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

  2. The Talk Today • The Puzzle: From Flexible to Fixed Exchange Rates in 1696 • Explaining Foreign Economic Policy • My Explanation: Strength of John Locke’s Argument • Concluding Observations

  3. The Talk Today • The Puzzle: From Flexible to Fixed Exchange Rates in 1696 • Explaining Foreign Economic Policy • My Explanation: Strength of John Locke’s Argument • Concluding Observations

  4. 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 Charles II Shillings, Minted 1664. Puzzle Explanations Argument Conclusion

  5. Deterioration of the Coinage Source: PH Kelly, 1991. Puzzle Explanations Argument Conclusion

  6. The Scarcity of Coin Source: PH Kelly, 1991. Puzzle Explanations Argument Conclusion

  7. Resolving the Crisis • Agreement on technological issue: Massive recoinage • Unresolved policy questions: • 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? • Should the standard be fixed or adjustable? • Who should shoulder the costs? Puzzle Explanations Argument Conclusion

  8. 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 Puzzle Explanations Argument Conclusion

  9. 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 Puzzle Explanations Argument Conclusion

  10. 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 Puzzle Explanations Argument Conclusion

  11. The Talk Today • The Puzzle: From Flexible to Fixed Exchange Rates in 1696 • Explaining Foreign Economic Policy • My Explanation: Strength of John Locke’s Argument • Concluding Observations

  12. Foreign Policy Ingredients • We know that interests and positive ideas are combined in and refracted through institutions to create policy Interests Institutions Policy Positive Ideas  But what is the relationship between ideas and interests? Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  13. 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 interests Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  14. 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 distribution Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  15. 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” Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  16. 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 Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  17. An Alternative Approach • Distinguish Types of Interests • Aggregate: “Grow the pie” • Narrow: How to “slice the pie” • Explain Ascendance of Particular Intellectuals and Ideas Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  18. The Talk Today • The Puzzle: From Flexible to Fixed Exchange Rates in 1696 • Explaining Foreign Economic Policy • My Explanation: Strength of John Locke’s Argument • Concluding Observations

  19. 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 Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  20. 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 Introduction Puzzle Explanations Puzzle Argument Argument Conclusion Case

  21. The Talk Today • The Puzzle: From Flexible to Fixed Exchange Rates in 1696 • Explaining Foreign Economic Policy • My Explanation: Strength of John Locke’s Argument • Concluding Observations

  22. 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! Introduction Puzzle Explanations Puzzle Argument Conclusion