Money and modernization in early modern England

Abstract

Classic accounts of the English industrial revolution present a long period of stagnation followed by a fast take-off. However, recent findings of slow but steady per capita economic growth suggest that this is a historically inaccurate portrait of early modern England. This growth pattern was in part driven by specialization and structural change accompanied by an increase in market participation at both the intensive and extensive levels. These, I argue, were supported by the gradual increase in money supply made possible by the importation of precious metals from America. They enabled a substantial increase in the monetization and liquidity levels of the economy, hence decreasing transaction costs, increasing market thickness, changing the relative incentive for participating in the market and allowing agglomeration economies to arise. By making trade with Asia possible, precious metals also induced demand for new desirable goods, which in turn encouraged market participation. Finally, the increased monetization and market participation made tax collection easier. This helped the government to build up fiscal capacity and as a consequence to provide for public goods. The structural change and increased market participation that ensued paved the way for modernization.

American Precious Metals and Their Consequences for Early Modern Europe

“…This evidence, which came to light only recently, is in line with the views of historians who argue that "there can be no doubt that Spanish bullion did come into the [English] mint, and did so in such quantity that ... [at times] it formed the core of mint supply" (Challis 1978, p. 195; see also Mayhew 1999, p. 63). Indeed, for the English case, for which data on the coin stock is available, there is a close correlation between availability of precious metals and higher mint output, as one would expect (Palma 2018b(Palma , 2019.…”

“…But, at least in Western Europe and most of the time, even larger denominations circulated by tale, so the distinction between commodity money and fiat was never binary, since there was always an element of credibility to the value of currency. Paper money (usually backed by reserves hence not fiat) and other credit instruments which for functional purposes classify as money appeared gradually, but for most countries did not become an important part of the money supply until rather late (Palma 2018b).…”

“…In premodern societies, where potential political instability and hence the specter of fiscal dominance were always present, coin and credit were complements, not substitutes. This was for the following reasons (Palma 2018b). First, personal credit instruments had to be based on private knowledge with respect to the creditworthiness of others and so they often did not circulate.…”

“…Some second-order receivers got a large share, in particular England which received a disproportionate share of the silver in the decades after the 1630s (Palma 2018b), plus two-thirds of the Portuguese-Brazilian gold extracted over the eighteenth century (Fisher 1971). The fact that England got a large share may have had to do with country-specific characteristics, but was also the result of exogenous geopolitical matters, as detailed in Palma (2018b). These also applied to the Netherlands (including the territories of modern Belgium), which were the receivers of large quantity of Spanish military payments, and also performed well during much of the early modern period.…”

“…The increased availability of precious metals "allowed for a substantial increase in the monetization and liquidity levels of the economy decreasing transaction costs, increasing market thickness, changing the relative incentive for participating in the market, and allowing agglomeration economies to arise" (Palma 2018b). It additionally made trade with Asia possible on a much greater scale, and contributed to high fiscal capacity levels by making tax collection easier.…”