How Fiscal Policy Affects Prices: Britain's First Experience with Paper Money

Abstract

International audienceFor almost 25 years between 1797 and 1821, the gold standard in Britain was suspended in order to finance the Napoleonic Wars, creating a paper pound or a fiat currency. Suspension was accompanied by substantial inflation and the accumulation of public debt. By identifying shifts in the spot exchange rate of paper pounds for gold, I document how contemporaries' expectations of how debt would be stabilized in the future shaped the pound's internal value. Thus, it is argued that during the “paper pound” period, fiscal prospects provided a third mechanism, beyond monetary and real factors, affecting the price level

Not an ordinary bank but a great engine of state: The Bank of England and the British economy, 1694–1844

“…Since the Bank's credibility, and hence capacity to have its notes accepted, in turn depended on the government's fiscal capacity, these links can be represented as another channel of endogeneity between the Bank's actions, its credibility, and the formation of fiscal capacity (Capie 2004). Nevertheless, it is naïve to suppose that monetary expansion was driven by fiscal dominance, because the Bank's actions were not ultimately controlled by the government, unlike suggested by Antipa (2016). 17 It is true that it might have been difficult for the Bank to deny credit to the government during particular military emergencies, but it was also often in the interest of the Bank to comply with suggestions by the Treasury, especially when Charter renewal approached.…”

Surge, retraction and prices: the performance of fiat coins in Sweden, c. 1715–1720

“…In many cases, paper money issues increased inflation and reduced the value of the currency on international capital markets (Bordo and White 1991; Sumner 1993; White 1995, pp. 234–41; Antipa 2016). However, some researchers have disputed the connection between volume and price by pointing out diverging developments, especially in North America in the eighteenth century.…”

“…In the eighteenth century, states usually issued paper money as a temporary measure in order to address pressing fiscal challenges. Postwar periods therefore turned into phases of restoring monetary stability by removing paper notes from circulation and returning to metallic coinage (Engdahl and Ögren 2008; Pieper 2012, p. 184; Antipa 2016). However, as François Velde has pointed out, deflationary monetary measures did not automatically lead to reductions in prices.…”