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Summarise John Locke's views on money and discuss them in relation to the context in which they arose.

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Introduction

Student i.d.: 324247 Summarise John Locke's views on money and discuss them in relation to the context in which they arose. John Locke is seen as a major figure in the history and development of political thought. He is also portrayed as one of the major economic thinkers of the so-called Mercantilist paradigm of thought, the prevailing economic ideology throughout the Fifteenth to Eighteenth Centuries. This has come primarily through two sources; initially, his Two Treatises on Government (1690) which later provided Adam Smith with the basic understanding of the Labour Theory of Value, and secondly, his pamphlets on Some Considerations of the Consequences of the Lowering of Interest (1691) and Further Considerations (1695) developed the quantity theory of money to an extent no economist had previously done before him. To establish Locke's theory of money, we must first establish what had occurred beforehand, both economically and politically. Scholasticism, the school of thought coming before Mercantilism, had very deep roots in religion, and sociology. Trade and most economic policies followed Biblical law in so far as the 'Virtue of Trade', the just price and usury. Usury was the forgoing of any interest available on money lent out, as instructed in the Sermon on the Mount. It was tantamount to robbery as any money lent out meant its ownership fell to the borrower, who could use it as they wished; in this context, it was seen the lender had no claim for any compensation for lending out this money. ...read more.

Middle

He believed that while there were other factors involved, the most important reason for Dutch wealth was their comparatively low interest rate. The question was whether their prosperity was caused through low interest rates, or if the rates were low due to this performance. He stated previous Dutch reductions had increased wealth, while showed that the low rates in Italy were giving a well performing economy, and the sluggish Spanish economy could be explained primarily due to their high interest rate of 12%. At the time, the English economy was still in the throes in Scholastic thought, and had usury laws. Child believed that as the Dutch had no usury laws, it followed that the economy performed well, with a secure financial sector and low public spending. John Locke argued against Childs' theory, believing a forced reduction in interest rates would indeed increase the demand for loans, but would also decrease the supply of lenders. A natural rate of interest was determined through quantity of money relative to trade, with scarcity of money also being a factor. He published "Some Consequences that are likely to follow upon lessening of Interest to 4%"(1668), in light of arguments for the government to reduce interest rates to a level comparative to the Dutch economy, cutting from 6% to 4% through an Act of Parliament. He believes interest rates are high when money- both metallic coins and financial demand and supply for borrowing- is scarce, and a government act aimed at suddenly increasing its quantity will only be harmful to the economy. ...read more.

Conclusion

Opposing theorists, such as Nicolas Barbon, insisted the coin was just a token, accepted at face value. Locke believed if coins were minted with a lower silver content, it would be equal to fraud, forcing consumers to accept coins less than the value entitled to them. Locke had close proximity to politicians in London, and on his return from exile to Holland, he was already seen as a major political thinker, although his expertise was called upon for economic issues, especially his theories on interest, and his input as to how to solve the recoinage crisis which resulted in the government minting new coins with the original silver value in them. Due to this, there was large-scale deflation, recession and unemployment for the following years, as bad clipped coins were still used and good full value coins were either hoarded or sold abroad as they held a full silver content. As he was not first and foremost an economist, his ideas inevitably fell foul of future economists, such as Adam Smith, who criticised his theories on money and its effects in the economy. Money is certainly not now as important as real factors in wealth creation, but changes in money supply can have a beneficial effect on economic activity levels, as money now is no longer confined to definitions of gold and silver deposits. John Locke had major political connections, and it was through these that his economic theories were implemented into the system. His ideas on interest rates gave rise to his theories on money, which even today echo in present day monetary policy determination for trade and currency manipulations. ...read more.

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