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Working paper 456

John H. Munro, "The Technology and Economics of Coinage Debasements in Medieval and Early Modern Europe: with special reference to the Low Countries and England", 2012-06-06
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Abstract: Coinage debasement in medieval and early modern Europe remains an ill-understood topic; and indeed an often cited article ("The Debasement Puzzle": Velde and Weber, 1996) sought to demonstrate that coinage debasements were both impractical and economically futile. The purpose of this study is to demonstrate that aggressive debasements were generally very practical and effective, so long as they were properly devised to profit both the merchants who brought bullion to the mints and the princes who earned seigniorage revenues from those mints. To be sure, the general public often suffered the consequences of this seigniorage tax from the consequent inflation. But another goal of this study is to demonstrate that inflation was almost never proportionate to the extent of the debasement, even during Henry VIII's Great Debasement (1542-53); and to demonstrate that both merchants and the prince benefitted from debasements in real terms, provided that they spent the increased quantity of now debased coins (of the same face value) quickly enough, before the full force of inflation was felt.

Central to the economic success of such debasements was the pre-modern mint technology: the very crudity of the techniques of "hammered" coinages whose mint outputs did not produce fully identical coins in each issue. For this and many other reasons explored in this study, domestic merchants and the general public almost always accepted coins by tale (number), at face value, and did not discount them for deficiencies in weight and fineness, except for those merchants dealing with gold coins in international trade.

The second part of this study is an examination of the European princes' motives for conducting such coinage debasements. As the previous argument and so many previous studies have indicated, an obvious motive was profit-seeking, so that such debasements may be regarded more as fiscal than truly monetary policies. But an equally powerful and perhaps even more widespread monetary motive was defence of the realm's coinages and mints: i.e., necessary defences and retaliations against aggressive, profit-seeking debasements undertaken by neighboring prices (or city states). In essence, that meant a defence against the operations of Gresham's Law, whose frequency and effectiveness in international monetary flows are also examined in this study. The operation of Gresham's Law also involved, however, the deterioration of the general standard of domestic coins through counterfeiting, fraudulent clipping and sweating of the coins, and especially by normal wear and tear in domestic circulation. Such deterioration, for all these reasons, thus meant that freshly minted, full-bodied good coins were soon driven out of circulation (exported abroad, melted down, or just hoarded) by the prevailing circulation of 'bad' coins, thus necessitating a defensive debasement to reduce the mint standard, in weight and fineness, to that of the prevailing circulation. The problem of Gresham's Law, related to both aggressive and defensive debasements, was resolved, to obviate debasements, only by the advent of modern steam-powered machinery to produce perfectly round, milled, and exact replicas of coins struck.

The final but brief aspect of this study is to answer the question raised by Sargent and Velde in their recent monograph: The Big Problem of Small Change (2002). Were such coinage debasement ever undertaken as a deliberate policy to expand the money supply (especially during the late-medieval "bullion famines") and in particular to remedy any chronic shortage of petty coins or "small change": other than as a defensive reaction to Gresham's Law? The answer advanced in this study, briefly, is simply NO (for the reasons explored in the conclusion).

Keywords: coinage debasements; ‘Great Debasement’; gold; silver; billon; bullion; bullionist policies; mints; mint outputs; seigniorage; brassage; token coinages; ‘small change’; Gresham’s Law; inflation; deflation; ‘bullion famines’ and monetary scarcities; warfare; taxation; France; Flanders; dukes of Burgundy; England; Henry VIII.

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