Monetary Theory in the Renaissance
Renaissance writers dismantled the medieval “communis opinio” that ideally coins should be valued according to their intrinsic metallic content. They discovered three important and enduring ideas in monetary theory that undermined the “communis opinio.” The first is that the value of a coin could exceed that of its constituent metal. A related second idea is that intrinsically worthless objects can function as money and displace full-bodied specie. A third idea is that using an intrinsically worthless object as money might generate inflation, but that whether it does depends on various circumstances, including the amount issued. Episodes with token coins that had produced inflation led some writers to approach a quantity theory of money.
Although these ideas seemed to emerge abruptly, earlier refinements of the “communis opinio” had prepared the way. But Renaissance writers reasoned in new ways. During the Renaissance, jurists became humanists. The advent of printing let non-jurists, particularly mint officials, debate monetary policy in public. Some of these writers drew evidence from historical chronicles and the accounts of travelers.
The three main ideas of Renaissance monetary theory are incorporated into our model and were used by post-Renaissance monetary theorists, including John Law and Adam Smith. Because they reflect ideas to be discussed in this chapter as well as policies and events in later chapters, it is useful to begin this chapter by briefly describing some of Adam Smith’s ideas about money. We shall encounter the origins of some of Smith’s ideas among Renaissance writers later in this chapter.
Our model embodies a feature of commodity money systems that was the focus of a notable mental experiment of Adam Smith ([1776] 1937, book II, ch. 2, 276–81). Smith evaluated the effect on consumption and the price level of relaxing a prohibition on issuing banknotes in a small country initially on a specie standard. Smith predicted that if the country were to allow banks to issue paper banknotes (i.e., intermediated evidences of safe private indebtedness that he called “real bills”), there would result a one-time boom in national consumption. Specie would leave the country in exchange for a one-time importation of consumption goods because the banknotes would displace specie. So long as the notes were backed by safe private IOUs, Smith predicted that the price level would not be affected.1 Smith’s experiment highlights that a commodity money system is wasteful because there are better uses for the resources absorbed by a commodity money. In various forms, calculations based on Smith’s experiment form the backbone of the case that a well-managed fiat money can dominate a commodity money (see for example Ricardo 1817, ch. 27, Friedman 1959, 5, Fisher 1920).2
Smith’s thought experiment represents the culmination of various experiments—in thought and fact—that began during the late Renaissance and in the context of small change. In the remainder of this chapter, we describe some writings about these experiments, postponing detailed descriptions of the actual experiments until later chapters.
Debt repayment, legal tender, and nominalism
The sixteenth century brought new ways of thinking about money. We begin by describing ideas of the influential French jurist Charles Dumoulin (1500–1566).3 He was a transitional figure who struggled to move beyond the medieval theory of money. A man of the Renaissance, he dismissed the centuries of dissecting and commenting upon the same text as wrongheaded. He criticized many parts of the prevailing medieval monetary theory, proposed a nominalism that divorced exchange values from weight of metal, and had insights that might have led him—and indeed soon led others—to appreciate token money. But Dumoulin retreated from the more radical implications of some of this arguments, and reaffirmed circulation by weight. We credit his role as progressive before recounting some of Dumoulin’s conservative recommendations.
Dumoulin the revolutionary
Dumoulin’s treatise on usury4 was a frontal attack on the medieval prohibition on interest. As he declared in his very first sentence, justice in contracts and trade is to be sought “not in fabricated constructions but in the things themselves.” He discussed the standard of deferred payment, and, more abstractly, the value of money. He sought to base his legal opinions about these age-old issues on a rational understanding of money derived from its actual use in exchange.5
To understand money, Dumoulin returned to Aristotle’s passage on barter and money in Politics. He also read Paulus’s exposition of the double coincidence of wants in Digest 18.1.1, ignoring the glosses. He concluded that because it had a particular purpose, money was not a traded good like any other. Money is made of metal, but is distinct from uncoined metal: “the form and substance of money, as money, is not the matter or the physical appearance of the money, but its assigned value (valor imposititius): hence any money, as such, is not brought into a contract or clause other than from the point of view of its current assigned value or quantity (quantitas)” (§ 694; 1681, 2:285). Dumoulin identified the quantitas in Paulus’s text with the exchange value of the coin, not its intrinsic content.
Dumoulin inverted terminology that had prevailed for three centuries.6 He said that the intrinsic value of a coin is its aestimatio, its value in exchange. Therefore he said that the Roman law on repayment of commodity loans should be applied to values in exchange, not value by weight. The counterpart of wine’s quality is the value of the coin, not its metal content, and its value at the time of the contract is the sum due. Thus, if N coins were lent when they were worth e1 each, then Ne1 is the sum that is owed. If the contract specified repayment in the same coins, and the coins are worth e2 at the time of repayment, then Ne1/e2 coins are sufficient tender. This doctrine is usually called “nominalism.”
Nominalism had important implications for disputes about debt repayment. In a loan, “it was both parties’ intention that a certain number of coins be given for immediate use in trade, and to be soon spent in exchange, which can only happen from the point of view of the current value at the time the coins are counted.” In this, Dumoulin anticipated Adam Smith’s comment that “what the borrower really wants, and what the lender really supplies him with, is not the money, but the money’s worth, or the goods which it can purchase” ([1776] 1937, book II, ch. 4, 334). It follows that “any subsequent increase or decrease of the same coins is completely irrelevant; because it does not make the quantity counted out earlier any larger or smaller, nor does it make its value in trade any stronger or weaker” (§ 688; 1681, 2:283).
One motivation for Dumoulin’s nominalism was no doubt its simplicity. Accepting that a franc is a franc and letting the king define the franc precluded protracted litigation over old debts and preserved the sanity of the legal system. Dumoulin cited, among many other “miserable entanglements of lawsuits on these matters,” one court ruling that remained unenforced after thirteen appeals. Contemporary legislation in the Low Countries underscores this point. A law of 1571 required revaluation of long-term debts when repaid, but the resulting flood of litigation led to a 1601 law that allowed repayment at face value instead (Stampe 1928, 74–75).
Dumoulin’s impact
Leading French jurists quickly adopted Dumoulin’s ideas. Although Denis Godefroy (1549–1621) remained attached to the medieval doctrine (to Dig. 12.1.3; 1688, col. 331), he stood apart. François Hotman (1524–90) distinguished debasements per se from changes in the official value of a coin. In the first case, so long as the new coin is rated at the same value as the old coin, repaying one for the other does not violate the Roman law rule against “aliud pro alio,” because the purchasing power is the same. In the second case, it is not the coin itself that is owed but the number of units of account it is worth: if a creditor demanded the same number of coins after an increase in the value of the coin, he would be demanding more than he is truly owed ([1573] 1610, 127–28). Hugues Doneau (1527–91), citing Hotman, agreed that the official rate of a coin was its true “intrinsic quality” and that the rules of Roman law should be interpreted on that basis (to Dig. 12.1.3: 1847, 10:109–26).
French jurisprudence followed, albeit prudently. 7 Dumoulin was a lawyer and championed his ideas in court. His first important legal victory occurred on appeal in 1535. In the case, a loan had been made in 1505 of £2,400 in the form of 1,332 écus (at 36s. each) and 8s. In 1535, the debtor tendered 1,066 écus (then worth 45s. each) and 30s. in change. The creditor refused, the debtor sued and lost, but, with Dumoulin as counsel, won on appeal. The case has not been found, but a very similar case dated 1539 has been identified, in which the court ruled that when gold or silver coins had been explicitly valued in terms of units of account, the debtor had to repay the debt in the same coins, but at their current value. Thus, if the value of gold coins in units of account had increased, the debtor could tender fewer coins. The only thing the creditor could demand was to be paid in the same metal, but a ruling of 1569 made it possible to tender any coin for another. 8 A ruling of 1560 allowed courts to require repayment of the same number of coins in one case only: when the coins had not been explicitly quoted in units of account in the original contract. This exception suggests that the aim was to enforce the contract as written, without having to resort to outside information.
French law eventually assimilated Dumoulin’s theory so thoroughly that, in the eighteenth century, the great jurist Pothier (1699–1772) could write that repayment on the basis of the value at the time of repayment is “constant practice in our jurisprudence; our jurisprudence is based on this principle that, in money, one does not consider the substance and the actual coins, but only the value attached to it by the prince” (Pothier 1824, 68). The authors of Napoleon’s Civil Code followed Pothier on this point, as on so many others, and incorporated the same-quality prescription of Digest 12.1.3 in article 1892, while exempting money in article 1893.
Dumoulin’s influence extended beyond France. In England, the ground-breaking decision on debt repayment was the “Mixt Moneys Case” of 1604 (Brett v Gilbert, 80 Eng. Rep. 507), which established nominalism in matters of debt payments in England (Nussbaum 1950, 177). The court’s decision cited both Aristotle and Dumoulin, and defended the king’s right to give value to base money with his stamp, just as he could make honorable a “mean person.”
Nevertheless, the progression of nominalism was not uniform. Discussions over the standard of payment continued in law books in Spain, Italy, and Germany (see, respectively, González Téllez, to X 2.24.18, 1715, 2:550–54; Costa 1603, 266–71; and Glück, to Dig. 12.1.3, 1841, 63–91). In Germany, the big inflation of 1622–23 prompted legislation prescribing debt repayment on the basis of an adjusted value, thus delaying the adoption of nominalism until the nineteenth century.
Dumoulin the conservative
Despite implications that others would soon extend, Dumoulin’s advocacy of nominalism was qualified and restrained. Some passages suggest that Dumoulin’s doctrine of debt repayment depended on the ruler’s absolute authority to set the legal value of coins. To the question, who assigns the “assigned value?” he answered, the ruler, but not arbitrarily. Dumoulin followed Bartolo in placing money in the domain of international law, jus gentium rather than domestic law. The ruler assigned value to coins, but only as a kind of notary: “This public estimation and current value depends not only on the prince in a monarchy or the leaders in a Republic, but also on the consent and usage of the people, and the practice of trade” (§797; 1681, 2:322). More generally, as asserted by Aristotle, money serves a purpose, and the object chosen as money should fulfill that purpose. It cannot be made of inappropriate material, and there must be a just proportion between the official rate and the intrinsic content. If the official valuation departed too much from the intrinsic content, or if it changed so frequently that it became useless as a standard of value, then money ceased to be money and should be treated as bullion. In that case, Dumoulin allowed a return to the medieval rules on debt repayment.
Dumoulin thus saw the king’s power to set legal rates as properly exercised only when it ratified market-driven changes in exchange rates between coins. He disapproved of monetary policies intended to place a currency at a competitive advantage, a policy that some merchants occasionally recommended.9 Dumoulin also condemned debasements designed to collect seigniorage. But he did not think that the king’s subjects should ignore the king’s decisions when they were wrong. The law remained the law, except in the most extreme circumstances such as the extraordinary debasements in France during the Hundred Years War.
Changes in legal rates in sixteenth century France were mainly of the sort that Dumoulin approved (see chapter 11). But legal theory and monetary policy were soon to interact in an unexpected way. Shortages of small change developed in the 1570s, soon after Dumoulin’s doctrine on debt repayment had prevailed. France experienced sharp increases in the exchange rate of large coins denominated in pence. When pennies were made essentially unlimited legal tender, creditors began to suffer large and unexpected losses. They pressed for a reform to make debts be denominated in the largest coin rather than the smallest. We shall study that reform in chapter 11. It implemented some features of the standard formula.
Fiat money
While promoting nominalism in the matter of debt repayment, Dumoulin continued to believe that the market value of a coin should be closely related to its intrinsic content. But if Dumoulin was unwilling to pursue nominalism to its logical conclusion, other writers would.
Dumoulin commented on these other writers. In the course of discussing debt repayment, he reviewed three existing theories about the value of money. The first was the romanist preference for zero seigniorage, which he endorsed, and the second was the canonist acceptance of a moderate seigniorage. The third, proposed “very recently,” rejected the relevance of the money’s content altogether, and accepted that money could be made of lead or leather and be tendered for a debt of gold or silver. Dumoulin dismissed it as “irrational and ridiculous: why, by the same token, it would be possible to make money out of printed paper, and that is just as ludicrous and ridiculous as a children’s game, and not only contradicts the origin and definition of money, but also experience and common sense” (§798; 1681, 2:322).
Fiat money in theory: Butigella
Dumoulin attributed that third theory to the Italian jurist Girolamo Butigella (1470–1515, fig.6.1), who was apparently the first to divorce money’s value from its content. In his commentary on Digest 12.1.3, Butigella criticized Bartolo’s view that the same money must be repaid, drawing on a variety of places in the Digest to assert that no attention should be paid to the quality of the material of a coin, and only to its estimation. If coins of a different material have the same value, the creditor cannot suffer a loss when he is repaid in a different coin. But Butigella went further, invoking Digest 18.1.1 as “a text that cannot be clearer.” Money does not derive its use from its substance, that is, its material content, so much as from its quantity, that is, its value. He rejected the comparative interpretation of “so much as” as “nonsense,” and concluded: “even if a coin were made of lead, indeed even of wood or leather, as long as it is publicly approved, it would be possible to repay it for another coin, because form rather than matter is taken into account.” That any coin “publicly approved” was legal tender was not just a matter of practice, as Bartolo had conceded, but a matter of law (Butigella, to Dig. 12.1.3, §32; 1608, 2:86).
Butigella enunciated the concept of fiat money, referring to a passage of Roman law that posited the origin of money in overcoming barter, as Dumoulin had done. The same passage played a crucial role in the Renaissance as Roman law underwent a transformation at the hands of the humanists, who examined the text of Roman law with the same critical eye they had trained on the received text of the Bible. They used their tools of textual criticism and their growing knowledge of antiquity to purge the medieval vulgate. They also dared to criticize the Roman text itself, and assess its validity and logical coherence.
Figure 6.1 Portrait of Girolamo Butigella on his tomb in Santa Maria sopra Minerva, Rome.
Double coincidence of wants revisited
To the extent that Roman law continued to influence monetary thinking, it did not do so through the doctrine of debt repayment. Instead, the focus turned to Paulus’s exposition of the origin of money and the double coincidence of wants (Dig. 18.1.1). Textual criticism of this passage fostered the propagation of ideas similar to those of Butigella.10
In the late fifteenth century, a group of scholars led by Giasone del Maino had revised the Roman law corpus based on a better manuscript (the “Florentine” edition). Giasone had derided as “ridiculous” the statement by Paulus that “in times past money was not as it is now,” since that implied that it could be other than it is, as if money could be made of something else than gold, silver, or copper. But others, such as Étienne Forcadel (1534–74), pointed out that money did not consist in its material content, and could be made of worthless material like leather (in Nekyomantia, dialogue 48, §2; 1595, 1:117).
In the same spirit, the scholar Guillaume Budé had proposed to revise the passage in Digest 18.1.1 that derives the power of money “not so much by its substance as by its quantity,” and to replace “quantity” with “quality.” Such a reading was actually consistent with the spin put on the text by the glossators (see page 94). But Budé’s proposal elicited protests from other jurists, who insisted that the reading “quantity” was correct. François Duaren (1509–59) rejected the reading, and interpreted “quantity” to mean “value and estimation,” adding that this was the amount due by the debtor, and if the coins had increased or decreased in value, the loss was suffered alternatively by the debtor or the creditor (in Disputationum anniversariarum, lib. 1, cap. 6; 1598, 1032).
Other formulations
The notion that money did not derive its value from its content gained widespread acceptance. Its exposition became increasingly sophisticated, even among jurists steeped in the medieval tradition.
For example, the jurist François Hotman wrote in 1573: “it must be understood that coins are valued not by their content, but by the custom of men and public laws; and for this reason they are commonly made not only of gold and silver, but also of lead and sometimes even leather…. Money has the same principle as a written bond; for a bond is not valued for its content, which are tablets, wax, parchment, but from law and from its power” (in Liber quaestionum illustrium, qu. 15; [1573] 1610, 121–23).
The Spanish theologian Gregorio de Valencia (1549–1603) asked the moral question, How could public authority augment the value of an item? The answer was that, by designating money as the medium of exchange to be used by all, public authority turned it into something useful, just as an artisan turned a useless piece of wood into a useful box. Money, being useful, could be exchanged for other useful things (Valencia 1598, 1095; disp. 5 qu. 20 punct. 2).
Fiat money in practice
Fiat money was studied not only as a the oretical possibility but also as a practical reality. In the second half of the sixteenth century, writers paid increasing attention to examples of fiat money, drawn either from the past or from distant places.
Some examples came from antiquity. Forcadel (dialogue 48, §2; 1595, 1:117) cited a passage in Seneca’s De Beneficis (5:14) that mentions leather money. Other examples came from more recent times. Hotman (in Liber quaestionum illustrium, qu. 15; [1573] 1610, 122) cited the episode of Frederic II during the siege of Faenza in 1241, and the fact that the Slavs of the island of Rügen off the coast of Germany used linens as currency. Pierre Grégoire (1540–1617) (in De Republica, lib. 3, cap. 6, n. 26; 1609, 43) cited two examples of obsidional monies: the episode of the count of Tendilla in 1483, and the use of siege money by Venetians in 1124 while they were besieging Tyre, an episode now considered apocryphal (see chapter 12). Grimaudet (d. 1580) learned from the reports of travelers that in China “they use a money that is made of paper, square-shaped and imprinted on one side with the image of the king” (1576, 20).
The synthesis of the two traditions, one showing the theoretical possibility of fiat money, the other pointing to its documented use as a means of raising revenues, was made by René Budel (1530–91), a jurist by training who worked as diplomat for the archbishop of Cologne, and later as mintmaster in Westphalia for the duke of Bavaria.
Budel was well aware of siege monies (see chapter 12). After reviewing several examples, and even providing pictures of these coins made of copper, lead, tin, and paper, he concluded (1591, 7): “I hold this to be indubitable that a Prince in the midst of costly wars, and therefore in great necessity, can order that money be made out of leather, bark, salt, or any material he wants, if he is careful to repair the loss inflicted thereby on the community with good and better money (see Andrea d’Isernia and Matteo d’Afflitto). This is what Girolamo Butigella says, that money can be made of lead or leather, provided that it is publicly approved, and it can be paid out instead of any other money, gold or silver.”
The conditions for valued fiat money
As the idea of fiat money progressed, writers sought to understand how it could acquire value. The historical examples of obsidional currencies, as well as the legal tradition stemming from the canon Quanto, promoted an understanding of the role of the convertibility of a token currency. For example, the Spanish canonist González Téllez (d. 1649) returned to the traditional canonist doctrine and its prohibition of excessive seigniorage, which “necessarily increases the price of goods and makes everything more expensive, as we have experienced more than once in our times” (a clear allusion to the Spanish vellón; see chapter 14). He rejected the “examples of various nations among whom we read that money has been made of diverse materials like wood and leather; for it will be answered that the monies of such peoples, and those made in times of pressing necessity, are not by right money but a pledge until a legitimate and rightful coin be made and exchanged for the wrongful one” (1715, 554).
Jakob Bornitz (1608), a German jurist, defined money not by its observable characteristics, but by its function as medium of exchange, following Aristotle. This inevitably led him to recognize the siege monies as “quasi-money,” similar to money but lacking its form or content. He insisted, however, that they needed to be redeemed after the emergency.
Scaccia’s influential legal treatise of foreign exchange includes a theoretical discussion of money (1619, §II, glos. III, 323). He repeated the romanist doctrine that metal should be worth no more coined than uncoined, justifying it with three arguments: (a) money is traded internationally, (b) it is threatened by counterfeiting, and (c) deviations from the bullion value occasion variations in the value of money. But, he added, in a closed economy that does not trade abroad, that has eliminated the risk of counterfeiting, and that has means to maintain the constancy of money, money could be made in whatever material and issued at whatever price the ruler wishes. Although the use of money belongs to natural law, as Bartolo had stated (to Dig. 18.1.1; 1570–71, 2:120), the precise monetary arrangements are a matter of positive law. Scaccia does not say how the invariability of the value of money is to be achieved.
The Frenchman Henri Poullain, writing in 1612, expressed the idea with a metaphor. “Within the state [bad coins] stand in for, and serve just as well as, the good ones; no more or less than in a card game, where various individuals play, one avails oneself of tokens, to which a certain value is assigned, and they are used by the winners to receive, and by the losers to pay what they owe. Whether instead of coins one were to use dried beans and give them the same value, the game would be no less enjoyable or perfect” (Poullain 1709, 67).
Geminiano Montanari, a mathematician and astronomer, wrote (Montanari [1683] 1804, 104): “If a state had no commerce with the other states and lived solely on its own productions, as China and a few others have done for so long, the prince could set the value of money as he pleased, and make it of whatever content he wished.” He cited the case of Chinese paper money described by Marco Polo. “But if a prince wants his own coins of gold and silver to be accepted by foreigners, so that his subjects can trade with them, he cannot value them if he does not set the right content.”
Both Poullain and Montanari drew the inference that, as small change was needed only for domestic transactions, it could be made of overvalued or fiat money. Montanari even made a comparison with deposit banking: the sovereign could make small change of any value he wanted, without prejudice to anyone, just as merchants use book transfers to clear their debts and the banks keep a fixed quantity of cash that “remains so to speak dead,” and that the sovereign could use himself.
The Neapolitan Antonio Serra ([1613] 1804, 147–48) highlighted the same temptation of token money when he advocated that small money be issued “in quantities sufficient for making change depending on the size of the state, and I say it should be made not of alloyed silver but of pure copper, in which only the form and not matter gives value, because this would result in a considerable profit for the prince without generating any of the said inconveniences, and in any case it will be very easy to determine the quantity which does not generate them.” He did not say how to compute that quantity.
This leads us to the third idea discovered by Renaissance monetary theorists, namely, that inflation would occur if the quantity of token coins were not controlled, a form of the quantity theory of money.
Limited legal tender
Limiting the demand for, rather than the supply of, small change is an idea that appeared early. Whereas medieval jurists had not allowed repayment of one coin for another without the creditor’s consent, Renaissance law had made all debts equivalent and payable in pennies. Yet, at the same time, legal tender limitations on small change, whether full-bodied or not, were becoming more common. Venice limited its mainland petty coinage to tenders of 5s. in 1463 (see page 179). In 1462 and 1464, Florence tried to restrict silver coinage to small payments, based on the nature of the transaction (see chapter 9). Aragon limited legal tender in 1497 soon after the introduction of convertible token coinage. In Germany, the Imperial ordinances of 1559 and 1576 limited small change to 25 florins in legal tender. In the United Provinces, in 1622, it was limited to 
of sums over 100 guilders (Monroe 1923, 97). In France, the pure copper coins issued in 1577 were legal tender up to 100s., and billon coins for a third of a debt. In England between 1613 and 1644, the copper coinage made under license was not legal tender. In 1672, royal farthings were limited to 6d. (Carothers 1930, 12).
Gasparo Tesauro (1609) rationalized these legal restrictions as means to prevent fluctuations in the value of the small denominations. In his view, the goal of monetary policy should be price level stability. Money “is everlasting, and should have a fixed proportion, since it is used to value all things, and not be valued by others: the measure of all things.”11
In his analysis, exchange rates between coins varied for three reasons: (a) changes in relative prices of different metals, (b) debasements of the small coins, (c) excessive issue of petty coins, even when it is full-bodied. In the last case, “when too much copper coinage is issued or imported from elsewhere, the price of the better coin is always altered, and this variation is detrimental to the creditor if he is repaid in that money; for, even if the quantity of copper coinage corresponds to the correct valuation in gold or silver, because of the tediousness of counting, the inconvenience of storage and the cost of transportation, some loss results for the creditor, and therefore it is thought that good coins of gold and silver correspond to a larger quantity of copper coins than the exact valuation requires, and thus their value changes.”
Tesauro cited approvingly the limited legal tender provisions of Portugal and Germany. But his prescriptions went beyond: “to avoid this alteration it is good that an insufficient amount of small and copper coinage be made, since it is customarily made for small purchases of food and to supplement large coins, not to repay creditors.”
Quantity theory
Restricting the quantity of small change to the needs of trade is an idea that recurs in the seventeenth century. Montanari’s statement that small change can be overvalued or fiat money, which we read earlier, was accompanied by a major qualification: “it is clear enough that it is not necessary for a prince to strike petty coins having metallic content equal to their face value, provided he does not strike more of them than is sufficient for the use of his people, sooner striking too few than striking too many. If the prince strikes only as many as the people need, he may strike of whatever metallic content he wishes” (Montanari [1683] 1804, 109; quoted in Cipolla 1956, 29). In case of over-issue, the small coins will replace the large ones, and merchants dealing with foreigners will need large coins, for which they will have to pay a premium, and prices will increase.
The Englishman William Petty (1899, 2:445) tried in 1682 to estimate the quantity to which small change should be restricted, by positing an appropriate per household figure of 12d. and multiplying by his estimate of total population. In an earlier work, published in 1662, he expressed general opposition to “debased” (that is, partly fiduciary or overvalued) coinage, he accepted that coins could be debased to a limited extent, with the seigniorage accruing to the king. Concerning privately issued money, he added: “nor are such tokens base as are coined for exchange in retailing by particular men (if such men be responsible and able to take them back, and give silver for them)” (1899, 1:85). He did not propose that state-issued small change be convertible, however.
Lessons from the Castilian experience: fiat money
These and other discussions about restrictions on quantities of small coins to be issued emerged largely in response to evidence from an experiment in Castile that involved large issues of overvalued copper coins called vellón (see chapter 14). That experiment prompted theoretical reactions. We survey reactions in Spain and France.
In Spain: Juan de Mariana (1609)
Spaniards were among the first to draw lessons from the Castilian vellón experiment. The most famous was the Jesuit Juan de Mariana (1536–1624), whose De Monetae Mutatione was written between 1603 and 1606 and published in Cologne in 1609 to avoid royal censure (the Spanish Inquisition nevertheless paid him a visit). 12
Though he disapproved of the vellón experiment, in the careful manner of the Jesuits, Mariana set out arguments in favor of the vellón experiment as well as against; he even refuted what he regarded to be weak reasons against the experiment. In doing so, he was probably describing the controversies between the advisors who pushed the kings of Spain toward that policy, and their adversaries. Among the advantages he cited were that silver would no longer be wasted in making coins; that instead of being absorbed within the money stock, silver from the Indies could be spent by the king for his wartime supplies;13 that without a stock of silver coins as a potential reserve to settle the balance of trade, trade and production would eventually have had to adjust to make deficits less likely, thereby turning the balance of trade in Spain’s favor and stimulating production; that the copper money was lighter and easier to transport, and that its cheap provision would lower the rate of interest and stimulate agriculture and industry.
Mariana rejected some arguments against the vellón. For example, he admitted that the over-valuation of copper coins would increase incentives for counterfeiting, but said that the new technology could resolve the problem. He recommended that coins only be made in the Ingenio of Segovia. He noted that effects on the balance of trade and aggregate demand were ambiguous, and “since they can go in either direction, they have force in neither” ([1609] 1994, 80).14
Forecasting inflation
Among his own main objections against the policy was his belief that small change should only be used for small transactions; he approved of laws that limited the acceptable amounts of small change in trade. While acknowledging that copper coinage was necessary in limited quantities, he wrote that an excess would lead to a disappearance of silver. He also alluded to historical observations that debasements always led to a rise in prices: he regarded the issue of vellón as a debasement and predicted that excessive quantities of copper coins would make them worthless. He noted that in some places a premium of 10% was already observed on silver coins, and elsewhere 5%. He predicted that price controls would be set by the king, but that individuals would either ignore them or abstain from trade. Ultimately, the king would be forced to demonetize the coins, or else devalue them, so that “overnight, as if in a dream, the owner of 300 ducats in this money will have 100 or 150” ([1609] 1994, 100). He saw the projected sequence of inflation and deflation as disruptive to trade and contracts, and therefore to the king’s tax revenues. He regarded the high seigniorage rates of 50% in the restamping operations as immoral, because in his view the king had no right to tax his subjects without their explicit consent, and noted that such high tax rates would not be tolerated on any other tax base. The worst consequence would be general hatred of the king: quoting Tacitus, he recalled that “everyone claims prosperity for himself, but adversity is blamed on the leader” ([1609] 1994, 104).
In France: Henri Poullain (1612)
As a member of the Cour des Monnaies, the Frenchman Henri Poullain advised the government on monetary policy.15 He read Mariana and observed the unfolding events in Spain. In the course of his duties, he dealt with proposals by private individuals to mint copper coins under license in France (as was done at the same time in England), and made predictions about the likely consequences.
In a 1612 memorandum on one such proposal, he wrote: “In any state, depending on its size, productivity and endowment in things useful to human life, there must also be a proportionate and definite quantity of coins, for the needs of the trade and commerce which takes place within it.” He estimated the quantity of money in France and the quantity of copper coins recently minted, and noted that in 1596 tax collectors were receiving large amounts of small coins, from which he concluded that the quantity of small coins in circulation was more than sufficient for trade. He then distinguished between foreign trade and domestic trade, and supposed that the total money supply was used half in one and half in the other.
He asserted that copper could displace large coins in domestic trade: “When the prince mints quantities of billon or copper coins, such bad coins remain in his state for the domestic trade, and the good silver and gold coins are taken out of the kingdom by its residents to purchase foreign goods. Thus bad coins hide and expel good coins” because, as we noted earlier, bad coins can just as well perform the function of money for domestic trade.
Poullain explained how copper coins were more expensive to make, and could not contain more than a third of their face value in metal: “they cannot pay or receive any price alongside the good coins of gold and silver without resulting in (leaving aside all other problems) an increase in the prices of all sorts of commodities, as it always happens with such devaluations” (Poullain 1709, 90), and he cited the example of Spain’s vellón coinage.
In a separate memorandum on the Castilian “monetary disorder” in 1612, he explained the mechanism by which prices increase. As shown in figure 14.4, the “monetary disorder” to which he referred was not inflation but the substitution of light copper coins for full-bodied coins; in 1612, vellón coins were not yet going at discount. “Any state is always in need of a moderate quantity of billon or copper coinage.” But an excess of such coins brings about a general rise in the price level: as gold and silver coins become rarer in proportion with the production of bad coins, so the price of imports rises. Eventually domestic goods also rise in prices, because “in any state there are always foreign goods of the same kind as the ones made within it.”
By 1661, monetary theorists had done much to overturn or at least to amend the medieval money-as-commodity view. We have documented how writers understood various of the elements that would eventually come together to form Cipolla’s standard formula; these included the theoretical possibility of token money and the role of convertibility for full-bodied money in supporting the value of tokens. In 1661, Sir Henry Slingsby (1621–90) proposed a complete version of the standard formula incorporating a government monopoly of convertible token coins. See page 268 for details. However, another century and a half would pass before Slingsby’s recommendation became public policy.
Renaissance writers had also put forward the quantity theory of money and the ingredients of Adam Smith’s 1776 “real bills” mental experiment (see page 101). Though he did not cite him, Adam Smith may have been influenced by the proposals of John Law ([c1704] 1994), originally written in 1703 or 1704 and recently published. Yet both Law and Smith can be seen mostly as reworking ideas from 1661 and earlier. They applied earlier analyses of the effects of substituting cheap metal coins for more expensive ones to substituting cheap paper notes for more expensive metal coins.
This completes our review of the thoughts of monetary theorists as they pertained to the policy problem of regulating the supply of small coins. These ideas were not created in a vacuum, but were influenced by contemporary policy discussions and experiments. Part III describes a variety of experiments that show the influence of ideas and technologies on events, as well as the influence of events on ideas.
1 He also predicted that domestic interest rates would fall. See Sargent and Wallace (1982) for a representation of Smith’s experiment.
2 Fisher (in Fisher and Cohrssen 1934, 382) admitted that he had not dared to propose going off gold completely in 1920, as such a plan would have been “lampooned and hooted down” at the time.
3 See Stampe (1926), Täuber (1928), and particularly, Thireau (1980, 401–31).
4 The Tractatus contractuum et usurarum, redituumque pecunia constitutorum, first published in 1546; Dumoulin published an abridgment in French, the Sommaire du livre analytique des contrats, usures, rentes constituées, interests et monnoyes, in 1547. References are to section numbers of the Tractatus (Dumoulin 1681, 2:1–332).
5 Täuber (1928, 23–24) cites Conrad Summenhart’s dictum that “lex ex ratione, non ratio ex lege”: law should proceed from reason, not reason from the law.
6 He was well aware that he was contradicting the “communis opinio” and cited Jean Faure as his only precursor in dissent (§749; 1681, 2:306).
7 See Szlechter (1951, 1952) and Schnapper (1957, 184–96).
8 The legal tender of the smallest denominations was limited in 1577, but the limit was implicitly removed in 1602.
9 For similar pressures in Saxony, see the three pamphlets published in 1530 and reprinted in Lotz (1893).
10 Some modern economic theories of fiat money (e.g., Kiyotaki and Wright 1989) are similarly grounded in the double coincidence of wants problem.
11 Tesauro (1609, 629–33), partially quoted in Cipolla (1956, 30).
12 SeeMariana ([1609] 1994) for a modern critical edition of the Latin text with German translation, and Laures (1928) for an English summary and analysis. A contemporary Spanish version has also been republished recently (Mariana [1609] 1987). García de Paso (1999a) analyzes Mariana’s text in the framework of a trimetallic version of our model (with gold, silver, and copper). See Grice-Hutchison (1978, 1993) for contemporary Spanish economic thought.
13 Compare this argument with the one of Adam Smith cited on page 101.
14 Mariana claimed to prefer historical examples to a priori theorizing.
15 Some of Poullain’s writings have been published (Poullain 1709), others are discussed by Harsin (1928). See page 204 on the Cour des Monnaies.