A takeaway from the Bank of England Museum: Go easy on issuing fiat currency

livemint.com:

On 21 July, I visited the Bank of England Museum in London. It was an interesting and an engaging experience. Nonetheless, I was left wanting more, simply because I thought the museum would be more about the history of money than about who did what at the Bank of England since its establishment in 1694.

Two gentlemen who should have found a mention in the museum’s exhibits are Isaac Newton and Thomas Gresham, both intricately linked to how money has evolved over the years. Newton, other than playing a key role in the scientific revolution, was also the Master of the Royal Mint from 1699 until his death in 1727. In 1717, as Master of the Mint, Newton made a decision which ensured that gold became England’s money, with the country gradually moving towards the gold standard, under which paper money was backed up by gold stored in vaults.

Interestingly, as the British Empire expanded, other countries thought the gold standard was one of the reasons behind that success and gradually started moving towards it. Thomas Gresham was a financial advisor to Queen Elizabeth I, who ruled from 1558 to 1603. When she became the queen, rulers over the centuries had been debasing money by issuing coins whose face value was more than the amount of precious metal in them.

Further, these rulers insisted that a debased coin with lower metal content was worth the same as a whole one with full metal content. This meant that citizens were expected to ignore the precious metal content of a coin and just look at its face value. This led to a peculiar situation where the good coins—whose metal content was equal to their face value—were hoarded, resulting in their vanishing from circulation.