Wednesday Isaac Newton Blogging: The (Very) Deep Roots of the Banking Crisis.

Coming up next June, I’ll be publishing my book, Newton and the Counterfeiter, in which I tell the story of Newton’s mostly unknown career as a criminal investigator and death penalty prosecutor.

It is as well a story that touches on the birth of the modern financial system — it covers the period when things like the Bank of  England, fractional reserve banking, a variety of paper instruments, debt-for equity swaps (a little later, actually) and other such esoterica were all being tried out.

Of great importance was the development of a bunch of different approaches to financing government expenditure.  All kinds of things got a work out. The book deals with some of them, including a marvelous chimera of an instrument that was at once a lottery ticket, paper money, and a bond.  Weird — but creditors of the Royal Navy, among others, were compelled to accept the notes at par.

Unsurprisingly, some writers on what was yet to be called the discipline of political economy had grave doubts about the transformation of money into paper, and government resources from receipts into debt.  They raised questions.  And on at least one occasion, Newton answered them.

In 1700, Newton, then Master of the Mint, got into a dispute with John Pollexfen, a member of parliament and a founding member of the Board of Trade (with Newton’s friend and admirer, the philosopher and theorist of money, John Locke).

Pollexfen was a hard money guy — paper might have some use in the financial system, but everyone knew real money took the form of silver and gold coins.

He argued that use of paper instruments depended on the money being held to support it.  Not for him was this new fangled notion of fractional reserve banking:  an institution issuing a note had to have the denominated amount in coin to back up the piece of paper that claimed to be money.  That is: paper was a convenient method of signifying the existence of an amount of real money; it was not money in and of itself.

Newton disagreed.  His handwritten draft of a reply to Pollexfen survives in his Mint papers, and in that draft he wrote that creation of paper instruments — including those issued by the government as debt — was essential to ensure that the nation’s economy did not collapse for want of an adequate money supply.  He wrote “If interest be not yet low enough for the advantage of trade and designs of setting the poor on work…the only proper way to lower it si more paper and credit till trading and business we can get more money.”

Interesting ideas, no?  Increase the money supply to lower the price of money, the interest rate, and thus enhance trade and employment.  What a notion!

The other Newton comment that I know of on the question of whether government debt instruments were a good idea is even more striking.  He wrote in a different context on the question of whether the creation of government debt instruments were inherently damaging to government finance and the economy that, in fact, credit was supremely useful because,

“Tis mere opinion that sets a value upon money [coined precious metal]…and the same opinion sets a value upon paper security…All the difference is …that the value of the former is more universal than the latter.”

Mere opinion!  This was a radical idea indeed at the turn of the eighteenth century

Newton did allow that credit was like doctor’s physic.  To a certain dose it was helpful; to excess it could be deadly… a sentiment which also has strangely contemporary echo.

None of this to say that Newton was anything like a pioneer of economic thought; he was not.  Most of his views represented variations on contemporary elite opinion — which was struggling to come to grips with a transformation in finance that accompanied the global expansion of English and European trade and economic life.

But even here there are parallels.  Much of our problem today derives from the toxic consequences of exotic variations on older financial tricks, some of which do in fact have roots that stretch back, through several removes, to this beginning.  Now, as then, the failure of many to grasp the implications, the risks, associated with such innovation presented opportunities both legal and definitely criminal.  Even the smartest were not immune to the lure of occult, effortlessly acquirable wealth…

…and not even Isaac Newton himself avoided the infection, as will be discussed in another post, soon.

(See G. Findlay Shirras and J.H. Craig’s article “Sir Isaac Newton and the Currency” in The Economic Journal, Vol. 55, No. 218/219 Jun – Sep. 1945 for a fuller account of Newton’s involvement in the currency/credit issues of his day).

(Also:  I can’t tell you what a pleasure it was to take a brief break and write about something that doesn’t have to do with either of the those-who-must-not-be-named who have been bedevilling my concentration these last too-many days.)

Image:  Augustus Pugin and Thomas Rowlandson, “The Great Hall of the Bank of England,” in Ackermann’s Microcosm of London (1808-11).  (Anachronistic, I know — but what a nice image.)  Source:  Wikimedia Commons.

Explore posts in the same categories: Economic follies, History, History of Science, Isaac Newton

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One Comment on “Wednesday Isaac Newton Blogging: The (Very) Deep Roots of the Banking Crisis.”


  1. Newton really was an alchemist!


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