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Intellectuals in Policymaking James Ashley Morrison Middlebury College November 14, 2008 John Locke and the Creation of Britain’s Fixed Exchange Rate Regime in 1696

Intellectuals in Policymaking James Ashley Morrison Middlebury College November 14, 2008 John Locke and the Creation of Britain’s Fixed Exchange Rate Regime

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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

Deterioration of the Coinage

5Source: PH Kelly, 1991.

Puzzle ConclusionArgumentExplanations

The Scarcity of Coin

6

Source: PH Kelly, 1991.

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