The Problem of Small Change - Was George III Responsible?

Much is said about George III’s failure to supply small change to the masses at the turn of the 19th Century. It was discussed in this excellent post by @johnmilton on some of the tokens this shortage necessitated https://www.cointalk.com/threads/two-british-bank-tokens.393665/

The cause is widely said to be the negligence or incompetence of the Royal Mint. It’s even supposed supplies were deliberately restricted to the American Colonies to undermine them (although Britain suffered the same problem). The Royal Mint’s inaction is put down to arrogance, which it certainly possessed. But was it more complicated?

Indeed, the problem existed well before George III. Until Edward I, the smallest denomination was a penny, which had to be cut into halves and quarters. Today’s penny may be near worthless, but the problem for most of the previous 1250 years was that it was worth too much. When Edward I introduced the farthing and halfpenny in 1279, trade increased. But even then, a quarter of a penny could buy everyone in the bar a pint of mead. For most of the history of coins, small change wasn’t used at all. People instead used barter or were given provisions by their landowner employers.

Æthelstan Cut Halfpenny, 933-938

London. Silver, 20mm, 0.7g. Crowned bust to right; + (ÆDELSTAN) REX. Small cross in centre; + LIOFHE(LM MO LOND) CI (Liofhelm moneyer of London) (S 1095). In 924, Æthelstan set the standard compensation for a sheep at five pence, while a pig was ten pence, a cow twenty pence and an ox thirty pence. This halfpenny could therefore buy a tenth of a sheep. Not much good if you just wanted an apple.

Problem 1 – Intrinsic Value

After Henry III’s recoinage in 1247 (which introduced the ‘long cross’ reverse to prevent clipping), the English penny was known to be dependable. This was because of its high purity. In France, recoinages were financed by debasing the silver, allowing the public to exchange like-for-like in terms of the face value of coins. Henry III, however, decided to maintain silver fineness, even though the people suffered when they had to exchange more old pennies for the new. It led to the English penny becoming the coin of international trade.

If people trust your currency, it’s a huge boost to trade – overseas merchants will accept your coins instead of bartering in unfamiliar goods, and they don’t need to build an element of doubt into the price. Since coins were only backed by their own intrinsic value, people would only trust them if they knew how much metal each contained. There was, in effect, a Silver Standard.

Henry III Class 3d1 Long Cross Penny, 1250

London. Silver, 18mm, 1.5g. Crowned head with pointed beard, pellet in annulet eyes, hENRICVS REX: III, initial mark star 4. Voided long cross, NIC-OLE ON L-VND (Moneyer Nicole of London), pellets on cross-bars of last two Ns (S 1364). From the Brussels (Belgium) Hoard of 145,000 coins, abandoned around 1267. Despite being found in Continental Europe, the hoard contained 81,000 British pennies. English pennies were the purest in Europe and were favoured across the continent.

It was therefore important your coins were worth their face value in metal. To do this, you needed a metal that was both widely accepted and practical for coin manufacture. Silver was that metal. But as society shifted from agriculture to manufacturing, shopkeeping and trading, people started using coins for lower value transactions for which silver was hopelessly impractical. When Elizabeth I revalued the coinage, silver was too valuable to make farthings big enough to use. This led to bizarre denominations like the threefarthings, which was struck to allow people to sell things worth a farthing and give change from a penny when people couldn't pay in farthings as they didn’t exist.

It’s worth noting that it was also important not to give a coin a face value much lower than the metal content. Aside from the expense, this encouraged clipping and for them to be melted down to create a greater number of (counterfeit) coins. It meant regular recoinages were needed. It also meant large farthings in silver were not an option.

Elizabeth I 3rd Issue Threehalfpence, 1561

Tower. Silver, 16mm, 0.7g. Bust 3G, large rose; E D G ROSA SINE SPINA (Elizabeth by the Grace of God a rose without a thorn). Long cross fourchée over quartered ‘small’ shield of arms within inner circle; CIVI TAS LON DON (S 2569). Elizabeth restored the sterling standard, but with a reduction in the size of the coins.

Problem 2 – Devaluation

But there was still a need for small change. The solution was to strike base metal coins. James I had introduced copper coins in Scotland and the idea was floated of issuing copper farthings in England, but the Royal Mint was wary. It’s usually asserted they saw base metal coins as beneath them. In fact, their reluctance probably lay in the lessons of history. When coins were issued that were worth less than their face value, inflation resulted, since people demanded more than a penny in coins to get a penny’s worth of silver.

It was a mistake often repeated. Henry III’s recoinage was to address the dire state of the coins circulating. Elizabeth I’s revaluation was to regain confidence in the currency caused by her father’s currency debasement to fund his wars. Tsar Alexis I of Russia faced rioting in the 1660s when he introduced copper kopeks, leading to a devaluation of the ruble. The problem even plagued the Romans. When they heavily and repeatedly debased the antoninianus to pay for war, it led to the collapse of the monetary economy.

Probus Antoninianus, 277

Lugdunum. Silvered bronze, 24mm, 4.2g. Radiate and cuirassed bust, IMP C PROBVS P F AVG. Mars holding spear and trophy, MARS VICTOR, II in exergue (RIC V2 38). From the Pamphill Hoard, 5,482 antoniniani deposited in 283. The antoninianus was introduced in 215 and was meant to be worth double a denarius, but only contained 1.5 times the silver. This caused inflation. It was then heavily debased as a long line of emperors sought to raise funds for war. People switched to barter. The ‘silver’ antoninianus was replaced in the 4th Century by the bronze follis – which contained more silver.

Even Gerard de Malynes, an assay master at the Royal Mint whose idea James I’s copper farthings were, recommended “setting the face value of [coins] exactly equal to [their] metallic content” when writing about the debasement of silver issues in 1601. He believed this would stop ‘wasteful’ speculation on the currency. Many people thought a nation’s balance of trade, and so wealth, depended on its reserves of precious metals, and didn’t want to see coins shipped to the Continent because they were worth more as bullion. But for copper farthings to be worth face value, they’d have to be very large. This was almost as impractical as them being very small. Moreover, they’d be very expensive to manufacture.

In the meantime, the coin shortage was causing great hardship. So, the private sector began striking their own tokens in lead. This private intervention caused inflation and reduced confidence in the coinage, but also gave the King an option. James I gave patents to a succession of private individuals to manufacture 'official' tokens. These were worth less in copper than face value to ensure a rise in the price of copper wouldn’t lead to them being melted down and counterfeited. That the Royal Mint didn’t manufacture these may have been down to arrogance, but it may also have been a prudent way of ensuring they could abandon the experiment if it went wrong without damaging the currency’s reputation – which was important for trade.

James I Harington Type 1b Farthing, 1613-1614

London Token House. Copper, 12mm, 0.30g, die axis 180°. IACO D* G. MAG BRIT (Obverse 1). Harington knot, FRA. ET. HIB. REX (Everson Type 1b 11; Peck Type 1b 39).

However, the Royal Mint was rather vindicated when these tokens were not accepted by the public. Merchants didn’t like them because the issuers wouldn't redeem them in silver. Workers didn’t like them because their employers took advantage of favourable terms in their purchase – they received 21 shillings of tokens for 20 shillings of silver, so bought huge amounts and offloaded them as wages. To counter this, it was arranged that anyone could exchange them back to silver at the Token House, but this was only any use for people in London, and new issuers found reasons not to exchange older tokens.

Problem 3 – Counterfeiting

The development of these tokens gives an insight into the problems faced with small change. They were amongst the first to include privy marks to prevent forgery and were the first bimetallic coins – because there was such a problem with counterfeiting. If the face value of a coin is higher than the metal in it, there’s a clear incentive to produce them (which is why the private sector got involved in the first place). Forgeries abounded, and the tokens were exchanged at much less than face value, causing inflation. The Royal Mint would not have been encouraged to enter into production themselves. While great strides were made in developing anti-forgery measures, production was halted by the English Civil War.

Charles I Rose Type 3 Farthing, 1636-7

London Token House. Copper, 13mm, 1.38g with brass segment, die axis 0°. Double-arch crown, sceptres through legend to edge, CAROLVS. D: G MAG: BRIT: (Obverse 1). Double rose, pointed-side crown, .FRAN: ET. HIB: REX. with Lys privy mark on reverse only (Everson Type 3 164; Peck Type 1c 309). The brass wedge at the top was an anti-counterfeiting measure.

Problem 4 – Metal Shortages

The Civil War caused a problem that’d be familiar to George III, Henry VIII and the Roman Emperors of the third century. There was a silver shortage. No matter how many copper coins you produced, people didn’t trust them and needed them to be redeemable in silver before they’d accept them. Copper hadn’t solved the original problem at all. Silver coins, on the other hand, were now worth more than face value, and so were clipped (if hammered) or melted down and counterfeited (if milled), while large amounts were sent as bullion to the Continent.

To fill the gap, the private sector escalated their production of base metal tokens. These worked because they were redeemable at the trader’s establishment in goods and services. But this meant they only circulated locally (else you couldn’t exchange them) and were inflationary (since they weren’t worth face value). So, they weren’t a solution for the government, but the government did little about them for want of any other solution.

Christopher Flower Privately-issued Farthing, 1650-2

Lead, 15mm, 1.73g. CRISTOPHER.FLOWER around fleur-de-lys. Shield containing Draper's Arms (Christopher Flower was a London draper) (M Dickinson 62D). Known as ‘farthings’ (1/4 penny), their low intrinsic value and the high volumes available meant they probably traded at as much as 8 to the penny.

Problem 5 – Impracticality

After the war, Charles II struck copper coins, without addressing any of the issues. Despite the farthings being twenty times the size of James I’s, they were still worth only half their face value. But the problem now was in their production. The Royal Mint was unable to manufacture the planchets and had to get them from Sweden, which led to a host of supply and transportation issues. The high cost of production meant the manufacturers cut corners. They brought in cheap foreign workers, some of whom couldn’t spell the legends. In William III’s reign, they even produced entirely cast coins. Still, they produced a glut of coinage and parliament actually acted to restrict supply of lower denomination coins – eventually resulting in a shortage. With such poor quality issues, counterfeits soon outnumbered genuine coins.

An attempt was made to switch from copper to tin. This would boost the tin industry, reduce the cost of production and help reduce counterfeits (the coins included a copper plug and the date on the edge for that purpose). But it wasn’t long before the corrosive properties of tin (and the reaction of tin with the copper plug) put an end to that idea. Tin coins also suffered the same problems as copper – the public didn’t trust coins not worth their face value.

William III and Mary II Farthing, 1690

London. Tin with copper ‘plug’. 22mm, 6.0g. GVLIELMVS ET MARIA. BRITAN NIA (S 3451). This was England’s second bimetallic coin of the 1600s (in the fight against the counterfeiters), still 180 years before the first ‘modern’ bimetallic coin – the Italian 500 lire of 1982.

In 1696, the Great Recoinage attempted to renew confidence in the beleaguered currency. But this failed, since the fluctuation in the bullion values of the metals on which it was based – gold and silver – usually meant the silver in the coins was worth more than face value and they were melted down for bullion.

George III – the Saviour of Small Change

By the time George III ascended to the throne, none of these problems had been resolved. George III fought his fair share of wars, which created a shortage of silver (and a lot of panic hoarding). With the high price of silver, the Royal Mint faced the familiar problem that low denomination silver coins would be too small – although the demands of war meant it had little silver anyway. The Bank of England had been stockpiling Spanish 8 reales for the purpose of funding the war, and so it was the Bank of England that took to countermarking and overstriking them to get higher-denomination silver into circulation.

It’s perhaps unfair to say the Royal Mint didn’t try. They struck copper coins in the 1760s and 1770s. But since these were in high-quality copper – the idea being the public would prefer these over the counterfeits – the counterfeiters immediately melted them down to provide the raw material for their fakes. Private enterprises produced more tokens than ever, which although usually in good copper, exacerbated the problem, since there was a ready market for melted-down official issues. Copper coins were actually in better supply than silver, but the public still didn’t trust copper. That wasn’t surprising, given the number of forgeries.

Halsall Penny Token, 1784-1787

Possibly the first coin minted at the Soho mint, Birmingham. Copper, 34mm, 16g. Arms of the Earls of Peterborough with supporters. HALSALL / D (penny). Engrailed edge (Lancashire D&H 1). The first Conder Token, minted to pay the workers at Colonel Mordaunt’s cotton mill in Lancashire. It spawned hundreds of similar tokens that took over Britain’s coinage in the 1790s.

George III’s Royal Mint is usually portrayed as being cajoled into action in the face of private sector inventiveness. But the reality is they always had a give-take, love-hate relationship with the private sector – the story of Eloy Mestrelle and his experiments with milled coinage in the 1560s comes to mind. In 200 years, will our governments be chastised for relying on the private sector to produce Covid vaccines?

In fact, George III’s Royal Mint was much more receptive to ideas than Elizabeth I’s had been with Eloy Mestrelle. It was rescued from its millennium-long paralysis by one of the private token manufacturers, Matthew Boulton. He’d developed a steam-powered production process that could strike large copper coins worth their face value in metal and included features to prevent counterfeiting. His methods led the world – it’s not as if the Royal Mint was a laggard. But even Boulton couldn’t overcome every problem. His ‘Cartwheel’ penny and twopence coins were infamous for being huge and unwieldly – and being impractical, they were unpopular.

At this point, the Royal Mint resisted introducing farthings and halfpennies because they anticipated demand would be huge and Boulton wouldn’t be able to meet it. They were probably right. But when they relented in 1799, the price of copper had gone up, meaning the new coins were smaller than expected – and the public had less need to switch from tokens whose intrinsic value had also risen. Counterfeits had a resurgence to take advantage of the increase in the price of copper.

George III Cartwheel Twopence, 1797

Soho Mint, Birmingham. Copper, 41mm, 56.9g. Laureate and draped bust, with incuse GEORGIUS III D G REX. Britannia seated with shield facing left, holding olive branch and trident, with incuse BRITANNIA legend and date (S 3776). Each coin was made from two pence worth of copper – 2 ounces – which made it the largest and heaviest British circulation coin ever made.

In 1815, the Battle of Waterloo proved anything but a ‘Waterloo’ for the Royal Mint. The end of war with Napoleon presented an opportunity the Royal Mint took. The 1816 Great Recoinage pumped coins back into the economy. Boulton-inspired equipment now furnished a new mint and they could manufacture whatever coins were needed. Tokens were banned outright in 1817. But the original problem remained – the need for coins to carry their face value in metal.

This was resolved with the introduction of the Gold Standard in 1821, based on the gold sovereign (pound) introduced in 1816. This differed from previous pegs in that silver was no longer used in a ‘bimetallic’ standard. This meant the values of silver or copper were no longer relevant to the exchange value of coins – all coins were redeemable in gold, so didn't need to be worth anything themselves. This removed the problem that dogged previous standards – namely, that a change in the price of gold relative to silver would lead silver coins to be either over or undervalued. The Royal Mint could produce coins with higher face values than the metal content, ensuring they wouldn't be melted down or shipped abroad. The link between intrinsic value and face value had been broken.

The Gold Standard wouldn’t have worked in centuries past. It relied on having a stable banking system, in which people could have confidence instead of the physical metal. Without that, runs on banks at times of panic would have seen the gold regularly disappear. The Bank of England was created in 1696, centralising the precious metal stockpile to ensure there was always enough to lend against, allowing Britain to move from a bullion-based economy to a credit-based economy. Trade could grow unimpeded. Banknotes soon accounted for more than half of transactions – where the value of a note is solely in the promise of its exchange for gold. It wasn’t expected anyone would redeem their notes and coins for gold, but the key was confidence, and large reserves were needed to settle trade balances. Such reserves wouldn’t have existed before the discovery of large gold deposits in the 1800s.

In adopting the Gold Standard, Britain was a world leader. The rest of the world took until the 1870s to adopt it. By the end of George III’s reign, the ancient problem of small change had been solved. Rather than the villain, he was the hero.

Sources:
Mind the Pennies …: Money and its Use in Early Medieval Europe, Anna Bayman https://pastandpresent.org.uk/mind-the-pennies-money-and-its-use-in-early-medieval-europe/
Long Cross Pennies (1247-1279), Rod Blunt https://www.ukdfd.co.uk/pages/Long-Cross-Pennies/Long Cross Pennies P1.htm
The Royal Farthing Tokens of James I, C Wilson Peck https://www.britnumsoc.org/publications/Digital BNJ/pdfs/1952_BNJ_27_30.pdf
Gerard de Malynes, fl.1586-1641, The History of Economic Thought https://www.hetwebsite.net/het/profiles/malynes.htm
A Brief History of British Regal Copper Production during the Seventeenth and Eighteenth Centuries, University of Notre Dame, Department of Special Collections https://coins.nd.edu/colcoin/colcoinintros/Br-Copper.intro.html
The Gold Standard: Historical Facts and Future Prospects, Richard N Cooper https://www.brookings.edu/wp-content/uploads/1982/01/1982a_bpea_cooper_dornbusch_hall.pdf

 

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Congratulations on an outstanding article. I will have to spend more time to fully digest it, but it has already helped me a great deal. I just completed a draft on the British monetary system during the Napoleonic Wars. Elements here will help me tighten it up.

 

Thomas J. Sargent's "The Big Problem of Small Change" has a lot of useful theoretical discussion as to the shortages of minor coinage in Medieval and Early Modern coinage. Some of the math and economic theory went over my head, but if I got the gist of it, the main argument went something like:

Small change is more useful than larger money in allowing transactions to take place. To use a modern example, almost anything you can buy with a dollar you could also buy with 4 quarters. But unless change is readily available, there are lots of things you could buy with 4 quarters which you can't buy with a dollar.

Even when all the currency units are made of the same metal (such as silver in the Medieval Era), small change still tends to be inherently in short supply. In addition, smaller money had a higher cost of production per unit value than larger coins, so governments were reluctant to produce it in adequate quantities. Governments tried to solve the problem by debasing the minor coinage, but that just led to inflation and a change in the value ratio of minor to major coinage.

The problem was only really resolved when technology improved enough to issue "token" coinage which didn't need to contain its full metal value. Modern milled coinage allowed for circulating copper and less than full-bodied silver without the rampant counterfeiting that previously occurred.

The UK especially exacerbated the problem by 1) not having copper coinage be legal tender which could be freely exchanged for silver; 2) not addressing the silver:gold price ratio to keep silver in circulation in the late 1700s; and 3) suspending the convertibility of paper money during the French Revolution/Napoleonic Era.

China's "cash" system of full-bodied copper coinage is also an interesting example. As far as I know copper traded with silver ingot-based money at what was effectively a floating exchange rate, which solved some problems but caused a a bunch of others. Larger-denominated copper coins were highly inflationary.

Anyway, here's my "full bodied" copper coinage: Sweden 4 daler 1756 (1.93 kg)