John Locke vs. the Mercantilists and Inflationists
[Excerpted from An Austrian Perspective on the History of Economic Thought, vol. 1, Economic Thought Before Adam Smith. An MP3 audio file of this article, read by Jeff Riggenbach, is available for download.]
From the early decades of the 17th century, English mercantilists were bitter at the superior prosperity and economic growth enjoyed by the Dutch. Observing that the rate of interest was lower in Holland than in England, they chose to leap to the causal analysis that the cause of the superior Dutch prosperity was Holland's low rate of interest, and that therefore it was the task of the English government to force the maximum rate of interest down until the interest rate was lower than in Holland.
The first prominent mercantilist tract calling for lowering the interest rate was that of the country gentleman Sir Thomas Culpeper, in his brief Tract Against the High Rate of Usury (1621). Culpeper declared that Dutch prosperity was caused by their low rate of interest, that the high English interest rate crippled trade, and therefore that the government should force maximum interest rates down to outcompete the Dutch. Culpeper's pamphlet played a role in Parliament's lowering the maximum usury rate from 10 to 8 percent. Culpeper's tract was reprinted several times, and Parliament duly pushed the maximum rate in later years down to 8 and then 6 percent.
Each time, however, resistance increased, especially as government intervention forced down the maximum rate repeatedly. Finally, in 1668, the mercantilists tried for their most important conquest: a lowering of the maximum interest rate from 6 to 4 percent, which would presumably result in rates below the Dutch. As a propaganda accompaniment to this bill, Culpeper's son, Sir Thomas Culpeper, in 1668 reprinted his father's tract, along with one of his own, whose title says it all: A Discourse showing the many Advantages which will accrue to this Kingdom by the Abatement of Usury together with the Absolute Necessity of Reducing Interest of Money to the lowest Rate it bears in other Countreys.
Culpeper Senior's pamphlet was published along with the influential contribution by the already eminent merchant and man of affairs, Josiah Child, in his first pamphlet, Brief Observations concerning trade, and interest of money. Child was a prominent member of the king's council of trade, established in 1668 to advise him on economic matters. Child treated lowering the maximum rate of interest to 4 percent as virtually a panacea for all economic ills. A lower rate of interest would vivify trade and raise the price of land; it would even cure drunkenness.
When the House of Lords' committee held hearings on the interest-lowering bill during 1668–69, it decided to hold testimony from members of the king's council of trade, of whom Josiah Child was a central figure. But another important figure was a very different member of the council of trade, and also a member of the Lords' committee, the great Lord Ashley, John Locke's new and powerful patron. As a classical liberal, Ashley opposed the bill, and at his behest, Locke wrote his first work on economic matters, the influential though as-yet-unpublished manuscript, "Some of the Consequences that are like to follow upon Lessening of Interest to Four Percent" (1668). Locke made clear in this early work his profound insight and thoroughgoing commitment to a free-market economy, as well as his later structure of property-rights theory.
Locke displayed straightaway his skill at polemics; the essay was basically a critique of Child's influential work. First, Locke cut through the holistic rhetoric; of course, he pointed out, the borrowing merchant will be happy to pay only 4 percent interest; but this gain to the borrower is not a gain for the national or general good, since the lender loses by the same amount. Not only would a forced lowering of interest be at best redistributive, but, Locke added, the measure would restrict the supply of savings and credit, thereby making the economy worse off. It would be better, he concluded, if the legal rate of interest were set at the "natural rate," that is the free-market rate, "which the present scarcity [of funds] makes it naturally at." In short, the best interest rate is the free-market, or the "natural" interest rate, set by the workings of free man under natural law, i.e., the rate determined by the supply of and demand for money loans at any given time.
Whether or not Locke or Ashley proved decisive, the House of Lords finally killed the 4 percent bill in 1669. Three years later, Ashley became chancellor of the Exchequer as Earl Shaftesbury, and the following year Locke became secretary to the council for trade and plantations, which replaced the old council of trade. At the end of 1674, however, Shaftesbury was fired, the council of trade and plantations was disbanded, and Locke followed his mentor into political opposition, revolutionary intrigues, and exile in Holland.
John Locke finally returned to London with the overthrow of the Stuarts and the Revolution of 1688, returning in triumph on the same ship as Queen Mary. Locke returned to England to find the old East India crowd up to their old tricks. England was in dire financial straits, Charles II having ruined public credit with his Stop of the Exchequer, and the East India people had once again introduced a bill in 1690 for the compulsory lowering of interest to 4 percent. At the same time, Sir Josiah Child was brought back to expand his pamphlet into a Discourse About Trade (1690), an anonymous book reprinted three years later as A New Discourse of Trade, with Child's name blazoned on the title page. It was the New Discourse that was to make such an excessive impression on 18th-century thinkers. In addition to the renewed arguments for lower interest, the Discourse and the New Discourse added more apologetics for the East India line on trade and on monopolies.
In response, John Locke's new political patron, now that Shaftesbury had died, Sir John Somers, MP, apparently asked Locke to expand his 1668 paper to refute Child's and other proponents of the 4 percent bill. Locke responded the following year with his expanded book, Some Considerations of the Consequences of the Lowering of Interest and Raising the Value of Money (1692) which brought Locke's previously unpublished arguments into public debate. Locke's work may have been influential in the 4 percent bill once again being killed in the House of Lords.
The latter part of Locke's Considerations was devoted to the great recoinage controversy, into which England had been plunged since 1690. In that year, England's basic money stock of silver coins had deteriorated so far, due to erosion and coin-clipping, and the contrast of these inferior "hammered" coins to the newer, uneroded and unclipped "milled" coins was so great, that Gresham's law began to operate intensely. People either circulated the overvalued eroded coins and hoarded the better ones, or else passed the poor coins at their lower weight rather than at their face value. By 1690 the older hammered coins had lost approximately one-third of their worth compared to their face value.
It was increasingly clear that the Mint had to offer recoinage into the new superior coins. But at what rate? Mercantilists, who tended to be inflationist, clamoured for debasement, that is, recoinage at the lighter weight, devaluating silver coin and increasing the supply of money. In the meanwhile, the monetary problem was aggravated by a burst of bank credit inflation created by the new Bank of England, founded in 1694 to inflate the money supply and finance the government's deficit. As the coinage problem came to a head in that same year, William Lowndes (1652–1724), secretary of the treasury and the government's main monetary expert, issued a "Report on the Amendment of Silver Coin" in 1695, calling for accepting the extant debasement and for officially debasing the coinage by 25 percent, lightening the currency name by a 25 percent lower weight of silver.
In his Considerations, Locke had denounced debasement as deceitful and illusionist: what determined the real value of a coin, he declared, was the amount of silver in the coin, and not the name granted to it by the authorities. Debasement, Locke warned in his magnificently hard-money discussion, is illusory and inflationist: if coins, for example, are devalued by one-twentieth, "when men go to market to buy any other commodities with their new, but lighter money, they will find 20s of their new money will buy no more than 19 would before." Debasement merely dilutes the real value, the purchasing power, of each currency unit.
Threatened by the Lowndes report, Locke's patron, John Somers, who had been made Lord Keeper of the Great Seal in a new Whig ministry in 1694, asked Locke to rebut Lowndes's position before the Privy Council. Locke published his rebuttal later in the year 1695, Further Considerations Concerning Raising the Value of Money. This publication was so well received that it went into three editions within a year. Locke superbly put his finger on the supposed function of the Mint: to maintain the currency as purely a definition, or standard of weight of silver; any debasement, any change of standards, would be as arbitrary, fraudulent, and unjust as the government's changing the definition of a foot or a yard. Locke put it dramatically: "one may as rationally hope to lengthen a foot by dividing it into fifteen parts instead of twelve, and calling them inches."
Furthermore, government, the supported guarantor of contracts, thereby leads in contract-breaking:
The reason why it should not be changed is this: because the public authority is guarantee for the performance of all legal contracts. But men are absolved from the performance of their legal contracts, if the quantity of silver under settled and legal denominations be altered … the landlord here and creditor are each defrauded of twenty percent of what they contracted for and is their due.
One of Locke's opponents both on coinage and on interest was the prominent builder, fire-insurance magnate and land-bank projector, Nicholas Barbon (1637–98). Barbon, son of the fanatic London Anabaptist preacher and leather merchant and MP Praisegod Barbon, studied medicine and became an MD in Holland, moving to London and going into business in the early 1660s. In the same year as Child's Discourse About Trade, Barbon, who had just been elected to Parliament, published the similarly titled Discourse of Trade (1690), again timed to push for the 4 percent interest bill in Parliament. An inveterate debtor and projector, Barbon of course would have liked to push down his interest costs.
In 1696, Barbon returned to the lists in a bitter attack on Locke's Further Considerations on the coinage. Arguing against Locke's market commodity, or "metallist," view of money, Barbon, urging devaluation of silver, countered with the nominalist and statist view that money is not the market commodity but whatever government says it is. Wrote Barbon: "Money is the instrument and measure of commerce and not silver. It is the instrument of commerce from the authority of that government where it is coined."
Fortunately, Locke's view triumphed, and the recoinage was decided and carried out in 1696 on Lockean lines: the integrity of the weight of the silver denomination of currency was preserved. In the same year, Locke became the dominant commissioner of the newly constituted board of trade. Locke was appointed by his champion Sir John Somers, who had become chief minister from 1697 to 1700. When the Somers regime fell in 1700, Locke was ousted from the board of trade, to retire until his death four years later. The Lockean recoinage was assisted by Locke's old friend, the great physicist Sir Isaac Newton (1642–1727) who, while still a professor of mathematics at Cambridge from 1669 on, also became warden of the Mint in 1696, and rose to master of the Mint three years later, continuing in that post until his death in 1727. Newton agreed with Locke's hard-money views of recoinage.
Barbon and Locke set the trend for two contrasting strands in 18th-century monetary thought: Locke, the Protestant Scholastic, was essentially in the hard-money, metallist, anti-inflationist tradition of the Scholastics; Barbon, on the other hand, helped set the tone for the inflationist schemers and projectors of the next century.
 Actually, Praisegod's real Christian name was highly unwieldy, even if more pious. He was named "Unless-Jesus-Christ-Had-Died-For-Thee-Thou-Hadst-Been-Damned" Barbon.
 In Barbon's A Discourse Concerning Coining the New Money Lighter, In Answer to Mr. Lock's Considerations… (1696). See Letwin, William Letwin, The Origins of Scientific Economics (Garden City, NY: Doubleday, 1965), note 2, pp. 78–9.
 Despite the hostility to Locke's point of view among modern inflationist and Keynesian historians, it is clear from Letwin's account, ibid., note 2, pp. 69–77, 260–70, that the calamitous price contraction that inflationists would have expected from the monetary contraction of the Lockean recoinage did not take place.
On Locke's clearly Scholastic-influenced view of the just price as the market price, as expressed in his book Venditio (1695), see Karen I. Vaughn, John Locke: Economist and Social Scientist (Chicago: University of Chicago Press, 1980), pp. 123–31.