Intellectuals in Policymaking

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