Monday, January 24, 2022

Why Henry III's gold penny failed

English gold penny minted by Henry III in 1257

A lucky metal detectorist just discovered a Henry III gold penny, one of the first English gold coins ever minted, on a farm in Devon in the southwest part of the U.K. My favorite thing about detectorist findings is that they give us a good excuse to learn about old coins. 

Minted in 1257, only eight of Henry III's gold pennies (pictured above) have survived. This is odd given that medieval historian David Carpenter's analysis of historical records indicates that 72,000 of these coins may have been produced within a year or two.

Why are there so few of Henry III's gold pennies still in existence? In this short post I'll suggest that the gold penny was a failure. Rather than circulating in trade, as one would expect of a coin, most of them were melted down within a year or two after issuance. And so there are very few gold pennies left for detectorists to find.

Leading up to the 1200s, the demands of English trade for coinage was mostly met by the workhorse English silver penny. Because the yellow metal was expensive, gold coins fell outside of the day-to-day spending range of the average person.

But Europe was getting wealthier and this was creating more demand for higher denomination coins. According to Alexander Del Mar, gold bezants were already circulating in England by the 13th century (page 236, [pdf]). Minted by the Byzantines, bezants had dominated Mediterranean commerce since 300 AD or so (see Munro). To boot, a handful of 11th- and 12th-century Islamic gold dinars and dinar-inspired coins have been found in England, writes historian Caitlin Green in a blog post, further suggesting a nascent demand for high-value coinage (see photo below). Del Mar cites texts from the era mentioning the circulation of Spanish maravedis, a gold dinar copycat.

Arabic gold dinar (AD 1163-84) found in Suffolk [link]

Meanwhile, the Italian city states of Genoa and Florence had begun to mint their own gold coins in 1252, the Florin and the Genovino. In the century before these two cities had pioneered the creation of large silver coins, the grosso or groat (worth 12 silver pennies) which England had yet to copy.

And so Henry III may have been eager to issue his own gold coin, one with his face on it and not someone else's stamp. But his effort failed .

When Henry III issued his gold penny, he rated it to be worth 20 silver pennies. That is, if you were an English merchant in 1256 you were required to accept a new gold penny from a customer at the same rate as 20 silver pennies. As a backstop, Henry III himself promised to redeem the gold pennies at 19 and a half pennies, the other half-penny being a fee. (See Evans, The First Gold Coins of England.)

In bimetallic coin systems, it was crucial for the monarch to choose the proper exchange ratio between silver and gold coins. If the chosen ratio diverged from the market's gold-to-silver rate, then Gresham's law kicked in. Undervalued coins disappear from circulation because they could be better spent elsewhere at their true market metal price.

In his paper Gold and Gold Coins in England in the Mid-thirteenth Century, Carpenter maintains that Henry III picked the right ratio between gold pennies and silver pennies.  A gold penny weighed the same as two silver pennies. At Henry III's chosen exchange rate of twenty silver pennies to one gold penny, this implied a price of ten grams of silver to one gram of gold. Carpenter says that this was in line with the prevailing 10:1 market rate between silver and gold bullion at the time.

But historian John Munro suggests otherwise. What Carpenter omits is that an English silver penny was only 92.5% pure, the remaining 7.5% being comprised of base metals. This means that Henry III's chosen exchange rate of twenty silver pennies to one gold penny actually valued the quantity of gold inside a gold penny at just 9.3 times that of an equivalent amount of silver, not 10 times.

Thus the king's chosen rate undervalued gold. And so Henry III's gold penny would have run smack dab into Gresham's law. It would have been more profitable for an English merchant to melt down 1 kg of gold pennies into bullion and buy 10 kg of silver with the proceeds at the going market rate than to spend that 1 kg of gold pennies as coins (since that would mean getting the equivalent of just 9.3 kg of silver).

Put differently, an English arbitrageur could engage in the following set of trades to make a risk-free return. He or she could spend 9.3 kg of silver coins to get 1 kg of gold pennies at Henry's official rate. Then they could melt that 1 kg of gold coins down and sell the gold bullion for 10 kg of silver at the market rate. Voila, our arbitrageur has magically turned 9.3 kg of silver into 10 kg of silver, earning a free 0.7 kg in silver. They would continue to execute this trade until the entire stock of Henry III gold pennies had disappeared.

There is additional evidence of the undervaluation of the gold penny. In 1265, just eight years after initially issuing them, Henry III increased the gold penny's rated value to 24 pennies from 20 pennies, writes Kemmerer (Gold and the Gold Standard, 1944). This rating would have been more in line with the market rate between gold and silver. But by then it was probably too late. All of Henry III's original issue of gold pennies would have been melted down. Nor was he minting any new ones. Specimens like the coin found this year in the farmer's field in Devon would have been one of a few to escape the melting pot. 

As for England's monarchs, they would only get gold coinage right in 1344 with the successful issuance of the gold noble.

1 comment:

  1. But wasn't there cost of melting the coins for arbitraguers? What does history tell us about that cost and how it affected the decision to melt a gold or silver coin in the period under discussion in this post?