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Scrip as private money, monetary monopoly, and the rent-seeking state in Britain - By ELAINE TAN (2011)

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Economic History Review, 64, 1 (2011), pp. 237255

Scrip as private money, monetary monopoly, and the rent-seeking state in Britain1By ELAINE TANScrippromissory notes payable in goods at company storeswas issued by employers to pay workers, and was an important component of British money during the industrial revolution. As late as the third quarter of the nineteenth century, scrip issued by coal rms, which represented the foregone demand for ofcial currency, was at least 9 to 24 per cent of the value of English country or Scottish banknote issues. In some areas, scrip was 38 per cent of the total wages paid. The states suppression of this private currency to defend its seigniorage rents was in part the motivation behind the prohibition of the truck system in 1831.ehr_549 237..255

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overnments today have the sole legal right to issue money. While economists disagree on the necessity of this monopoly and have proposed many theoretical arguments for and against privately-issued currencies,2 history has provided many examples of successful competitive note issue, most notably by private banks in the US and Scotland.3 With a few exceptions, however, less attention has been paid to money issue by private non-nancial enterprises.4 A non-nancial company may issue currency by minting coins according to a common standard of weight (for example, merchant tokens), or it can issue bills of exchange which are accepted by non-rm organizations. A rm can also produce scrip, a currency substitute, to pay workers.5 In Britain, scrip was part of the truck system used by employers to pay wages and was mainly found in coal industries in the nineteenth century. From 1831, after the passage of the anti-truck law that year, scrip was used primarily in the payment of wage advances, while wages on payday were mainly in ofcial money. This use by employers makes scrip different from bank-created private money and provides a departure point for thinking more broadly about unregulated payments systems, a free market in currency issues, as well as their importance compared to

1 I am grateful to two anonymous referees and the editors for comments. Thanks are also due to Stan Engerman, Anna Schwartz, Richard Timberlake, and John Wood for comments on a related paper and insightful conversations on monetary economics. The warm hospitality of American Institute for Economic Research and City University, Hong Kong, where this article was revised, is acknowledged gratefully. 2 See the survey by Selgin and White, Invisible hand. 3 For example, Rockoff, Free banking; Sylla, Forgotten men; White, Free banking; Horwitz, Competitive currencies. 4 One exception is Timberlake, Private production. Bills of exchange, discussed later, were issued by nonnancial enterprises. However, they were money only if they were accepted by individuals and households. If bills were only transferable among rms, they were trade credit; Brechling and Lipsey, Trade credit. In general, only small bills functioned as money, and medium and large bills were not used as currency. 5 Scrip was also issued in lieu of legal currency by local governments and transportation companies; Timberlake, Scrip money, p. 401.

Economic History Society 2010. Published by Blackwell Publishing, 9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.

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ELAINE TAN

other forms of money during British industrialization. Scrip, comprised of paper currency called notes, tickets, or lines, was non-interest bearing. It was a form of endogenous money, the demand for which was driven by labour transactions. Scrip was redeemable, without notice, for goods at company stores afliated to rms that issued it. It was accepted by independent third parties and households within the locale for payment in lieu of legal tender. By the mid-nineteenth century, scrip taking the form of wage advances was usually redeemable within a period of a few months. All these characteristics qualied scrip as a form of private short-term local money, and the truck system as a rudimentary credit system.6 Parliament passed a general prohibition of the truck system and the use of scrip in 1831, when it mandated wage payments in legal tender only. This law is viewed traditionally as the result of motives to protect workers.7 Evidence for this interpretation is usually based on the declared motives of parliamentarians. For instance, the two men who introduced the bill to the Houses of Commons and Lords concurrently both said that the intention of the law was to benet the working classes. For instance, Edward Littleton, who introduced the Truck Act as a private members bill, reminded the House, that this Bill was founded on the statements contained in petitions from all the great manufacturing towns and counties, most numerously signed by the labouring classes, and not contradicted by any counter petitions or statements whatever. The measure was introduced therefore at the desire of the working classes, and was intended for their benet.8 The same bill was introduced concurrently in the House of Lords by Lord Wharncliffe, who reasoned that the truck system had to be abolished as it was not conducive to the prosperity and interest of the manufacturing population.9 However, labour protection could have taken other forms, such as monitoring prices at company stores or requiring scrip-issuers to incorporate as banks. The hardships of the working classes had little to do with the mode of payment. As Thomas Attwood pointed out, workers paid in ofcial money were also having problems.10 In forbidding currency substitutes, the state was in effect eliminating rivals to its prerogative in money production. By using scrip, the truck system bypassed ofcial coin and banknotes, as Littleton and Wharncliffe also argued.This would have had the effect of compromising the single monetary standard backed by the state and reducing its seigniorage rents. Hitherto neglected, this monetary perspective on truck indicates that the British state was not a disinterested party. It had in fact much to gain potentially from the abolition of truck. Direct evidence for the seigniorage hypothesis is hard to come by because governments are generally loath to reveal their rent-seeking motivations. Some MPs who advocated the prohibition of truck argued explicitly for a common currency standard and the centralization of money production under state control. Although relatively few in number, they were prominent government ofcials, including the Master of the Royal Mint and Robert Peel, the then Home Secretary.6 Indeed, a contemporary newspaper called it a bad system of banking; Spectator, 18 Dec. 1830, cited by Hilton, Truck Act, p. 471. 7 For example, Hilton, Truck system, pp. 6387. 8 Hansard (Commons), 3rd ser., VI, 12 Sep. 1831, col. 1360. 9 Hansard (Lords), 3rd ser., IV, 7 July 1831, col. 923. 10 Hansard (Commons), 3rd ser., I, 14 Dec. 1830, col. 1168.

Economic History Society 2010

Economic History Review, 64, 1 (2011)

SCRIP AS PRIVATE MONEY

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So we turn to indirect evidence. That seigniorage was an important consideration for the government could be seen from various taxes and duties placed on nancial instruments which reduced demand for ofcial currency. It was also evident in debates about the Bank of Englands charter at about the same time and the charges imposed on it for its note-issue monopoly privileges. The more signicant scrip was, the greater the states incentive to abolish it. In order to determine its signicance, this article uses a two-step argument. Firstly, it asks: how signicant was scrip during the third quarter of the century, after its use had declined for decades? If private currency remained important even after a prolonged period of decline, then it would have been much more signicant in the 1830s when the state acted against it. This enables the use of wage records from the 1870s to cast light on the institution right before the Act of 1831, a period for which data are unavailable. Secondly, the signicance of scrip is quantied by presenting a model linking the potential increase of ofcial currency to the absence of scrip. Thus, the model and the 1870s data enable us to determine the counterfactual gain to the state with the abolition of scrip in 1831. To preview the result: in the absence of scrip, country or Scottish banknotes (the alternative legal private currency) in circulation would have increased by a nontrivial 9 to 24 per cent at the minimum. Scrip made up 38 per cent of wages in some locales, even in the waning years of the truck system. The amount of ofcial money displaced, and correspondingly the states potential gains in rent, thus provides indirect support for the seigniorage hypothesis. Previous studies of scrip in Britain and the US have argued for its signicance, but have not managed to estimate by how much ofcial money would have increased if scrip had been abolished.11 Moreover, discussions of money during the industrial revolution have tended to ignore private, non-bank monies.12 Including such non-bank currencies, of which scrip in mining communities was a component, suggests the wide use of paper credit and monetization in isolated areas. Previous research has not delved into scrips benets vis--vis other forms of money. That employers issued, and workers accepted, scrip indicates that it was preferable to other forms of money, such as bills of exchange, banknotes, and coin. Bills were taxable through stamp duties. Banknotes were only as stable as their issuers and supply was rigid from mid-century, and coin tied up capital in unproductive stocks of money commodity.While well-functioning scrip was benecial to workers on the whole, fraud and abuse by some employers gave the system its bad reputation among contemporaries and historians. The article proceeds as follows. The next section reviews t