21 September 2009

QE 1601

Quantitative easing is described in wikipedia and analysed in blogs such as cynicus economicus: it is a process of creating money ex nihilo (out of nothing).

So, why consider the process in 1601?

Hans Pawlisch explains in, Sir John Davies and the conquest of Ireland, how in 1601, the English government decided to debase the Irish coinage from 9 oz of fine silver to 3 oz of fine silver. The government didn't withdraw the old sterling from circulation and failed to persuade people to accept the coin at face value.



This sort of thing has happened before and since but the reason that this particular instance is of importance is because it led to the case of mixed money.

In this case an Irish merchant purchased wares to the value of £ 100 from an English merchant. When time came for payment, the Irish merchant tendered base (3 oz fine) money; the English merchant refused to accept this money and sued for breach of contract.

The suit revolved around three issues: the prerogative; nature of sterling money and the time of payment. In this case it was found that the crown could alter the intrinsic value of money in the absence of a state legislature. Just as a king can enoble a humble man to an aristocrat thus could he enoble a base coin to a fine one. It was found in the case that it wasn't the intrinsic value of the coin that gave it currency but that it had the stamp of the soveriegn: bonitas extrinsica (face value) was more important that bonitas intrisica (metallic content).

By establishing through etymological analysis that sterling meant 'of Viking origin' and that the Vikings had imposed their currency on both Ireland and England, it was discovered that the base Irish coin was currency.

Lastly, it was found in the case that current money was whatever currency was current at the time when the payment was due - not when the contract was concluded between the parties.

In this way case law became a source of law for the legitimacy of fiat currency.

This case was used as a precedent in other cases; such as ones after the Civil War in the US when people did not want to take Union dollars.

It was also used in the case of Treseder-Griffin 1956. In this case a contract that was signed in 1930 contained a gold clause - when it was signed Britain was still on the gold standard. A clause was put in the contract that had the effect of giving one of the parties the right to be paid in gold sovereigns if Britain came off the gold standard. It took until 1954 for someone to try and enforce this term but unfortunately, on the basis of the case of mixed money, paper money could be substituted for gold.

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