ‘bad currency driving out good currency’ is known as Gresham’s Law.
And Henry VIII’s later currency was very bad – the layer of silver covering the coins being so thin it would rub off the design of the king’s face at the highest part, thereby winning him the nickname ‘Old Coppernose’. To retire her father’s debased currency, the government of Elizabeth I had to enact laws banning the outflow of good coins to foreign markets and ending the legal-tender status of the bad coins beyond a certain date.
All very interesting, you may be thinking, but why the history lesson? Here on The Value Perspective, what particularly caught our eye about Henry’s strategy was the way he had to go to ever greater lengths – dropping the coins’ silver content down from 75% to 50%, then 33% and ultimately 25% – for ever diminishing returns. To achieve the same effect each time, then, Old Coppernose had to do much more.
Another important point to bear in mind about debasement is that it rarely happens in isolation. Once one country is seen to be profiting from the approach, others are naturally going to have a go and so the middle of the 16th Century saw what would today be called ‘competitive devaluation’ taking place across Europe – at which point, the history lesson takes on a more modern resonance.
The process of debasement may these days be known as quantitative easing but, just as with reducing the amount of silver in a coin, it is all too easy to start and very, very hard to stop. With the glossy new fivers now entering circulation, our current monarch need not worry about any new nickname but the story does beg the question as to who will show her namesake’s strength of character and end the debasement. And when?