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Clipping, a form of debasement, was related to the intrinsic value of the precious metal coins, and the fact that they were easily recognized and named. Clipping was the word for cutting small amounts from coins as well as filing metal from the edge of the coin, making it slightly smaller. The clippers relied on the fact that after clipping, that is reducing the intrinsic value of the silver coins, they would continue to be recognized and used for payments. They were quite right and the practice of clipping was widespread.

The practice of clipping was frowned upon but not stopped for many years. Good coins were clipped and put back into circulation leading to all in circulation becoming "bad", i.e. the currency falling well below the legal standard. An example of the legal standard was the reign of William the Conqueror. The main mint was established in the Tower of London (hence the name "the Tower pound" used at the time), and the state adopted for silver coins a standard fineness of 925 parts of pure silver in 1 000, and this came to be known as "sterling silver" and "the ancient and right standard of England". Clipping was one of the reasons for the re-minting of coins and their debasement by the state.

example of clipped coin

Box 4: example of clipped coin


Before we consider the principal method of money creation that took place in England in the coin money stage, debasement of coinage, we need to consider the origin of the pound and its parts. Under the Carolingian monetary system referred to earlier, the state had sole control of the mint. The basis of the coinage of this system was the pound, which replaced the Roman currency. An interesting fact here is that the pound became the unit of account, but it did not have a physical form. This is an important fact when one considers that bank deposit money also does not have a physical form.

Even though the pound did not then exist in physical form, it was declared by the state to be equivalent to a certain fixed number of the coins that did exist, called pence (half-pence also existed). The pence were minted of silver of a standard purity and were of a particular size and weight and stamped with images on both sides. Old duffer readers will recall financial accounts in pounds, shillings and pence. What was the shilling? It also did not exist initially; like the pound it corresponded to a certain number of pence.

The silver pence (called pennies) had a weight of 2 grams of silver, and half-pence a weight of 1 gram of silver. A shilling (as already noted it initially also did not exist in physical form) corresponded to 12 pence. The pound corresponded to 240 pence; therefore it had a weight of 480 grams of silver. Clearly, the pound was also equivalent to 20 shillings (20 x 12 pence = 240 pence x 2 grams = 480 grams), and to 480 half-pennies each of which weighed 1 gram.

Minted by the state, which granted to itself the sole right of coinage, the currency was declared legal tender; Pirenne informs: "Extremely severe penalties were promulgated against counterfeiters and those who refused to receive the legal deniers [= old name for pence] in payment were punished."50 From this expert opinion it is quite clear that counterfeiting was considered a far more severe crime (as indicated above, counterfeiters were boiled alive at one stage) than not accepting the currency. The latter punishment was probably unnecessary because the coins possessed all the qualities of ideal money as expounded by Jevons: cognoscibility, utility, portability, divisibility, indestructibility, stability of value, and homogeneity.

As noted earlier, the most significant feature of coin money that led to significant new money creation much later was "cognoscibility", i.e. the fact that the coins were recognizable and named. The quality "stability of value" (remember the "store of value" role of money?) of the coins is related to its intrinsic value (= value of the precious metal); this is what was compromised in later times, i.e. the coins were debased.

This brings us to debasement of the coinage by the state. There is evidence of state attempts to maintain the standard of coins. For example, when the parts of the pound (pence) were first issued by Charles the Great "... he took the greatest pains to keep up the standard of weight and alloy of its coins." Similarly, Morgan informs that after William the Conqueror's reign (when a new standard for coinage was set as shown above), "[f]rom time to time kings departed from this standard, but such conduct was always viewed with disfavour, and pressure of public opinion forced a return to the standard which was regarded as 'ancient and right'."

However, this was not to be the case for long. Newlyn sets the scene: as soon as ".. .coins [are] accepted by count rather than by weight the possibility emerges of a divergence between the bullion value of the coin and its purchasing power as a unit of currency. This possibility opened up the opportunity of 'debasing the coinage' - an opportunity of which, historically, kings have not been slow to take advantage."

After the break-up of the Carolingian Empire in the second half of the ninth century, which led to the formation of separate states, the Charlemagne pound was replaced by other currencies in some of the new territories. The pound remained in others and as we know still remains as the currency of the UK. According to Pirenne, amid the confusion and anarchy after the break-up, the state (kings, feudal princes, and in some cases churches) ".were not slow to usurp the right of coinage and in the absence of any effective control, their weight and fineness became more and more debased."

How was the debasing of coinage effected? At times (sometimes frequently) the state would withdraw all coinage from circulation, and mint new coins with the same names, but they were smaller and of less weight (in some cases) but always debased with alloy (i.e. less silver and more base metal). There was a "profit" of course - in the form of additional coins of the same name - and these were for the account of (i.e. kept by) the state, to be spent later. The "profit" was given a name later: seigniorage56, a word that applies today.

Serious debasement of coin money took place on a number of occasions in history. For example, by the end of the fifteenth century, 480 silver pennies were coined from a pound of silver instead of 240 pennies previously. Thus, the weight of the penny was reduced (from 2 grams to 1 gram). During the reigns of Henry VIII and Edward VI debasement of the currency took place in the form of reducing the silver content of the coins (i.e. their fineness). From 1542 Henry VIII began reducing the fineness of the coins and this continued through the reign of Edward VI - from 915 parts per 1 000 to 250 parts per 1 000 of silver. This serious debasement of the coinage (= money creation) caused a period of high inflation. Morgan estimated that between 1540 and 1560 prices doubled.

The debasement of the coinage continued in the reign of Elizabeth I. Harrod informs us that " the time of Queen Elizabeth 1 the pound [currency] contained only about 4 oz of silver"

It will by now be evident that this was possible because of the reality of money being accepted by count and not weight, which is associated with the naming of money (penny, shilling, etc) and the concept of legal tender. As we saw earlier when governments designate the names of coin money as legal tender only these may be used for the tender of payment, irrespective of the intrinsic value of the coins. This is why, today, the coins used for payments have almost zero intrinsic value. They may be referred to as token coins (defined as coins of which the value of metal is less than their purchasing power).

The debasement of the coins was the early equivalent money creation "out of thin air" as occurs today. As we know, bank notes have zero intrinsic value, and yet they are used for payments with ease; they are also token money, to which we turn in the next section.

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