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Working paper 355

John H. Munro, "Warfare, Liquidity Crises, and Coinage Debasements in Burgundian Flanders, 1384 - 1482: Monetary or Fiscal Remedies?", 2009-04-07
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Abstract: Coinage debasements were a prevalent and generally very harmful feature of most economies in late-medieval western Europe, and most certainly in Burgundian Flanders (1384-1482). Flanders also experienced several economic recessions or contractions from three related sources: warfare; the so-called �bullion famines�, with liquidity crises; and the irredeemable decline of its former mainstay, the woollen textile industries. Since many of my previous publications dealt with the Flemish cloth industry, this paper focuses on the other two major economic problems, of which warfare was the most important factor. The question posed therefore is simply this: did the Burgundian dukes undertake coinage debasements principally as a monetary or as a fiscal policy? In a recent and highly praised monograph, Sargent and Velde (The Big Problem of Small Change, 2002) have contended that almost all late-medieval and early-modern coinage debasements were undertaken to remedy not just coin shortages, but especially shortages of petty or billon coins. For the Burgundian era, one may make a strong prima facie case that Flanders (and all the Burgundian Low Countries) suffered from two major �bullion famines�, or certainly from severe coinage scarcities, including very severe scarcities of petty coins: from the 1390s to about 1415, and from the early 1440s to the early 1470s. In both periods, moreover, Flanders suffered from very severe deflations. In this paper, I contend that warfare was indeed, directly and indirectly, a primary cause of those monetary scarcities, especially in reducing the income velocity of money and thus in increasing hoarding � in my view, far more important than any supposed balance of payments deficits and �bullion outflows to the East�. Nevertheless, I can find no convincing evidence that the Burgundian rulers ever undertook coinage debasements to remedy these coinage scarcities and to combat deflation (with one minor exception, in 1457, for petty coins).
Instead, the thesis of this paper is that the Burgundian rulers undertook coinage debasements primarily as aggressive fiscal policies, and primarily to finance warfare. Almost all medieval princes exacted a seigniorage tax on bullion minted. They sought to maximize these revenues both by increasing this tax rate and by enticing much larger quantities of bullion into their mints: by both the techniques of debasement and by auxiliary bullionist policies. The paper seeks to show that the Flemish coinage debasements were generally successful, by satisfying three conditions: (1) that merchants delivering bullion to the mints received in return a greater number and greater face value of coins than before (and a greater value than from any competing mints); (2) that the public continued to accept debased, or more debased, coins at nominal face value, receiving them by �tale� rather than by weight and intrinsic value; and (3) that such merchants, also benefitting from asymmetric information, were able to spend their new coins before their gains were eroded by inflation. This paper demonstrates that the inflationary consequences from Flemish coinage debasements were always less than would be predicted from strictly mathematical formula for price changes � perhaps because the debasements did not counteract the prevailing forces of monetary contraction and deflation. At the same time, however, because so many principalities then pursued coinage debasements as veritable guerres mon�taires, many princes undertook coinage debasements for purely defensive reasons: to protect their domestic mints from foreign competition and their realms from influxes of foreign debased and especially counterfeit imitations: i.e., to counteract Gresham�s Law.
This study concludes with a striking anomaly in Spanish monetary history: Spanish monarchs, having agreed to abjure and forgo seigniorage taxes on coinage, did not engage in any debasements, of either the gold or silver coinages, from 1497 to 1686. But they had the luxury of alternative revenues from taxes on imports of vast quantities of silver from the Spanish Americas during most of this era. The Burgundian dukes had no such alternative sources of revenue to finance their wars.

Keywords: debasements, gold, silver, billon, bullion, bullionist policies, mints, seigniorage, inflation, deflation, liquidity

JEL Classification: E31; E41; E42; E51; E52; E62; F33; H11; H27; N13; N23; N43