Gold, Silver and the Glorious Revolution; International Bullion Arbitrage and the Origins of the English Gold Standard

Stephen Quinn, College of William and Mary

Before 1696, England was on a silver standard. After the Glorious Revolution in 1688, however, England entered into an expensive war with France that eventually pushed England into a bimetallic monetary regime. The Nine Years War (1689-1697) required large remittances from England to the Continent for the support of military forces. In response to the war's demand for capital flows, the pound exchange rate weakened. Silver and gold were both substitute means of international payment, but the two metals responded in very different ways. The price of gold in England increased with the demand for bullion. Because the legal price of silver coins was fixed, however, silver adjusted to the higher demand for bullion with silver exports. A massive outflow of English silver began in 1689 and continued through the war. By 1695 the price of gold had skyrocketed while much of the former silver content of English coins had been shipped overseas. In 1696, the English Parliament responded by reminting the silver coinage and establishing a price ceiling for gold. Except within a limited price band for gold, England introduced a legally fixed, bimetallic standard in 1696 that favored gold in domestic circulation by undervaluing silver relative to gold. These tensions between substitutes were still at work centuries later when England converted silver coins into token money and adopted an official gold standard. (Redish) However, the ruinous strain on England's silver standard had begun with William III and the Glorious Revolution.

This paper examines both the export of silver from England and the transfer of funds on behalf of the English government during the Nine Years War. The finding that some of the financiers who participated in the exportation of silver also remitted funds to the English troops highlights the complementary nature of the two activities. The paper focuses on the London goldsmith-banker Stephen Evance in his dual roles as a conduit through which silver left the domestic English economy and as a member of a syndicate that financed England's forces in the Nine Years War. Stephen Evance's extant bullion accounts (March 1688 through August 1690) cover the critical period surrounding the Glorious Revolution in November 1688 and England's entry into the war against France in May 1689. (Evance) The goldsmith-banker's experiences characterize the micro-level responses of merchants and bankers to the shock of international military payments in the 17th century.

The pressures of recurrent war remittances increased demand for bills of exchange from England on the Low Countries. This military demand for credit, in turn, weakened the English pound on the foreign exchanges. The falling pound exchange rate (Flemish schellingen banco per English pound) created an arbitrage opportunity for the export of silver from England and the import of credit (bills of exchange) into England. The most profitable way of selling silver when the pound suffered a weak exchange rate was in trade for bills of exchange payable on London. Evance was a goldsmith-banker who bridged England's domestic silver market and the international bullion market. The goldsmith-banker's bullion business responded to the arbitrage incentives by channeling silver purchases from a large number of customers into sales to a few international buyers.

The resultant claim from exporting silver (credit, in London, owed by Continental financiers) was the same asset required to offset the transfer of funds on behalf of the English Treasury. The export of English silver complemented the transfer of funds from London because the wartime capital flows that prompted the export of English silver were not made directly by the English government. Rather, the English Treasury contracted with private financiers to secure international bills of exchange with which to pay the troops. (Jones) The Treasury worked through private syndicates to avoid having to ship bullion, yet bills of exchange created international obligations that remained to be settled. The intermediaries that supplied military transfers faced finding a means of paying these Continental creditors. In contrast, the bills of exchange that Londoners like Evance could profitably accept in trade for silver provided debts due in the Low Countries. This credit in the Low Countries from exported silver matched the financing needs of military remittances. Chart 1 presents a schematic of how the export of silver produced a flow of credit (bills of exchange) that off-set the flow of bills of exchange from London to pay the troops. In addition to selling silver, Stephen Evance also participated in a syndicate of bankers and merchants that managed the transfer of remittances to English forces on behalf of the Treasury from May 1691 to October 1694. Because Evance sold silver in the international markets, he was well placed to secure the credits on the Continent that those financing England's war effort required. The effective arrangement for Evance as a silver exporter and as a member of the remittance syndicate was that the government purchased from Evance the credit the goldsmith-banker generated by exporting silver. The goldsmith-banker was able to convert silver, via foreign credit, into domestic assets such as government debt. (see Chart 1) Like other goldsmith-bankers, Evance specialized as a delegated investor in Treasury debt (called tallies) on behalf of depositors. The goldsmith-banker capitalized on the complementary opportunities to sell silver for export and to finance the Nine Years War.

I. The market mechanism that pushed England into a monetary crisis in 1695 and moved it inexorably towards the gold standard was the substitution of gold and silver for bills of exchange in the settlement of international payments. Bills of exchange were debt instruments denominated in foreign money and payable in a foreign port. Bills of exchange acted much like travelers checks today; they saved merchants the expense of moving bullion, and were the dominant means of international payment in the 17th century. (van der Wee) The exchange rate for bills of exchange was the effective exchange rate for most commercial activity and was widely quoted. Gold and silver became preferred to bills of exchange as means of international payments when the exchange rate for bills became particularly strong or weak. If the pound was strong (weak), merchants would prefer to send bullion to (from) England rather than purchase expensive bills of exchange on (from) London.

The large capital outflows from England generated by the Nine Years War caused the exchange rate of the pound to weaken beyond the transactions cost differential between bills of exchange and bullion. Both gold and silver were drawn from England by the international bullion markets, but the institutional structure of England's monetary system favored the export of silver rather than gold. Since England was on a silver standard, the unit of account value of silver coins was fixed. One shilling equaled one shilling, so the price of silver coins could not rise in response to increased demand. Therefore, English silver coins had to adjust to demand fluctuations by quantity.

The peculiarity of English silver coins during the second half of the 17th century was that silver left the money by way of clipping rather than demonetization of the entire coin. In 1688, the average circulating silver was 15% underweight because of clipping. (Haynes) By late 1695, over one-half of the average circulating coin was gone. The silver released by illegal clipping supplied the domestic English bullion market with fresh silver to export. Clipping also allowed coins to stay in circulation, which minimized the contraction of England's money supply in the face of tremendous silver outflows. By not shipping bullion itself, the English government was able to avoid pulling whole silver coins out of circulation. Instead, bankers like Sir Stephen Evance could pass domestic English bullion, liberated from circulating coins, onto the international bullion markets and indirectly pay for England's troops fighting in Flanders.

The accelerating rate of clipping eventually triggered Parliamentary concern in 1695. The rumor of a recoinage in turn sparked a collapse in monetary confidence, and the public stopped passing clipped coins at tale (full unit of account value). The monetary crisis drove Parliament to the Great Recoinage of 1696. (Jones, Li) The Great Recoinage ended clipping by placing milled edges on all circulating coins. After 1696, silver coins could only adjust to a weak pound exchange rate by leaving circulation. The loophole in England's silver standard created with clipping was permanently closed.

Unlike silver, gold adjusted to the falling pound exchange rate by rising in price. By 1695, the price of a gold guinea had risen to 30 shillings from its traditional 21 shillings and six pence. The rising price of gold coins had the same effect as lowering the content of silver coins while keeping their price constant. Draining silver from each domestic coin without lowering the coin's unit of account price meant the relative price of the silver bullion contained within the coin increased. The difference between how the two metals adjusted to a falling pound exchange rate was that silver responded with a substantial outflow of bullion from England while gold responded with a dramatic increase in price. When the weakening pound exchange rate increased the demand for substitutes, silver could not rise in price because England was on a silver standard. The excess demand for silver was met through clipping rather than demonetization. In contrast, the price of gold coins did increase in response to the heightened demand for gold as a substitute for international credit. Hence, the underlying bullion financing of the Nine Years War was with silver rather than gold.

II. The bullion records of the London goldsmith-banker Stephen Evance cover the start of the Nine Years War and the beginning of the large military capital flows that followed. Before the outbreak of English hostilities in 1689, Evance had been accumulating gold. With England's entry into war with France and the weakening pound exchange rate, the goldsmith-banker's bullion business shifted primarily to silver. Evance purchased silver from a large number of domestic English sources and sold silver to a few international merchants. The goldsmith-banker became a middleman through whom silver passed from England to the Continent.

This paper makes extensive use of Stephen Evance's Bullion Book #5, which has survived in England's Public Records Office, to reveal the goldsmith-banker's role as a bullion dealer. (Evance) From March 1688 to August 1690, Stephen Evance purchased silver in over thirteen thousand transactions totaling [[sterling]]230,000. Nearly three-quarters of those transactions were unnamed and accounted for over half the pound value of Evance's total silver purchases. Evance's silver sales, however, tell a very different story. Evance recorded only 450 sales, but the average pound value of each sale of silver was [[sterling]]478 as compared to [[sterling]]171 for the average silver purchase. Although the goldsmith-banker sold nearly as much silver as he purchased, he sold silver in larger parcels and to fewer people. a href="quinn.tbl-1.jpg">Table 1 summarizes the composition of Evance's bullion business as recorded in Bullion Book #5. Examining the important purchasers of silver from the goldsmith-banker suggests Stephen Evance was a portal through which silver left England. Evance's largest silver buying customers were Sephardic Jews with close ties to the international bullion trade centered in Amsterdam. Together, David Penso, Jacob Gabay, Gomes and Alfonso Rodriguez and Joseph Beuno Henriques purchased [[sterling]]61,100 worth of silver, or about 30% of Evance's entire bullion sales. These customers knew each other through the London synagogue and had contacts with Sephardic bullion merchants based in Amsterdam. (Hyamson, Israel) Indeed, I was able to find some record of one of Evance's other silver-buying customers, Alexander Henderson, in Amsterdam. Henderson bought [[sterling]]11,500 worth of silver from Evance and was found to have active bullion dealings with the Amsterdam Exchange Bank. (Wisselbank)

Analysis of Stephen Evance's major customers provides strong evidence that the London goldsmith-banker acted as a channel for silver to leave England during the Nine Years War. Under the strong peacetime pound in 1688, the goldsmith-banker bought gold. When the pound then weakened under wartime duress in 1689, Evance became a silver exporter. Stephen Evance's behavior as a bullion merchant is consistent with Section I's expectations of how bankers and merchants responded to changing exchange rates. The next section considers the connections between the goldsmith-banker's bullion business and Evance's role in remitting the military funds that caused silver to leave England.

III. The weak pound on the foreign exchanges drove silver out of England through the shops of men like Stephen Evance; however, a weak pound also meant a strong Flemish schellingen banco. Taking advantage of the strong Flemish exchange rate, financiers could purchase English silver with a bill of exchange written in the Low Countries payable on London. This 17th century version of arbitrage between bills of exchange and bullion created debts owed in the Low Countries in exchange for silver. If Stephen Evance was participating in such arbitrage, he would have needed an outlet for his credits in the Low Countries. Supplying transfers of funds for England's military in Flanders was one such use that also complemented Evance's acquisition of government debt. From May 1691, just eight months after Evance's bullion book ends, through October 1694, Stephen Evance participated in a syndicate that remitted funds to the Continent on behalf of the English Treasury. Unlike their Dutch predecessor, Evance and his colleagues did not charge the Treasury a fee. Rather, Evance and his colleagues were intermediaries that profited from the complementary activities of exporting bullion (discussed above) and acquiring government debt.

The bills of exchange that the goldsmith-banker's syndicate furnished were often repaid with government debt. The English Treasury appreciated contracting with intermediaries that not only charged no fees but that also accepted government debt. From the outbreak of hostilities, Evance had loaned substantial sums to the Treasury. Many other goldsmith-bankers also specialized as intermediaries between depositors and the Treasury, and the Nine Years War generated a great new supply of government debt. (Quinn) Goldsmith-bankers offered depositors liquidity while the bankers enjoyed the extraordinary interest rates the Treasury offered on debt. Intermediation between depositors and the Treasury required the acquisition of government debt, and the Treasury was willing to supply debt in exchange for the transfer of funds.

By agreeing to supply bills of exchange, Evance was bridging his bullion and government debt businesses. The bills of exchange Evance's syndicate sent to the Continent created debits in the Low Countries. Arbitrage between silver and bills of exchange created credits in the Low Countries. In effect, Evance was converting exported English silver into government debt. Although the English government did not export silver to pay the troops, the very agents with whom the Treasury contracted to transfer funds did participate in the export of silver. Moreover, Evance was able to connect the two profitable activities of international bullion arbitrage and investing in government debt.

IV. The London goldsmith-banker Stephen Evance participated in both the transfer of wartime capital to the Continent and the exodus of silver that followed from it. In response to the weak pound exchange rate, Evance sold silver to international bullion merchants. To acquire English government debt with his credits on the Low Countries, Evance joined a syndicate that remitted funds to support England's forces abroad. Stephen Evance was at the heart of a mechanism that paid for an expensive foreign war by clipping and exporting silver from England's circulating coins.

The behavior of Stephen Evance and his associates highlights the dynamics of the early modern international markets. Merchants and bankers balanced the international gold, silver and credit markets through substitution and arbitrage. Merchants switched to the lowest relatively priced means of international payment, be that gold, silver, or bill of exchange. Moreover, arbitrage between this trio of alternative media of exchange accelerated the attainment of inter-market equilibrium. Stephen Evance's participation in the export of silver from London as the credit exchange rate weakened supports these claims.

The monetary crisis of 1696 was a product of the actions taken by international players like Evance over the years since 1688. By the end of 1695 and years of growing capital outflows, the price of domestic English gold coins (guineas) had risen 50% and the average silver content of circulating coins was less than half the original mint weight. The goldsmith-banker contributed both to the English government's ability to finance forces abroad and to the out-flow of silver that balanced England's current account. The Great Recoinage of 1696 did two things. First, silver coins were reminted back to full weight and not allowed to fall in weight again. Second, a ceiling price of gold was imposed. Both domestic gold and silver were stripped of their ability to adjust to severe international pressures except by demonetization and export of a coin's bullion. Because England fixed her gold to silver ratio higher than France or Holland did, future credit shocks that weakened (strengthened) the pound exchange rate drew silver out of (drew gold into) Britain. Although England had shifted from a silver standard to a loose bimetallic standard, the gold, silver, and bill of exchange markets were moving her inexorably towards gold.


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Haynes, Hopton, Brief Memoires Relating to the Silver and Gold Coins of England, (Lansdowne MS 801, British Library, 1700).

Wisselbank Ledgers, Indices, Balances, Amsterdam Municipal Archives, (5077/4).


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