Clues
Let experience, the least fallible guide of human opinions, be
appealed to for an answer to these inquiries.
—Alexander Hamilton, The Federalist Papers, No 6.
In parts III and IV, we read history in the light of our model. Part III describes events before and part IV events after the technological and theoretical innovations of the Renaissance.
In part III, we document the recurrent shortages and debasements that were symptomatic of the medieval money supply system. We first provide a sample of problems from various parts of Europe, then focus in more detail on evidence from three places where documentation is relatively abundant: Florence, Venice, and sixteenth-century France. We close with some early experiments with convertible coinage that emerged under special circumstances. We find evidence of shortages of small change and of authorities groping for solutions. The authorities were confined by the technology, institutions, and theories of their times; in part III, we see them mostly as adjusting the parameters of our model, especially those that influence the positions of the intervals, while living within the medieval monetary mechanism. But at times, we see them pushed by the problem of small change to strain against the constraints imposed by the monetary mechanism and existing monetary theories. Some early experiments in part III foreshadow later ones to be seen in part IV.
Part IV describes monetary experiments of the seventeenth and eighteenth centuries, which were influenced by a new technology and new ideas that opened the realm of large-scale fiat monies. The seventeenth century witnessed unprecedented bursts of inflation. We document an influential experiment carried out in Castile and its echoes throughout Europe. One country, England, steered clear of government-produced token coinage and experimented with alternate ways to provide small denominations, none of them satisfactory. We study the repercussions of one particular shortage-induced crisis, the Great Recoinage of 1696, and its consequences for England’s subsequent move toward the gold standard. All in all, these experiments taught later monetary authorities much both about the difficulty of implementing a system with token coins and about more general aspects of monetary theory.
The remainder of this chapter presents some themes that will recur elsewhere in part III. We see some recurring syndromes as tell tale signs of particular forces that our model has isolated.
Shortages of small change and bullion famine
Chapter 8 will review some of the evidence for shortages in medieval Europe. The evidence reveals a recurrent syndrome with the following symptoms. People grumbled that they lacked coins, particularly small ones. They complained about the poor condition of the money stock, with many coins being clipped and worn. There were reports of invasions of foreign coins, which, in spite of being obviously distinct and often of weaker intrinsic content, circulated widely. The monetary authorities responded with various actions. They prohibited the circulating of foreign coins, the melting of domestic coins (particularly small ones), and the export of bullion. Sometimes they minted small coins at a mint price that the government or the mintmasters topped off, or with silver compulsorily purchased. Often they used debasements and increases in the mint price to attract bullion.
Such symptoms of coin shortages helped spawn a literature on an alleged “bullion famine” (Day 1987; Spufford 1988a, ch. 15). That literature interpreted the coin shortages as indicating that western Europe suffered from a shortage of bullion, that is, mintable metal. The cause was said to be an adverse balance of trade with the East, which resulted in a permanent drain of silver from Europe. The literature interpreted debasements as ways to make a dwindling amount of silver go farther by increasing the nominal stock. The monetary contraction has also been said to have helped cause economic depression during the late Middle Ages.
The “bullion famine” argument does not distinguish among denominations of coins, and so seems to use a one-coin model. But it would be difficult to rationalize the bullion famine story within a single-coin version of our model.1 In that model, a permanent drain of silver resulting from “excessive” imports would raise the price of silver in Europe, change the terms of trade, and thereby end the imports. It is difficult to imagine how such a drain could persist for prolonged periods (Sussman 1998). Debasements would have distributional consequences, with ambiguous effects on macroeconomic aggregates. Even if the money stock had been shrinking due to imports, the welfare consequences would not be obvious, and it would be difficult to interpret the persistent complaints and the authorities’ concern. Finally, the coexistence of complaints of currency shortage with local reports of repeated invasions of neighboring currency make it difficult to see a shortage at the aggregate level of western Europe, or even at the local level: how can one speak of currency shortages and invasions of currency at the same time?
Reports of shortages and policy makers’ responses to them make more sense within our multiple-coin model, with its distinct demand for small change. Subsequent chapters use the model to interpret various aspects of those shortages and the policy responses.
Shortages and invasions of coins
Among the recurrent symptoms in periods of shortages are simultaneous complaints about the state of the domestic currency and about invasions of foreign coins. In chapter 2, we told how such invasions could be regarded as an endogenous or market-determined debasement that occurred when citizens decided to use the small change offered by a foreign government whose melting and minting points for small coins bracketed the current domestic price level when those for domestic small coins did not.
Ghost monies and units of account
An enchanting passage in Cipolla (1956) is about “ghost monies”: emerged after at various times and places transactions came to be denominated in units of coins whose physical manifestation had disappeared. Cipolla presents the persistence of ghost monies as a mystery, but our model makes us think that they are natural outcomes of the medieval monetary mechanism.
Medieval units of account have long been a subject of debate.2 Understanding those units of account is important for historians because prices and values (including income and wealth) are expressed with units of account in the original documents. We believe that in medieval account books, the phrases that are generally classified as “units of account” referred to the types of coins in which sums had been or should be paid. Our model sheds light on why traders sometimes drew distinctions among different types of coins.
In a world where the problem of small change has been solved, the type of coin in which a monetary obligation was paid, pennies or dollars, was irrelevant. But it could become relevant under medieval monetary arrangements. When exchange rates remained constant, coins of different types could be treated as though they were equivalent. Then they could be used indifferently to meet the cash-in-advance constraints because they carried the same rate of return. But during times of exchange rate instability, coins ceased to be equivalent, particularly in economic transactions where rates of return mattered, like debt contracts. Thus, when et changed over time, a creditor who was owed one coin of type 2 should care if he were repaid 1 coin of type 2 or et coins of type 1.
Monetary authorities at times tried to influence units of account and restore the lost equivalence between various coins. They would do so essentially by specifying that an existing debt, denominated in coin 2, could be extinguished by tendering eL coins 1 for every coin 2 owed. This ultimately was the meaning of the legal tender values3 assigned by governments in the Middle Ages, ultimately developping into a full list of official relative prices for all denominations. For example, when Venice set the rate of the gold ducat in 1285, it did so in the following words: “that the gold ducat must be current in Venice and its district for 40 soldi a grossi, and that everyone, Venetian or foreigner, must accept the same gold ducat for 40 soldi a grossi in payment, under such penalty as shall be set by the lord Doge” (Cessi 1937, 51).
But if eL diverged significantly from the market rate et, private agents preferred to ignore or evade the law. In Venice and Florence, they did this by the Humpty-Dumpty4 method: an amount denominated in “coin 2” would be taken to represent, not coins of type 2, but eL coins of type 1, as the law required. To denote an amount really in coin 2, they might use a phrase such as “coin 2 in coin 2” or “coin 2 of coin 2,” to which the law did not apply. Sometimes, the authorities intervened again and insisted that the newly emerged “coin 2 of coin 2” be equivalent to eL coins 1. The private agents would kindly oblige, but then denote real coins 2 as “coin 2 of coin 2 in coin 2.” Understandably, this terminology can be confusing for modern historians, who have dubbed these apparitions “ghost monies,” because they are not what they seem.
Such Humpty-Dumpty units of account also emerged when there was no law to evade, but a practical problem needed resolution. When the market exchange rate between coin 1 and coin 2 did remain constant for long periods of time, sometimes a generation, habits formed, contracts were simplified, and one took less care to distinguish among the different types of coins. When the exchange rate suddenly changed, there was a need to interpret existing obligations and to have words mean exactly what the parties, or at least the party with more bargaining power, intended. Our model affirms that there can be periods of constant exchange rates alternating with upward movements in e large and permanent enough to require such adjustments. The ghost monies are thus another impression left in the historical record by a phenomenon that our model captures.
Free minting
Free minting meant “unlimited,” not “free of charge.”5 Free minting was a common feature of late-medieval mints (Spufford 1988b). By the mid-fourteenth century, it was common place in Italy and elsewhere. Florence instituted free minting for its silver grosso on October 3, 1296 (Bernocchi 1976, 160), Siena did so on March 13, 1350 (Promis 1868, 79), as did Venice for its silver soldino on March 29, 1353 (Lane and Mueller 1985, 162, 346, 447). Genoa also had free minting in the fourteenth century. The merchant’s manual of Pegolotti (1936), written around 1340, lists the mint prices in various mints of the Mediterranean, preceded by the same formula: “and to him who brings silver to the mint, the mint returns.”
Free minting is not well documented in earlier periods. Of course, neither are other mint policies, so the absence of surviving provisions does not mean that free minting did not exist. But other documents suggest that coins were sometimes minted on government account. For example, surviving documents in Siena show that, in the 1280s, the Consiglio generale decided every year in mid-December whether or not to mint large or small coins, and sometimes left the decision to the discretion of the officials. In 1296, to remedy a perceived shortage of coin, the city lent to the mint 1,000 florins to buy silver and have it coined; the money stayed at the mint to serve as a bullion fund and was repaid only in 1306 (Paolozzi Strozzi et al. 1992, 425–28).
In the absence of an explicit free minting policy, the authorities could nevertheless have been pursuing a policy that closely approximated it. For example, if the authorities ran the mint by trying to maximize profits, this would lead them to purchase unlimited quantities of silver at a mint price that covered production costs and afforded a monopoly profit. There is evidence of such behavior. In Venice, although free minting of silver was not explicit until 1353, regulations of 1278 enjoined mintmasters to cover their expenses and achieve a prescribed rate of net seigniorage for the commune whenever they could (Lane and Mueller 1985, 166). In practice, this meant that mintmasters would offer to coin silver as soon as the market price of silver reached a certain level; in other words, mint freely at a set price. In Florence, one deliberation of the Consiglio throws a similar light on its motivations. In September 1285, it debated whether to mint grossi. The argument prevailed that no such decision should be taken because of the high price of silver, and that the matter should be considered when it again became possible to mint profitably (Gherardi 1896, 1:290).
The evidence
From a variety of sources across Europe, the rest of part III assembles evidence about the workings of the medieval monetary mechanism. We shall cite evidence of: (1) recurrent shortages of small coins; (2) depreciations of small coins relative to large ones; and (3) debasements of small coins that were justified as attempts to cure shortages of them. We interpret the evidence in terms of our model. We also indicate how monetary authorities gradually became aware of the defects of the supply system that they administered and occasionally experimented, as in Venice and France, with ways to repair it. Those early repair efforts, which implemented parts but not all of the standard formula, were judged to have failed. Thus, the following five chapters of part III mostly paint a picture of the difficult task confronting medieval monetary authorities, given the flawed system that they administered and the imperfect tools at their disposal (including the current state of monetary theory that we described in part II). Part IV will then describe later experiments that ultimately transformed the medieval system for supplying coins into the modern one governed by the standard formula.
1 See chapter 2 or Sargent and Smith (1997).
2 Einaudi (1936), Cipolla (1956, 38–39). Weber (1996) analyzes the unit of account in medieval Basle using econometrics.
3 The term “face value” is anachronistic, since the face of coins bore no value.
4 “‘When I use a word,’ Humpty Dumpty said scornfully, ‘it means just what I choose it to mean—neither more nor less.’” ‘Through the Looking Glass,’ ch. 6.
5 See chapter 2 for how coining on government account and free minting affect the lower bound on the price level provided by a commodity money.