Isaac Newton: Economist and Saviour of the Nation
Created | Updated Jun 15, 2015
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Newton's contributions to science should not be allowed to overshadow his contributions to English economics. He introduced the gold standard, advocated for paper money and oversaw the Great Recoinage. Yet he was caught out by the South Seas Bubble, even though he had seen it coming. As in so many aspects of his life, Newton's work in the Royal Mint is a story of contradictions and extraordinary dedication.
New Man on the Job
Looking for a sinecure1, Newton became Warden of the Mint in 1696, due to the patronage of Chancellor of the Exchequer Charles Montagu. Having said just five years previously that he did not want to move to London, this was now exactly what Newton did. London at the time was a boom-town, still recovering from the Great Fire of 30 years previously. It was home to around three-quarters of a million people - something like a tenth of the entire population of the British Isles.
With his new position, Newton had obtained living quarters alongside the Mint workings, in the Tower of London. They were small, smelly and noisy; Newton stuck them out briefly before forking out for more salubrious accommodation in Jermyn Street.
He had also inherited an institution - and a political economy - on the point of collapse. By 1695, there was simply not enough silver in the country to mint new coins, and there were not enough small denomination coins in circulation for everyday trade. The problem was that the silver that made up each coin was worth more than the face value of the coin itself. Huge profits could be made by melting the silver down and selling it in France. Combined with this were the menaces of 'clipping' - literally cutting the edges off coins and selling the metal, leaving the slightly smaller coin in circulation - and forgery. In this pre-banknote era, forgery literally did require a forge, with fake coins being cast from low-silver alloys. The crude technology of the Mint meant that real coins varied in size and quality enough that both of these techniques could be used, but the damage to England's economy was incalculable.
This could not have come at a worse time. England was engaged in a series of ruinously expensive wars with France on the continent2. Without cash to pay the armies, there was a real risk that the English forces would desert and leave the country open to invasion. Already the National Debt had been created in 1689 and the Bank of England had been chartered in 1694 to lend money to the government, both for the explicit purpose of funding this war. (By modern standards, the Bank initially operated in a way that would make the worst of the sub-prime investors nervous - for each pound that investors deposited, the Bank could lend a pound to the government and still retain the original pound from the investor. It worked, but there was no security against a run on the Bank.) On the domestic front, riots would take place when government workers were paid in coins so debased or defaced as to be worthless. At one stage, the goverment was reduced to effectively paying the Navy with lottery tickets. It was only a matter of time before the situation slipped from 'desperate' to 'catastrophic'.
A potential solution to clipping and forging had been tried in 1662, with the edges of coins being 'milled' - patterned along the edge as well as on both faces - but this was no defence against melting down the silver for export, and the mixture of new, milled coins with older, unmilled ones in circulation simply allowed the forgers to target the latter. All that milling did was guarantee that the coins being melted for export were of purer silver.
The Right Man for the Job
By the time Newton arrived at the Mint, it was clear that something radical had to be done. It was equally clear that none of the top team at the Mint was capable of doing it. If the nation's fat were to be pulled out of the proverbial fire, it would have to be up to the untried but dedicated new Warden of the Mint to do it.
Newton's solution was both bold and simple. He proposed a Great Recoinage - the recall and reminting of every single coin throughout the Kingdom. The newly minted coinage could then be issued at a new valuation, with the value of the silver content matching the value of the coin. As a bonus, the edges could be milled on every coin in circulation. Many, including Newton's friend John Locke, thought such a thing to be impossible - how does one issue a penny coin worth less than a penny? At the time, the idea that the value of a currency could fluctuate was unheard of; silver and gold had a certain intrinsic value, not something that could be altered even by the King, much less his Warden of the Mint.
Newton had other problems as well. He was not in absolute control of the Mint. Instead, he was part of a triumvirate, with the competent but uninspiring Comptroller James Hoare, and the drunken gambler of a Master of the Mint, Thomas Neale. There is little doubt that before Newton arrived, the setup was heading for catastrophe; and it can only have been galling to Newton that although he was in principle on equal terms with the other two, the idle and useless Neale took home a base salary higher than Newton's and, topped up with a commission on every coin minted, his total earnings were far in excess of Newton's own. Ironically, Newton's epic recoinage would simply enrich Neale still further.
When Newton started at the Mint, he was in day-to-day charge of 300 workers, running two shifts from 4am to midnight (which explained why Newton's adjacent quarters were so unpleasant - the Mint presses were noisy, and the steam that powered them was produced by burning all sorts of unpleasant materials). It was typical of Newton that, having taken the job as a sinecure, he threw himself into his new duties with breathtaking intensity.
In 1696, he began to recall the existing coins, declaring one denomination after another to be illegal for all purposes except tax payments. But despite his best efforts, the production of new coins could not keep pace with the recall, and for much of the year the country - the most sophisticated political economy in the world, with a national debt, a central bank and the first attempts at paper money and a stock exchange - was reduced to a barter economy. Government bonds were traded at a mere 70% of their face value, and troops were paid with food rather than cash.
In response, Newton became effectively the world's first management consultant. He carried out what amounted to a time-and-motion study, studying the actions of each worker to discover where the slowest processes in the manufacturing chain were found. His notebooks from the period are filled with calculations on the highest possible rates of each step in the process, recognising that the process as a whole could only run at the speed of its slowest single step. Using this data, he installed new machines in key positions that greatly improved the capacity of the Mint. He established branches of the Mint in Bristol, York, Exeter, Norwich and Chester (another revolutionary idea, franchising out the creation of wealth and value itself), although none of these ever lived up to his expectations. Chester in particular was a hotbed of corruption, despite the presence of Newton's good friend Edmund Halley as Deputy Comptroller, and closed again in 1698. And, of course, like every good consultant since, Newton demanded a pay rise to put him on an equal footing with Neale.
Newton's success was astonishing. When he took over the Mint, its estimated peak capacity (never fully achieved) was £15,000 worth of silver per week. By the time the recoinage was completed, three years later, it was running consistently at £100,000 of silver per week. In all, Newton oversaw the minting during this period of £6,840,719, at a cost of £2,700,000. And all this from an academic and politician who had never had a 'real job' before.
Meantime, the government was experimenting with other, initially less literal, means of making money. In 1697, they launched a complex lottery. 140,000 tickets were issued, priced at £10 each. As well as offering a shot at a cash prize, each would give the bearer a steady interest rate, and therefore a guaranteed profit. The price was selected to be attractive to wealthy individuals or to consortiums. This was to be funded by a tax on the malt used to make beer, and the bonds therefore became known as the Malt Lottery. To this extent, they were modelled on a similar, hugely successful venture of a few years before. But there was a crucial difference - these bonds could be freely exchanged on the street. They were, in effect, the world's first paper money.
Although the previous lottery had been successful to the extent that it raised a lot of money for the war in France, for investors it had been a disaster. The Treasury had been unable to keep up payments, and angry investors had petitioned Parliament for the return of their investment. Although they would eventually get their money, this would not happen until a year after the Malt Lottery. So when the near-identical Malt Lottery was proposed, with the fate of the previous investors still uncertain, uptake was poor. In the end, the government had to resort to paying the Navy, and others who could not refuse, with the unsold tickets.
In the meantime, Newton was still seeking to secure and improve his own position in the Mint. He researched the ancient privileges of the Warden and feuded with other officials, including Lord Lucas, the Governor of the Tower.
After nearly four years of work as hard as any he had undertaken in his life, Newton finally got the sinecure role he had initially wanted. Neale passed away, and Newton - who had already usurped many of his privileges and responsibilities - moved directly from being Warden of the Mint to Master of the Mint, a move never made before or since. And with the Great Recoinage over, and England's economy now steady (at least for the next 20 years, when the South Sea Bubble would again rock the nation to its foundations), Newton was finally able to use his job title as the sinecure it was intended, funding his real interests in running the Royal Society and feuding with other scientists. In 1705, Newton was knighted, largely for his work in the Mint.
After the Great Recoinage
There would be a few more demands on Newton's time as a political economist. England and Scotland finally abandoned the 'one monarch, two states' system in 1707, and Newton was required to carry out a Scottish Recoinage to bring the two currencies into line in 1707 - 1710. The result was a common currency; but compared to the Great Recoinage, this was an afterthought. And, of course, Newton was required to enforce the integrity of his coins by hunting down forgers and coiners.
By 1717, virtually all the silver in England had moved to France, and the English financial system had switched to a de facto gold standard it was to retain until 1931, and something which Newton had considered nearly two decades earlier. Newton, ahead of his time as ever, argued for inflation and free-floating paper money, secured against tax income rather than precious metal reserves. He remained Master of the Mint until his death in 1727.