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Intellectuals in Policymaking
James Ashley MorrisonMiddlebury College
November 14, 2008
John Locke and the Creation of Britain’s Fixed Exchange Rate Regime in 1696
The Talk Today
I. The Puzzle: From Flexible to Fixed Exchange Rates in 1696
II. Explaining Foreign Economic PolicyIII. My Explanation: Strength of John Locke’s
ArgumentIV. Concluding Observations
2
The Talk Today
I. The Puzzle: From Flexible to Fixed Exchange Rates in 1696
II. Explaining Foreign Economic PolicyIII. My Explanation: Strength of John Locke’s
ArgumentIV. Concluding Observations
3
Monetary Crisis: Clipped & Worn Coins• In 17th C England, most money was specie—
minted, precious metal coins• Edges of coins clipped; clippings sold for profit• In 1694, coins’ market diverged from nominal
value; clipped coins traded at discount
4Charles II Shillings, Minted 1664.
Puzzle ConclusionArgumentExplanations
Resolving the Crisis
• Agreement on technological issue: Massive recoinage
• Unresolved policy questions:1. What should be the standard of the new coins:
de jure “official standard” or the de facto market rate?• Should the exchange rate be high or low?
2. Should the standard be fixed or adjustable?3. Who should shoulder the costs?
7Puzzle ConclusionArgumentExplanations
The Treasury’s Orthodox Plan: Adjustable Exchange Rates
• Argument– Market already values shilling at 20% less than
rated value– English Policy has always been to devalue the
standard when the coinage deteriorates
• Prescription– Remint Coins at new, de facto standard– Devalue in the future as necessary– Compensate to holders of clipped coins
8Puzzle ConclusionArgumentExplanations
Locke’s Revolutionary Proposal: Fixed Exchange Rates• Prescription– Maintain standard; adopt fixed ER regime– Value light coins by weight: costs imposed on holders
of clipped coins• Argument– Market has not fully adjusted to “new” value of
shilling: contracts and sticky components remain at the “old” standard
– State is obliged to protect property rights vested in money as a store of value
– State must commit to maintaining the standard even in adversity
9Puzzle ConclusionArgumentExplanations
The Decision: England Adopts “Specie” Standard
• Exchange Rate Value: Maintain standard, return to parity
• Exchange Rate Regime: Fixed• Distribution• Tax on elites• Compensation to holders of clipped coins
(speculators; poor) 1696 marked England’s adoption of the
international specie standard—first silver, then gold—which continued until 1931
10Puzzle ConclusionArgumentExplanations
The Talk Today
I. The Puzzle: From Flexible to Fixed Exchange Rates in 1696
II. Explaining Foreign Economic PolicyIII. My Explanation: Strength of John Locke’s
ArgumentIV. Concluding Observations
11
Foreign Policy Ingredients
• We know that interests and positive ideas are combined in and refracted through institutions to create policy
12Puzzle CaseArgumentIntroduction
InstitutionsInstitutionsPositive
IdeasPositive
Ideas
InterestsInterestsPolicyPolicy
But what is the relationship between ideas and interests?
Puzzle ConclusionArgumentExplanations
Explanation 1: Ideas served Interests of Elites
• General Theory:– Shepsle (1985): Ideas are “the hooks on which
politicians hang their objectives and by which they further their interests”
– Schonhardt-Bailey (2006): Ideas provide “political and ideological cover” for the pursuit of interests
• Application to 1696– Macpherson (1967); Appleby (1978); Kleer (2004)– Locke’s ideas were adopted because they served
moneyed and landed interests13
Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
Problems with Interest-Dominant Story
• Economy was in crisis; focus was on “growing the pie” rather than how to “slice it”
• Exchange rate regime proposals coupled with redistributive policies to affect desired distribution– Compensation to holders of clipped coins– Progressive taxes– Unemployment benefits
• Key issue was uncertainty, not distribution14
Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
Explanation 2: Ideas Define Routes to Goals
• General Theory:– Increasing complexity makes policymakers depend
on “epistemic communities” (P. Haas, 1992) to provide them with “road maps” (Goldstein & Keohane, 1993)
• Application to 1696– Macaulay (1885); CR Fay (1932); Laslett (1957)– Locke deferred to because of his “towering
reputation as a thinker”
15Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
Problems with Epistemic Communities Story
• Consensus within epistemic community rejected change– Battle between entrenched orthodoxy and the
radical John Locke
• Crisis is insufficient– Precedents for dealing with crisis within
established framework: devalue and remint
16Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
An Alternative Approach
1. Distinguish Types of Interests– Aggregate: “Grow the pie”– Narrow: How to “slice the pie”
2. Explain Ascendance of Particular Intellectuals and Ideas
17Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
The Talk Today
I. The Puzzle: From Flexible to Fixed Exchange Rates in 1696
II. Explaining Foreign Economic PolicyIII. My Explanation: Strength of John Locke’s
ArgumentIV. Concluding Observations
18
Strength of Locke’s Argument
• Treated different types of interests separately– General interest: Exchange rate regime– Narrow interests: Loss from Clipped Coins; Costs of
Repair
• Gave ground on the distributive issues• Strong intellectual argument for fixed ER regime
as best path to serving general interest– Theory: Greater internal consistency– Empirics: Better explanation of observed phenomena
19Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
Locke’s Political IQ Enabled Strong Delivery
• Relied on sympathetic policymakers to serve as conduits– Respond to objections– Clarify points– Meet policymakers’ needs
• Responded adeptly to twists and turns in political process – E.g. Forum-shopping by opponents
20Puzzle CaseArgumentIntroductionPuzzle ConclusionArgumentExplanations
The Talk Today
I. The Puzzle: From Flexible to Fixed Exchange Rates in 1696
II. Explaining Foreign Economic PolicyIII. My Explanation: Strength of John Locke’s
ArgumentIV. Concluding Observations
21
Conclusions• Theory/Approach• Distinguish types of interests
• Broad Interests: How to “grow the pie”• Narrow Interests: How to “slice the pie”
• Evaluate and explain ascendancy of certain ideas
• Quality of argumentation matters• Empirical• Origins of silver/gold standard go back to 1696• Same debate again and again: 1819, 1925, 1931• John Locke deserved repute!
22ConclusionPuzzleIntroductionPuzzle ArgumentExplanations