The Price Revolution in France
The “Price Revolution” was a European-wide inflation during the sixteenth and early seventeenth centuries. A century of shortages and depreciations of small coins led the French authorities in 1577 to entertain issuing token small coins as a possible cure for shortages.
In France, a famous dispute about the causes of this inflation arose between a monetary official named Jean Cherruyer de Malestroit and the jurist Jean Bodin. In 1566, Malestroit published the results of his research into this “strange dearness of all things.” He claimed that the price of silver relative to commodities displayed no long term trend, and attributed the increase in prices purely to the debasement of the currency. Two years later, Jean Bodin published a reply in which he proposed other causes, chiefly an abundance of gold and silver metals in France, coming in part from “the new lands full of gold and silver” that had been conquered by Spain.1
This chapter uses our model to analyze the price revolution in France. From 1510 to 1580, nominal prices increased by a factor of 3.6 (see fig. 11.3), while the metal content of the unit of account declined by a factor of 1.7 (see figs. 11.6 and 11.7), which implies that the value of precious metals declined by a factor of 2.
These numbers make room for contributions from the explanations of both Bodin and Malestroit. Bodin could point to the factor of 2 and attribute it to the American treasure.2 That leaves a factor of 1.7 to be accounted for. Our model tells us to look for shortages of small coins as a force pushing prices up and coin contents down. We find such shortages and accompanying subsidiary monetary disturbances, intertwined with depreciation of the two precious metals at uneven rates. This mix of causes perplexed Malestroit and Bodin, as well as the policy makers who urgently tried to make sense of the inflation. Their responses included a remarkable reform in 1577. Although it did not endure, that reform contributed to the long process of learning to master small change.
Relative price change as inflation
Along with Bodin, we need no sophisticated monetary theory, or little monetary theory at all, to explain the upward trend in prices that resulted from the cheapening of metals: elementary price theory can do the job.3 The money systems in place at the time were designed to link the price level to the relative price of precious metals in terms of consumption goods, and that they did.
A simplified one-coin version of our model illustrates the basic mechanism through which the relative price of silver determines the price level, while the demand function for money determines the nominal supply of silver coins. Temporarily suppose that the only coin is the silver penny. Then our model reduces to:
where 1/φs is the world price of silver in terms of consumption goods, and b1 is the silver content of the penny, measured in ounces of silver per penny. Equation (11.1a) determines the price level, to within an interval whose width is determined by the seigniorage rate σ1. A sufficiently big fall in the relative price of silver (i.e., a rise in φs that is big enough relative to the interval width σ1) causes the price level to rise. When σ1 = 0, (11.1a) determines the price level.4 The demand function for real balances, equation (11.1b), then determines the supply of nominal balances m1. The simple “quantity theory” equation (11.1b) carries the implication that the real stock of coins m1/p measured in terms of consumption goods is a constant k.5 Therefore, the nominal coin stock must increase proportionately when the price level rises. The money supply increases automatically in response to a rise in φs because the supply mechanism gives people incentives to bring silver to the mint to purchase coins whenever the price level threatens to fall below 
, the “minting point” for pennies.
Disturbances to coin denominations
The one-coin model captures much about how world metal prices impinged on prices in France, but cannot help us understand the interesting disturbances to the denomination structure that were superimposed on the general inflation. This chapter describes these disturbances as well as features of the general inflation, and accounts for them in terms of a three-coin version of our model. The model keeps track of three main categories of coins: silver pennies, larger denomination silver coins, and large denomination gold coins.
Briefly, our theory accounts for the observations as follows. A decrease in the relative prices of gold and silver in terms of consumption goods pushed the intervals between the minting points and melting points for all coins to the right. But the price of gold relative to silver itself fluctuated, meaning that the intervals for gold and silver coins moved unevenly. Those uneven movements caused shortages sometimes of gold coins and other times of silver coins as temporary leftward shifts in one of the intervals induced melting. In addition to shortages caused by uneven movements in intervals for gold and silver coins, we shall describe evidence of the kind of “within the intervals” shortages that indicate a binding “penny-in-advance constraint” in our model. These shortages manifest themselves in rising rates of exchange of large denomination coins (both gold and silver) for small denomination coins. We document how the prices (in pence) of both gold and silver large denomination coins often appreciated during the century.
Table 11.1 List of symbols for the three-coin version of the model.
| Variable | Meaning | Units |
| m1 | silver pennies | denier |
| m2 | larger silver coins | teston |
| m3 | gold coins | écu |
| φS−1 | world price of silver | cons good / oz silver |
| φg−1 | world price of gold | cons good / oz gold |
| b1 | metal in penny | ounces of silver / penny |
| b2 | metal in teston | ounces of silver / teston |
| b3 | metal in écu | ounces of gold / écu |
| e2 | exchange rate of teston | pence / teston |
| e3 | exchange rate of écu | pence / écu |
A three-coin model
Table 11.1 summarizes key notation in a three-coin version of our model. We let m1 denote the stock of pennies, m2 the stock of large denomination silver coins, and m3 the stock of gold coins. Only pennies satisfy the penny-in-advance constraint. We let φg−1, φs−1 denote the world prices of gold and silver, respectively, denominated in units of the consumption good. We use pence as the unit of account, and let e2, e3 be the exchange rates of large denomination silver and gold coins, respectively, for pennies.
Figure 11.1 Intervals in the three-coin case.
We posit exogenous world-market-determined movements in φg, φs that provoke domestic monetary responses in the form of changes in the money supply, in the price level, and the bi’s set by policy makers and the ei’s set by the market. Both φst and φgt moved upward over the century, and both had year-to-year fluctuations.
Figure 11.1 shows intervals for the three types of coins, gold, silver, and small silver or billon. The gold and silver coins are denominated in terms of the smallest coin, the billon coin.
Upward trends in φst and φgt move the intervals for all three types of coins to the right, thus increasing their “minting points.” That causes increases in the price level and also in the supplies of all types of coin. However, that the φ’s did not increase monotonically allowed coin shortages to arise in the following two ways.
Supply: movements in the relative prices of metals
Ignore for now the bottom interval in figure 11.1, and consider the consequences of uneven increases in φs and φg. A relative increase in φg (a lowering of the consumption price of gold) shifts the top interval to the right relative to the middle interval, causing minting of gold coins when pt hits the minting point for gold. Eventually, the price level rises and reaches the melting point for silver coins, which are now melted. If all silver coins are not to be melted, the silver interval must somehow be shifted to the right (or the gold interval to the left), either by decreasing b2 (or increasing b3), or by increasing e2 (or decreasing e3). The converse holds if φs increases: silver becomes cheaper, is minted, and eventually gold is melted, until the intervals are realigned. Thus, uneven upward movements in φg and φs can explain increases in either e2 or e3, but only ones that are not synchronized in time.
Demand: within the intervals shortages
Our model shows how there can be shortages of small coins, even though the price level has not encountered the melting point for any coin. These shortages occur when the penny-in-advance constraint is binding and cause the exchange rates e2t, e3t of the large coins for pennies to rise. That shifts the intervals for the larger coins and, through the ordinary quantity theory equation, moves the price level (denominated in pence) to the right, thereby hastening the day when the penny is to be melted. Within the mechanism, the cure for this situation is to debase the penny, thereby shifting its interval also to the right.6 We keep both sides of the model in mind when we interpret the evidence summarized next.
Anatomy of money and inflation
This section describes a variety of facts about monetary arrangements in the sixteenth century, the main ones of which we can summarize as follows. For most of the century, prices were stated in terms of the penny, a small silver coin. There was a general upward trend in the price level but little or no trend in the relative price of gold and silver. There were many depreciations of the metal content of the penny and increases in the rates of exchange of larger coins for pennies. Some increases in the exchange rates of large coins for pennies were decreed by the government, but many others were spontaneous market-determined increases called surhaussements. There were few depreciations of the metal content of larger silver and gold coins. There were intermittent shortages of coins of all denominations, especially smaller ones. The exchange rate fluctuations eventually provoked controversies and policy shifts about the appropriate units of account for contracts.
Types of coins and units of account
Our model groups coins into three main types: gold coins, large denomination silver coins, and small denomination billon coins. In practice, these corresponded to, respectively, a gold coin called the écu soleil, and its half; a large silver coin called the teston, and its half (replaced in 1577 by a similar coin, the franc); and several billon coins. The face value of the billon coins remained fixed throughout the period: the douzain (from the French douze, twelve) at 12d., the liard at 3d., the double at 2d., and the denier tournois or penny, by definition 1d. As had been the case in the Middle Ages, the units of account were multiples of the penny, the sou (12d.), and the livre tournois (240d.). Prices and debts were quoted in these units of account. 7 Royal edicts also gave the large coins a price in terms of the penny: at the beginning of the century, the gold écu was rated at 36s. 3d. The teston, introduced in 1514, was rated at 10s.8
Figure 11.2 Price of wheat in Toulouse, annual average, in livres tournois per setier (93 liters), 1486–1650 Source: Frêche and Frêche (1967, 85–88).
The price Level
Starting in the 1510s, there was a general upward trend in the price level. Figures 11.2 (prices of wheat) and 11.3 (a regional commodity price index) show the typical profile.9 Prices are here expressed in the unit of account (livres tournois), which was based on the penny (denier tournois).
Supply: the relative price of gold and silver
Our data indicate that during the sixteenth century, φs and φg increased at about the same rate. The stars in figure 11.4 plot the average legal ratio of silver to gold in Europe, by decade. Until the 1580s, it remained between 10.5 and 11.5, the same range that had prevailed during the late Middle Ages. The solid lines give the upper bounds and lower bounds on the ratio in France. Where ME denotes the mint equivalent and MP the mint price, the upper bound is
and the lower bound is
Figure 11.3 Commodity price index, Poitou, 1460–1640. Source: Raveau (1929, 2–3).
There were very few changes in bi for the larger coins. The metal content of the gold écu, minted from 1475 to 1641, was changed only in 1519 and 1561, for a total debasement of 4%. The content of the teston was changed only once in 1521, soon after its first issue, by 4%. Its successor the franc was never altered during its life from 1577 to 1641. The frequent movements in figure 11.4 are mainly due to changes in the legal values e2 and e3 assigned by royal edicts. These changes track the movement of the gold/silver ratio φs/φg over time.10
Figure 11.4 Upper and lower bounds on the gold/silver ratio in France, and European average gold/silver ratio (stars), 1475–1650. Sources: Wailly (1857), Spooner (1972).
Note that not until after 1600 was there any systematic trend in the bands in figure 11.4. If the market ratio ever rose above the upper bound, it became profitable to melt gold coins and mint silver coins; and vice versa whenever the market ratio fell below the lower bound.
Figure 11.5 summarizes quantities that were minted of the three types of coins. Early in the century, until 1530, when figure 11.4 shows that silver was becoming more expensive relative to gold, there was much minting of gold but little of silver, as figure 11.5 shows. By 1550, the trend reversed itself: silver became cheaper relative to gold, and substantially more minting of silver than of gold occurred. This pattern is consistent with the model, which highlights how shifts in the relative values of φs and φg influence whether the price level is at the minting point for silver or gold coins.
Figure 11.5 Total minting in France, broken down into gold, silver and billon minting: nominal amounts (top panel) and shares of total (bottom panel), France 1493–1600. Source: Spooner (1956, 522–30).
So far, the model’s predictions are not surprising, and our observations are not new. When we turn to smaller denominations, however, the situation becomes more complicated and we contribute something new, including an explanation of the spontaneous debasements known as surhaussements.
Debasement of billon coins
Billon coins were debased repeatedly during the century: the penny in 1515, 1541, 1566, and 1572; the douzain in 1519, 1540, 1550, 1572, and 1575. The cumulative debasements from the beginning of the century to 1577 were 52% and 44% for the penny and douzain, respectively. In figure 11.6, the solid lines represent the interval [1 – σ1)b1−1, b1−1], the mint price and mint equivalent, for the douzain. Every movement in the upper solid line corresponds to a reduction in b1, which denotes the metal content of the douzain.
In this respect, monetary policy for small coins differed markedly from that for large coins. In figure 11.6, the upper dotted line traces the legal value, in terms of pennies, of a constant fine weight of testons. In our notation, this represents e2b2−1. The lower dotted line traces (1 – σ2)e2b2−1, the mint price. The movements in the dotted lines of figure 11.6 almost always represent changes in the official exchange rate between large silver coins and billon coins e2, while b2 remained almost unchanged. By 1577, the rate of the teston had been raised, or “cried up,” eight times, from 10s. to 16s.11
Figure 11.6 Intervals for small silver coins (solid lines) and large silver coins (dashed lines), France, 1514–1650. The units are livres of account per marc (244.75g) of silver argent-le-roi (
fine).
This difference was not confined to silver. In figure 11.7, the upper line traces the changing value of e3b3−1 for the gold écu. By 1577, its official rate e3 had been raised ten times, from 36s. 3d. to 65s. Again, as noted earlier, b3 was almost unchanged throughout the period.
The French authorities did not attempt to make small denomination coins fiduciary to any degree. In figure 11.6, the upper solid line, which is the inverse of the intrinsic content of the penny, is never above, and is often below the dotted line, which corresponds to the larger coin. The solid line ends in the 1590s, however, when the small denominations were replaced with pure copper coins.
Figure 11.7 Intervals for gold coins, France, 1475–1650. The crosses and stars indicate the market value of the écu-soleil, 1553–62 (see text). The units are livres of account per marc (244.75g) fine gold.
Mysterious movements in exchange rates
Why were billon coins debased so often? There is ample evidence that the rates ei were determined by the market, and later occasionally ratified by government pronouncements (Glassman and Redish 1988). One form of evidence comes from those pronouncements, which often reflect a frustration on the part of the authorities at their inability to control market rates. Thus, in 1519, the king said that “the prices of gold and silver bullion haven’t stopped increasing, and continue to increase from day to day, so much so that our mints remain inactive to the great detriment of our affairs and the public good” (cited in Levasseur (1902, CXL). Malestroit, in his 1566 publication, said that “the opinion of the mob has always ruled, for kings, whatever resistance they ever oppose, are in the end defeated and forced to follow the disorderly will of the people, and to raise the value of the écu day by day.” The Cour des Monnaies, in charge of supervising mint policy, admitted as much in 1577: “Your Majesty has been forced to increase the rate of the coins, to accommodate the price that your people gave to them of its own authority” (cited in Stampe 1932, 35).
We have direct evidence on the free rate at which large French coins circulated, such as the diary of the sieur de Gouberville, a squire in Normandy, who routinely recorded those rates when he made payments, and the correspondence of the Ruiz family, Spanish merchants established in France. In figure 11.7, crosses indicate the value e3b3−1 implied by the prices noted by Gouberville for the French écu; the stars indicate similar quotations from other private accounts of the time. Also, large Spanish coins like the silver real and the gold escudo or écu pistole were legal tender in France throughout the period. Figure 11.8 plots the market values of these Spanish coins from the diary of Gouberville (crosses), and from the correspondence of the Ruiz (stars and circles).12
The crosses and stars of figures 11.7 and 11.8, when compared to the solid lines that embody the official rates, make clear why the authorities felt powerless, even as they tried to catch up with the market.
The figures also suggest that the period from 1575 to 1577 was one of accelerating appreciation of the large coins, both gold and silver. Indeed, contemporaries described the summer of 1577 as one of crisis. Not only did rates grow faster on average, but geographic dispersion widened. The gold écu pistole (lower panel of fig. 11.8) reached 100 sols in September in Nantes, but only 75 to 78 sols in Paris and 66 sols in Lyon. The silver real reached 12 sols in Nantes, but only 7 or 8 sols in nearby Laval, 8 to 10 sols in Paris.13 These extraordinary variations, in both gold and silver coins at the same time, were seen as signs of chaos.
Figure 11.8 Legal tender value (solid line) and market price in Normandy (crosses), Lyon (stars), and Nantes (circles) of the silver real (top panel) and the gold ´ecu pistole (bottom panel), 1554–77. Source: see text.
Our model asserts that uneven upward movements in φg and φscannot explain simultaneous increases in e2 and e3. Further, the movements in the exchange rates induced by shifts in the φ values are achieved by deliberate government policies to alter e, but the evidence shows that the surhaussement was a market phenomenon, and that, as mentioned in our discussion of figure 11.8, increases in the legal face values of coins merely recognized in law what already was fact. Our model of currency shortages emanating from the demand side (i.e., a binding p.i.a. or penny-in-advance constraint) can account for such endogenous increases in the market rates of large coins.
Evidence of small coins shortages
As in earlier periods,14 there were reports of shortages of small coins in the sixteenth century, particularly in the late 1530s and early 1540s, and again in the 1570s. The shortages were particularly acute in 1577. Evidence comes from two types of source. In texts of laws and edicts on monetary matters, the king typically described the current situation in order to justify his actions. In addition, diaries were left by contemporaries. 15
An ordinance of 1538 described in detail the mechanics at play. Many people, French and foreigners, and not only merchants, were driven by profit to gather silver bullion and melt French silver coins, take the metal to the nearby mints of Béarn and Lausanne, convert it into small denomination coins, then import these coins back into France, where they circulated at a mint equivalent higher than that of French coins. As a result, “at present there are few or none of our coins that our poor people might use and aid themselves in their trade of goods, which is the cause of the daily increases in the price of gold and silver bullion and the idleness of our mints” (Fontanon 1585, 2:95; cited in Levasseur 1902, CXLIX).
In 1544, shortages were still reported in parts of France, particularly in the South, and authorizations were given to mint small coins. But the next year, complaints of excessive issues led to a ban on any further minting (Saulcy 1879–92, 4:437; Levasseur 1902, XLVII; Spooner 1956, 133). In 1572, mint officials asked for more douzains to be authorized, on account of their scarcity in most provinces (blamed on taxpayers’ use of small coins to pay their liabilities while large coins were hoarded) and the impossibility of getting change of 1s. or 2s. on an écu (Spooner, 1956, 165 n3).
There were many contemporary accounts of acute shortages in 1576 and 1577. The memoirs of Claude Haton, a resident of the town of Provins, note that in February 1576 the price of gold and silver coins started rising again, and “from then on, all small coins such as karolus [10d.], unzains [11d.], douzains [12d.], coins of 3 and 6 blancs [15d. and 30d.], as well as doubles [2d.] and liards [3d.], were so scarce, that one handled as few of them as if there had been none in France…. He who owed but 5s. to a man would tender an écu [60s.], a pistole [58s.], a thaler [40s.] or such large coin, at the rate [the creditor] wanted, to receive some change” (Haton 1857, 2:870).16 In 1577, Pierre de L’Estoile noted in his diary that, in Paris, “there was no small change that the people could use. For this reason the king deposited with city officials quantities of douzains, to relieve the little people and exchange their coins at the rate set in the ordinance, to avoid greater agitation” (L’Estoile 1992, 2:147–48). The diary of Louvet, in the town of Angers, also emphasizes the scarcity of change, and the use of scrip: “In the year 1577, there was such scarcity of money and such great turmoil because of the increase (rehaussement) that breadmakers, brewers, and other craftsmen of the town of Angers paid each other with parchment notes, marked with the mark they used on their own silverware, which they received and cashed from one another for 6d. and 12d.” (cited in Levasseur 1902, CLXXVII).
Policy responses
The difficulties of the system of multiple denominations engendered much debate, and led to a major reform of the coinage in 1577. The reform embodied several features of the standard formula, including switching the unit of account from the penny to the large gold coin (the écu) and issuing overvalued small coins with limited legal tender.
Perception of the problem by the authorities
We have mentioned the exchange that took place from 1566 to 1568 between Malestroit and Bodin on the sources of inflation. As the problems sharpened into a crisis after 1575, the debates grew more urgent. Many participants in the debate were hampered by their tendencies to confuse cause and effect and were tempted to search for malevolent parties and denounce their failings—for example, foreign merchants (wile and greed), the populace (ignorance and fickleness), or local officials (neglect and incompetence).
Better analyses emanated from the professionals in monetary policy who staffed the Cour des Monnaies.17 Some of those experts recognized a link between the surhaussement and shortages of small coins. In a memorandum of December 1576, the Cour des Monnaies linked the increase in the valuation of large coins to shortages of small coins and to their export, noting that French importers of foreign goods preferred to pay their foreign bills with small coins (cited in Stampe 1932, 35):18
Merchants have sent thither all our douzains and other billon coins, to avoid the large and excessive loss they would have incurred had they paid in écus or other foreign gold and silver coins, on which, at the rate at which they circulate by the people’s will, one would lose 15, 12, 20 and 25% when tendering them abroad, which loss doesn’t occur on douzains and other billon coins which have not been raised in price by your people as with said gold and silver coins. The scarcity of those billon coins means that your subjects often cannot obtain the provisions and other things they need, by lack of said good coinage, which is less dispensable than high-grade gold and coins.
This last sentence concisely summarizes the binding “penny-in-advance constraint” of our model. Recall also that, in our model, binding penny-in-advance constraints and shortages of small coins lead to depreciations of their exchange rates. These depreciations can be large enough to shift the relative positions of the intervals for large and small coins so much that there will be melting down, or exporting, of the small coins, further exacerbating the shortage.
The officials of the Cour des Monnaies understood the spontaneous surhaussement as a result of the actions of self-interested individuals, and sought to identify the incentive driving people to raise the price of large coins. Removing the incentive, they thought, would end the disorder. But they saw the shortage as consequence rather than cause. So they turned elsewhere for the incentive and found it in the desire of debtors to lighten the burden of their nominal debts. They thus came to see a link between surhaussement and the choice of units in which to denominate prices and debts, namely the penny-based sols and livres.
Consequently, the government at first attempted to prevent movements in the exchange rate between coins, and later decided to anchor the monetary system on the gold coin. At the same time, it decided to make the small coins out of pure copper and to restrict their legal tender. Thus, some elements of the standard formula were making their appearance, albeit in scattered order.
Unit of account and legal tender
French law after 1360 had allowed freedom to denominate contracts as the parties wished. In the sixteenth century, the king tried to enforce the face values he assigned to coins. Merchants evaded these efforts in various ways: by posting multiple prices depending on the denomination of the payment, or by posting a single price but requiring a specific denomination. A law of 1541 explained in its preamble: “Some merchants in their business are wont to ask before closing a deal in what coins they will be paid and at what rate, and accordingly increase or decrease the price of their wares, taking coins at a rate higher than that set by our laws. And everyone immediately follows this, not realizing that this results in billonements19 and export of coins, and a great loss for us and for the public good of the kingdom.”
The king outlawed these practices, to no avail. “Billonement” continued unabated, taking the following form according to the government: merchants demanded payment in écus in order to collect them and ship them abroad, to be turned into foreign coins; these coins then came back, circulating above their legal rates. Another attempt was made in 1551 to prevent the first step of this process, that is, the specifying of particular coins for payment, by requiring that prices be posted and contracts denominated only in units of account (sols and livres). However, the Parlement refused to register the law, and it was restricted in 1558 to wholesale and retail merchants only. Finally, it was completely rescinded in 1571, and the freedom to denominate in écus was restored.
The preamble of the law of 1571 reflects a new understanding of the problem: “the surhaussement of coins comes in part from the common accounting in sols and livres in all transactions and contracts; since these sols and livres have depreciated from year to year by the effect of this surhaussement, the creditor receives much less than he should, contrary to the fairness that should prevail in contracts, and loses part of what is owed him, being paid in coins at a higher rate” (cited in Stampe, 1932, 29–32). Officials thought that they had identified a motive for the increases in et: debtors tried to pass off large coins for more than they were worth in order to reduce the value of the livre-denominated debts. This was a way to come to grips with the higher rate of return on large coins.
Figure 11.9 Unweighted average of exchange rate indices of the French livre against various currencies in Italy, Spain, Antwerp, and London, 1562–76. Each currency index is 1 in 1565. Source: Lapeyre 1955, 464–67.
Units of account and international trade: the fairs of Lyon
The opinion that livre-based units of account were to blame for the increases in et became the received theory at the Cour des Monnaies, and the proposed solution was to denominate debts in terms of large denomination coins. The theory received the support of the international bankers of the fairs of Lyon. Descended from the medieval trade fairs, these quarterly events served mainly to clear debts generated in trade rather than to trade the goods themselves. For two weeks, bankers would meet to net clear debts. The balances that had to be settled served as the “excess demands” on whose basis the exchange rates were set by consensus among bankers.20
The exchange rates set at the fairs of Lyon were expressed in foreign currency per French livre. A Seville banker holding a debt payable in Florence only cared about the ratio of the Seville rate to the Florence rate. But holders of claims denominated in French livres cared very much about the value of the livre. That value had been falling since 1570, as shown in figure 11.9, by an amount that reflects the increases in et over the same period shown in figures 11.7 and 11.8.
In 1575, the organizers of the Lyon fairs decided to denominate their transactions in the gold écu rather than the livre and also to require that at least ⅔ of any settlement be made in gold. In July 1577, they required the exclusive use of gold (Lapeyre 1955, 449–51). The reform stabilized the quotations of exchange rates in Lyon. It also seemed designed to remedy the ease with which claims on French goods were bought up by foreigners, which monetary officials associated with the reigning disorder.
The reform of 1577
While the monetary crisis unfolded, the country was in political turmoil. The Estates General debated various reforms. 21 The Cour des Monnaies took the occasion to press for a comprehensive monetary reform based on a change in the unit of account; so did the Lyon bankers, who sent a delegation to the Estates to plea for reform. Their efforts were successful, and a reform was drafted in September and passed in November 1577. The gold écu was chosen as the basis of the new accounting system. All sums of money greater than the value of one écu were to be denominated in écus only. Existing debts denominated in sols and livres were converted into écus at the rate of 60s. per écu.22
The gold écu was not made sole legal tender, however. Various combinations of gold and silver coins, down to billon coins of 15d., were made unlimited legal tender for écu-denominated payments, and the creditor could not demand repayment in gold écus. In particular, a new silver coin, the franc, was made equivalent to ⅓ of a gold écu.
For coins smaller than 15d., two measures were taken. One was to provide for minting of pure copper deniers and doubles (1d. and 2d.) in the Mill Mint of Paris, for the first time in France,23 and for minting of liards (3d.) in fourteen mints throughout France, strictly on government account. The other was to limit the legal tender of the smallest coins (1 to 3d.) to 100s., and that of coins from 6d. to 12d to ⅓ of the payment (art. 21 of the edict).
Finally, several additional measures were taken, all with the intention of removing causes of the price increases. Foreign coins, which were usually allowed to circulate and given a face value for circulation in France, were all demonetized, with the exception of the Spanish escudo and real. Importers were allowed to receive payment in foreign coin, but were directed to bring the coins to the mint. Also, the edict placed restrictions on nonmonetary uses of gold and silver by limiting the size of goldware and silverware and prohibiting the use of gilding, and threatening to impose price controls on goldsmiths’ products.
The system created by the reforms of 1577 remained intact until 1602. There are indications that the smallest denominations were produced in adequate quantities, but minting data show that the quantities were small (see fig. 11.5). The rise in prices also seems to have slowed or halted at about that time (fig. 11.3). The price of the gold écu, which had risen 30% from 1560 to 1577, fell back and remained stable. Contemporary evidence points to an easy adoption of the reform throughout the country, contrary to expectations (Levasseur 1902, CLXXIX–CLXXXI; Lapeyre 1955, 451).
A significant exception to the price stability occurred in the early 1590s, when France was in the grips of a civil war and parts of the country were not under control of the central government. The copper coins issued from 1578 were overvalued.24 There were some complaints that the coins were not accepted in trade, and the issue officially ended in 1585, but in practice it continued until 1595. From 1589 to 1595, when civil war raged, there were illegal issues of copper coinage in various regions. In Provence, in particular, the inflation seemed to have been substantial: a decree of 1609 deflated debts contracted between 1591 and 1593 by 25 to 50% (Schnapper 1957, 198; see also Spooner 1956, 171, 176, 180–81). Only in 1596 were issues brought under control, and it was decided to restrict production of these copper coins to the screw press in Paris.
Collapse of the reform
The reform of 1577 implemented elements of the standard formula. It removed the provision of the smallest denominations from the classic supply mechanism by making them tokens, minted on government account in limited quantities. It also limited their legal tender. It shifted the basis of accounting from the bottom of the denomination structure, the penny, to the very top, the gold écu, whose size and fineness was to remain constant.
The reform reflected growing understanding of the problems of supplying small change with the medieval money supply mechanism. The authorities understood that the rise in pt was associated with the rise in et: as the edict of 1577 stated (art. 5), “the valuation of all things is made on the basis of the écu’s price.” Most aspects of the reform were directed, however naively, at suppressing the symptoms of rising et. Large foreign coins, whose circulation was seen as giving occasion for speculative bidding, were prohibited. The restrictions on nonmonetary uses of gold and silver attempted to protect the large denominations from melting, another symptom of the interval having shifted because of a rising et.
But the reform did not fully implement the standard formula. Although it prefigured the gold standard of the nineteenth century by basing the monetary system on the gold coin and setting a fixed exchange rate of smaller silver coins, it kept free minting of silver.25 Furthermore, as luck would have it, the gold/silver ratio of 11.0 chosen in 1577 soon compared unfavorably to the rest of Europe (fig. 11.4). As a result, minting of gold coins stopped almost completely (fig. 11.5) and the gold écu, on which the monetary system was based, disappeared. In its place, large quantities of the silver franc were issued. The écu continued as a unit of account, becoming like an Italian ghost money: the écu came to mean three silver francs rather than one gold coin. Moreover, since gold clauses had been made illegal, and payment in gold could not be required, gold coins disappeared from contracts as well.
Finally, the small denominations had been made token, but without convertibility. The disturbances of the 1590s revealed the danger inherent in unbacked token coinage, as parts of France encountered copper inflation.
Over the strong protests of monetary officials and businessmen, the new system was scrapped in 1602. Accounting in livres replaced accounting in écus. Limited legal tender for small coins was apparently dropped.26 The écu, which had been maintained at 60s., was increased to 66s. Sully, who was prime minister at the time, wrote in his memoirs (1822, 3:243–48):
I found a remedy that was more effective and less violent than punishments and confiscations to prevent the exportation of gold and silver out of the realm; namely, to increase their value. Since there could be no other cause of this abuse than the excessive disproportion between the value of our gold and silver coins, and that of our neighbors, at the same time I established in the realm accounting by livres, where it was previously done by écu. Some may find this notion too subtle, since either method of reckoning ought to come to the same. I do not find so on the experience I have made, that the usage of the écu, by lack of a denomination more suitable for small purchases, imperceptibly raises all items of trade in sale and purchase beyond their true value.
Concluding remarks
Our model prompts us to dismantle and reassemble ingredients that previous commentators and researchers have adduced to explain disturbances to the French currency in the sixteenth century: inflows of gold and silver and debasements of small coins. Relative to past explanations, our model converts the debasement of small coins from cause to effect. We have described how uneven downward movements in the relative price of gold and silver for consumption goods could cause some upward adjustments in the exchange rates of large silver and gold coins for small coins, and how disturbances from the demand side could cause others. In response to such exchange rate changes, the only way to bolster the supply of small coins was to debase them. The debasements were infrequent and followed rather than preceded the increase in the exchange rate of large versus small coins, as shown in figure 11.7.
In 1577, rather than continuing to debase and allowing the coins that formed their unit of account to depreciate, the French attempted a radical reform that embodied elements of the standard formula. In particular, the French chose a single large denomination coin to serve as the unit of account and to anchor the price level. They suspended the medieval supply mechanism for the lowest denomination coins and instead produced coins of pure copper using the new minting technology.
The reform incompletely implemented the standard formula and reflected a partial grasp of the problem. The reform did not make all small denomination coins tokens, nor did it make them convertible. The silver coinage remained within the medieval supply mechanism, at a fixed ratio to the new gold-based unit that soon fell victim to unlucky timing. Gold and silver coins could only be kept in concurrent circulation with more debasements, an action that defeated the purpose of the reform. Instead, only silver remained, and the gold écu’s transformation into a ghost money was seen as a failure, as was perhaps the outburst of inflation during the civil wars of 1592–93. More experimenting and more theorizing would be necessary before the standard formula would eventually triumph.
Appendix: mint equivalents and mint prices
Mint equivalents and prices for silver and gold during this period in France are shown in tables 11.2 and 11.3, based on the following sources. Coin specifications can be found in Wailly (1857) and Lafaurie (1956). Edicts concerning legal values are listed in Stampe (1930, 1932); see Richet (1961) for the legal values of foreign coins.
Table 11.2 Mint equivalents and mint prices of the gold écu. The unit of weight is the marc (244.75g) of fine gold.
Table 11.3 Mint equivalents and mint prices of the silver teston and franc. The unit of weight is the marc (244.75g) of silver fine.
1 The insight that exogenous increases in the supply of precious metals raise the price level was not new. Andrea d’Isernia made the same observations in the thirteenth century (d’Isernia, to 2.F.56, s.v. “moneta”; 1541, 98). In such cases, Isernia thought that a compensating change in the currency was allowable, and that debts should then be repaid in new coins at the old price, a proposal not unlike Fisher’s compensated dollar (1920).
2 The traditional explanation for the decline in value of gold and silver is the influx of American treasure cited among other factors by Bodin (Hamilton 1934). This explanation has been contested on quantitative and chronological grounds (see Munro [forthcoming] and references cited there). We will use the traditional label for this decline, but our model only requires some exogenous decline.
3 As Schumpeter (1954, 312), Bodin’s explanation of the French inflation relies on nothing more than a downward-sloping demand curve for precious metals.
4 As noted by Sargent and Smith (1997), equation (11.1b) can act as a quantity theory of the price level only within the interval of size σ1.
5 This feature leads to Friedman’s (1951) calculation that the opportunity cost in terms of consumption goods of the precious metals tied up in a commodity money is independent of the metal used as the commodity money.
6 Glassman and Redish (1988) noted that debasements occurred as responses to increases in et, which they call undervaluation of the large coins. In their interpretation, these increases are due to movements in the gold/silver ratio, counterfeiting, and wear and tear on the small coins. They see shortages of small coins as a consequence of these increases.
7 For the period 1483–1575 in Paris, Schnapper (1957, 185) finds 25 long-term debt contracts out of 475 denominated in gold écus, the rest in livres.
8 See Wailly (1857) and Lafaurie (1956) for the specifications of French coins.
9 Note the pronounced cyclical behavior of wheat prices.
10 In fact, Spooner’s series is an average of the ratios of mint equivalents for gold and silver across Europe, as there are no series on market prices. The presumption is that those ratios, as in France, tracked the market ratio.
11 The value of coins was announced by the king’s criers at crossroads and markets. Crying up meant increasing the value, crying down or decrying meant decreasing, demonetizing, or more generally prohibiting (as when King James II of Scotland ordered in 1457, with little success it seems, “That the fute-bal and golfe be utterly cryed downe, and not to be used”).
12 See Leddet (1928, 191, 201, 208) for the Gouberville prices, Spooner (1956, 163–65) for the other écu price, Lapeyre (1955, 462-3) for the Ruiz prices, and Stampe (1932, 14–15, 18–19) for legal tender values.
13 Those rates are literally off the charts of figure 11.8.
14 See the examples cited in chapter 8.
15 See also Levasseur (1902), Liautey (1921), and Spooner (1956) for overviews of the period.
16 This is like buying bubble gum with a $20 bill to make change.
17 This body, created in 1358, had executive and judicial roles. As an exécutive agency, it advised the king on monetary matters and implemented his decisions regarding legal rates, coin designs, and mint prices; it also leased the mints to entrepreneurs. As a judicial court, it had appellate (and, since 1552, final) civil and criminal jurisdiction over cases involving coins, precious metals, and mint employees, regulated jewelers and goldsmiths, and monitored mintmasters. Stampe (1932) reproduces several memoranda originating in the Cour des Monnaies.
18 This mechanism, and the ensuing necessity to debase small coins, was noted by Lafaurie (1956, x).
19 The term designates trading in bullion, or billon, the word meaning both low-grade silver alloy and uncoined metal of any kind; see Munro (1974).
20 See Lapeyre (1955) for the fairs of Lyon, and da Silva (1969) for their seventeenth-century counterparts in Italy.
21 In the second half of the sixteenth century, the Estates General met frequently. After 1614, they met only once, in 1789.
22 This adjustment foreshadowed Leijonhufvud’s (1984, 21) “blueback scheme,” a version of which was implemented during the Argentine stabilization of 1986.
23 The issue of these coins had already been planned in 1575, and they were initially to be made only in the Paris mint, using the new screw press. But, as part of the 1577 reform, their production was extended to all other mints (Lafaurie 1956, 117).
24 The copper denier contained 1.57g of copper. If copper is valued at 8.6g of silver per kg of copper (e.g., Parenti 1939, 57*), the intrinsic value of the coin was 27% of its face value.
25 As we will see in chapter 17, Britain’s initial design for the gold standard in 1816 contained the same flaw.
26 Szlechter (1952, 108) cites a court order of 1607 enforcing repayment of a debt in gold coins with billon; the edict of 1602, in its article 7, only seems to maintain the? limit on billon payment for pre-existing debts.
