Newton and the Counterfeiter: The Unknown Detective Career of the World's Greatest Scientist

by Thomas Levenson

  Would Isaac Newton kindly provide his thoughts on a matter of national importance? What should the nation do about the worsening shortage of silver coins?

  Part IV

  The New Warden

  10. "The Undoing of the Whole Nation"

  WILLIAM LOWNDES, SECRETARY of the Treasury, had a problem that had been growing worse for years. For at least half a decade, it had been evident to anyone paying attention that there was something wrong with England's money. Specifically, there wasn't enough of it. The silver coinage, all the denominations from half-groats (two pence) to crowns (five shillings), was evaporating. From the late 1680s to the mid-1690s, the supply of these coins—the basic units of exchange for the daily business of the country—shrank year by year. By 1695, it was almost impossible to find legal silver in circulation. Something needed to be done, and it was Lowndes's job to suggest the proper course of action.

  He sought help. In September 1695, he wrote a letter asking advice of England's wise men. Some were obvious choices. John Locke had written a series of papers on money and trade in 1691. The architect and polymath Sir Christopher Wren had extensive experience with both government and budgets in his role supervising the rebuilding of London's churches and St. Paul's Cathedral after the Great Fire of 1666. Charles Davenant was one of England's leading writers in the field just beginning to be called political economy, and he had served as an excise official, administering England's tariffs. Most of the rest of the men Lowndes contacted were more such eminences: the banker Sir Josiah Child, a major shareholder in the East India Company; a lawyer, John Asgill; and Gilbert Heathcote, a governor of the newly formed Bank of England. But Newton?

  The Principia had established Newton as the smartest man in England and thus a natural figure to be called upon at a time of national crisis. That he had no knowledge of government finance or experience of the market was hardly a handicap. The beginnings of the modern economy predate the emergence of economics as a formal discipline and of that special class, economic experts. And so it happened, without any apparent hesitation, that England's greatest natural philosopher first turned his mind to the problem of money.

  The Mint and the Treasury had been wrestling with the damage done to the currency by coiners and clippers since the early 1660s. But at about the time the Stuarts fell and William rose to the throne, a new threat emerged: the trade in silver from England to Amsterdam, Paris, and beyond. The exchange was driven by a difference in the price of silver against gold in London, compared with the prices on the Continent. Simply: you could buy more gold in France with a given lump of silver than the same weight of English minted coins could purchase in London. There was no shortage of clever operators who figured out the arbitrage opportunity: collect silver coins in England, melt them down into ingots, ship them across the Channel, buy gold, and then use that gold to buy yet more silver back home. It was the nearest thing imaginable to a financial perpetual motion machine.

  By 1690, within two years of the coronation of William and Mary, the outflow of silver coins became acute enough to provoke a parliamentary investigation. Several members of the Worshipful Company of Goldsmiths—the guild governing dealers in precious metals—petitioned for aid to prevent what they said was the ruin of their business. In the preceding six months alone, they claimed 282,120 ounces of silver had been shipped out of London to metal dealers in France and Holland—enough to strike at least 55,000 pounds sterling of minted money, more than ten percent of the total silver coinage struck at the Royal Mint in the previous five years. Who was responsible? Never one of their own company, to be sure! Instead, the goldsmiths implicated foreign metal dealers, especially those ubiquitous and useful villains the Jews, "who do any thing for their profit."

  A committee led by Sir Richard Reynell was formed to pursue the goldsmiths' charges, and on May 7, Reynell rose in the House of Commons to report the results of the inquiry. The petitioners' claim was a fact: silver was indeed abandoning the kingdom. There was no mystery about the reason. The difference in value of English silver bullion on the continent of Europe, compared with the face value of the full-weight legal shillings coined out of each ounce, was not much—about one and a half pennies per ounce of silver. But that was profit enough, according to the parliamentary investigators, to make it worthwhile for traders to turn English money into ingots to be sold across the Channel.

  Reynell was a little more temperate than the petitioners in his assignment of blame. While "the Jews, for their Profit, exported [silver] in very great quantities ... to the utter Ruin of the working Goldsmiths," Reynell admitted that there lived "English, as well as Jew, who for their Advantages, would doubtless melt down our Crown Pieces, &c and sell for Foreign Silver to the Undoing of the whole Nation for want of Money, unless a present Remedy were found to prevent Exportation of any Silver or Gold."

  Making matters worse was the other half of England's currency debacle: the existence of those two parallel coinages—the old, hand-struck, pre-1662 money and the newer, heavier, machine-made pieces. Bad money was driving out good. The machine-made money, precisely weighed and secure, would never circulate so long as debased coins passed for the same face value. The great Victorian historian Lord Macaulay later reported that as the crisis reached its climax, the Exchequer took in no more than ten good shillings in a hundred pounds of revenue—one out of every two thousand coins. Macaulay wrote, "Great masses were melted down; great masses exported; great masses hoarded; but scarcely one new piece was to be found in the till of a shop or in the leathern bag which the farmer carried home after the cattle fair." The resulting crisis was, he wrote, much more serious than the misgovernment of Charles and James. "It may well be doubted that all the misery which had been inflicted on the English nation in a quarter of a century by bad Kings, bad Ministers, bad Parliaments and bad Judges was equal to the misery caused in a single year by bad crowns and bad shillings." It did not matter to most Englishmen who ruled in London "whether Whigs or Tories, Protestants or Jesuits were uppermost, the grazier drove his beasts to market; the grocer weighed out his currants; the draper measured out his broadcloth; the hum of buyers and sellers was as loud as ever in the towns." But when "the great instrument of exchange became thoroughly deranged, all trade, all industry were smitten as with a palsy. The evil was felt daily and hourly in almost every place and by almost every class."

  Gold guineas could still be found, costing about thirty shillings at a goldsmith's bank. But a pound of beef at Spitalfields market went for about three pennies in the spring of 1696. A gallon of beer ran a shilling or less. A laborer's daily wage was thirteen pence or so. As the small silver coinage that was the engine of daily life disappeared, trade suffered, and then almost stopped. "Nothing could be purchased without a dispute," Macaulay wrote, and "the simple and the careless were pillaged without mercy." The Mint had produced nearly half a million pounds' worth of silver currency between 1686 and 1690. But so much silver poured out of England in the next five years that the Mint could find almost none to coin, producing just over seventeen thousand pounds between 1691 and 1695.

  Reynell and his colleagues confirmed the facts of the crisis, but "though the Committee found the complaint of the Petitions very just and the Inconveniences to the Kingdom very great, they could not agree of a way for preventing the same." A law on the books prohibited the melting of minted coin, but as long as English silver was worth more as bars of metal than the Mint said it was as crowns or shillings, England's hard cash would continue to vanish down the Thames.

  Nothing was done in that session of Parliament, or in the next, or the next. All the while, as Macaulay put it, "the coins went on dwindling and the cry of distress from every county in the realm become louder and more piercing." For five years, arguments about the crisis raged across London. Finally, the one man with the power to demand action found himself personally in danger for lack of good silver coin. In July 1695, King William commanded a mixed army of English and Dutch soldiers besieging t
he French in the fortress city of Namur, in present-day Belgium. The campaign was part of William's grand strategic attempt to check Louis XIV's power in Europe and beyond. The two sides had already been fighting for seven years and would continue for more than a century, in what Winston Churchill would correctly term a world war. But at this particular moment, William faced the prospect of being defeated not by force of arms but by lack of cash to keep his army in the field.

  The difficulty stemmed from a change in the way Europeans made war on each other. In a land campaign, the contending armies engaged in a series of assaults on fortified positions. It was slow, indecisive, positional warfare, dominated by combat engineers and the artillery, interspersed with sudden bursts of intensely bloody face-to-face combat whenever the cannons managed to blow a breach in the opponent's defenses. Both sides responded to the resulting stalemate by ramping up their armed forces. Louis's France, at war for decades, had already boosted the size of its standing army. The English followed suit. From just 25,000 men under arms at the beginning of the war, William's army grew to about 100,000 by the mid-1690s.

  Supporting militaries on that scale forced radical change, not just in the types of battles such oversized forces could fight, but in the way governments and nations organized themselves to pay for their ambitions. In England, the necessary changes turned on the conditions attached to William's rise to the throne. He held power not by hereditary succession but by the gift of an elected lawmaking body, the Convention Parliament. It was a carefully limited grant: the elected members held on to the power of the purse. William himself received a salary from the state, thus becoming the first monarch to serve as the most prominent member of what was just becoming a professional civil service.

  And most of what that nascent civil service did was to figure out ways to extract from the English people the money needed to run the ever more ambitious national government. William's revenue-collecting bureaucracy tried land taxes, customs duties, excise charges. In 1691, Parliament passed a bill authorizing a levy of more than i.6 million pounds to pay for "the Carrying on a Vigorous Warre against France." As a sign of the growing reach of the government, it appointed tax commissioners in cities and counties all over England and Wales—among them, for "the University and Towne of Cambridge," a Mr. Isaac Newton. The government borrowed as much as it could, much more than any previous English administration. William's ministers created a whole new kind of debt, an early form of government bonds, in 1693, raising a million pounds in one issue, more in another. It still wasn't enough to feed and arm the troops needed in the field, so in 1694, Parliament chartered the Bank of England. By the end of 1695, the Bank had already lent the government i.2 million pounds.

  Even such enormous sums were not enough. By the mid-1690s, spending on the war exceeded government tax income. Worse, the export of good silver money as bullion, and the assault of the clippers and coiners, meant that the government collected much of its income in coins so debased that no private trader—and, crucially, no foreign banker—would accept them at face value. By 1695, the exchange rate for English silver currency in Amsterdam was dropping steadily. By midsummer, the cost of the war had affected both high finance—the ability of the government to raise large sums through loans—and the basic supply of hard cash, all that English silver that had vanished from the coinage. Put the two together, and William's army was perilously short of money.

  The crisis could not have come at a worse moment. Taking Namur would be both a strategic and a symbolic victory, but not if William could not press his campaign there. Absent a ready supply of money from London, it fell to the army's paymaster, Richard Hill, to find some cash fast. He traveled to Brussels to solicit funds from the rich banking community there, but it took him months to secure a loan of 300,000 florins, explicitly because of the state of English government finances. The money did reach the army before it dissolved into rabble, and Namur fell on the fifth of September, but the war dragged on. For reasons of state, perhaps, and certainly of personal vanity, Louis XIV would not enter serious peace negotiations in the wake of a very public defeat. So, as the campaigning season ended in late 1695, it was clear that the war would resume the following spring—unless one of the combatants happened to go bankrupt in the meantime.

  The implications were obvious, certainly to William and his government. If England were to continue to fight, it needed a stable currency. When William opened the session of the House of Commons on November 26, 1695, he almost begged its members to respond to the currency crisis.

  He began with apparent diffidence, acknowledging that it was a "great Misfortune, That, from the Beginning of my Reign, I have been forced to ask so many, and such large, Aids of my People." But, he warned, there was to be no relief. "I am confident you will agree with me in Opinion," William said, "That there will be, at least, as great Supplies requisite for carrying on the War by Sea and Land this Year, as was granted in the last Session"—more, in fact, for "The Funds which have been given, have proved very deficient." William acknowledged the "great Difficulty we lie under at this time, by reason of the ill State of the Coin." Fixing that problem would cost yet more money the government did not really have, but this was "a matter of so general concern, and of so very great importance, that I have thought fit to leave it entirely to the consideration of the Parliament."

  It was a neat display of rhetorical jiu-jitsu. The King modestly deferred to the Commons—he was, after all, monarch by grace of Parliament's vote—to figure out who should suffer to fund his unpopular war. But the question remained: what could the government actually do to prevent the sale of English silver to the highest bidder?

  Hence Lowndes's plea for help, and the answers that came in from the good and the great—among them Isaac Newton.

  11. "Our Beloved Isaac Newton"

  TO NEWTON, WORKING through the problem Lowndes had set, one fact was obvious. Though he did not put it in quite this language, it was clear that currency criminals were rational actors responding to an uncomplicated set of incentives. Silver clippings represented pure profit, as was the margin harvested abroad for full-weight minted shillings. Human beings would continue to take those gains unless compelled by coercion or a change in the marketplace. The problem was as straightforward as the simplest of equations.

  Newton also understood that force alone could not eliminate the smuggling of bullion, given that the crime of clipping persisted despite the death sentence it carried. So he turned his attention to the source of profit in the illegal silver trade, and came up with two measures that could destroy the elementary economic logic behind the assault on England's coins. First the nation had to get rid of its old, worn, increasingly debased currency. To do so, Newton and many others recommended a complete recoinage. All of England's silver money, old and new, was to be called back in to the Mint, melted down, and remade into a single, consistent, edged issue. That step alone would mostly solve the clipping problem. With no more hand-hammered, smooth-edged money in circulation, it would become exceedingly difficult to shave much metal from the new coins.

  But without a shift in the ratio of weight to face value of the new coins, reminting England's money would not curb the relentless flow of silver across the Channel. To solve that problem, Newton argued, it was essential "to make Milled money constantly of the same Intrinsick & Extrinsic value, as it ought to be and thereby to prevent the Melting or Exporting it." That is, instead of two different sources of the value implied by a coin—the "intrinsic" market price of its metal and the "extrinsic" value imparted by the stamp of the head of a monarch that transformed an ordinary disc of metal into legal tender—these separate measures must be brought into agreement. With silver and gold both being used as money, this meant altering the relative value of the two. In this case, when England's silver bought more gold on the Continent than it could buying guineas at face value, that meant lowering the amount of silver per shilling—making Dutch or Spanish gold more expensive as counted in English silver
money. Such a devaluation, performed correctly, would eliminate the price differences exploited so successfully by the currency buccaneers.

  Lowndes, the leading public figure arguing for devaluation, welcomed Newton's reasoning and support. He still found it hard to make his case, because at its core was a radically modern thought: the King's imprimatur was a mere fiction and not the working of a kind of magic that determined the absolute worth of a given piece of silver. By Newton's logic, the word "shilling" could be thought of as no more than a convenient way to express what a given amount of silver bullion was worth as a commodity. In that view, units of currency—shillings, half-crowns, guineas—could not be absolute statements of value, extensions of the divine authority of kings. Instead, they were relative claims of the prices of quantities of metal—of anything—and those values could change with every shift in conditions in the real world.

  Thus, lurking within the argument for devaluation lay a genuinely unsettling idea. Money need not be seen as merely a thing, a tangible object jangling in one's purse. It could be understood as a term in an equation, an abstraction, a variable to be analyzed mathematically—as in fact skilled traders had been doing more or less explicitly every time they played the markets in Holland against those in London.

  Newton himself did not at first grasp the full implications of his analysis. He still had moments when he thought that the government could, on its own, fix a value for England's silver. He told Lowndes that after devaluation, any dealer who offered a higher price for silver by weight than the face value of the same weight of milled money should be jailed "till the Party offending shall give an Account of himself." But the underlying logic of his discussion of the two sources of value led implacably to the conclusion that devaluation was the only way out of England's currency predicament.