Friday, May 6, 2016

What makes medieval money different from modern money?

What's the main difference between our modern monetary system and the system they had in the medieval ages? Most of you will probably answer something along the lines of: we used to be on a commodity standard—silver or gold—but we went off it long ago and are now on a fiat standard.

That's a safe answer. But the fiat/commodity distinction is not the biggest difference between then and now.

The biggest difference is that in the medieval age, base money did not have numbers on it. Specifically, if you look at an old coin you might see a number in the monarch's name (say Henry the VIII) or the date which it was minted, but there are no digits on either the coin's face or obverse side indicating how many pounds or shillings that coin is worth. Without denominations, members of a certain coin type could only be identified by their unique size, metal content, and design, with each type being known in common speech by its nickname, like testoon, penny, crown, guinea, or groat. Odd, right?

By contrast, today we put numbers directly on base money. Take the Harriett Tubman note, for example, which has "$20" printed on it or the Canadian loonie which has "1 dollar" etched on one side.

This seemingly small difference has huge consequences for the monetary system. I'll illustrate this further on in my post by having a modern central bank adopt medieval-style numberless money. The interesting thing is that, contrary to our prejudices about commodity-based money, the medieval system had the potential to be a highly flexible monetary system, far more capable of coping with shocks than our current one, and by implementing medieval money, a modern central banker would get a powerful tool to help in his or her efforts to keep inflation on target.

But first, here are a few more important details about the medieval monetary system. Back then, sticker prices and debts were not expressed in terms of coins (say groats or testoons) but were always advertised in the abstract unit of account, pounds (£), where a pound was divisible into 20 shillings (s) and each shilling into 12 pence (d).  Say that Joe wants to settle a debt with Æthelred for £2 10s (or 2.5 pounds). In our modern monetary system, it would be simple to do this deal. Hand over two coins with "1 pound" inscribed on it and ten coins with "one shilling" on them. Without numbers on coins, however, how would Joe and Æthelred have known how many coins would do the trick?

To solve this problem, Joe and Æthelred would have simply referred to royal proclamation that sets how many coins of each type comprised a pound and a shilling. Say Joe has a handful of groats and testoons. If the king or queen has proclaimed that the official rate is thirty testoons to the pound and eighty groats in a pound, then Joe can settle the £2 10s debt with 60 testoons and 40 groats or any another combination, say 75 testoons. If the monarch were to issue a new proclamation that changes this rating, say a pound now contains forty testoons, then Joe's debt to Æthelred must be settled with 100 testoons, not 75.

To sum up, in the medieval ages the method of determining the content of the unit of account was divorced from the physical objects that were in circulation. Rather than appearing on the coin, the proper ratings were printed up on a royal decree. By contrast, in our modern era monetary authorities have stopped the practice of remotely defining the unit of account in favor of striking it directly onto physical and digital objects.


Let's try to get a better feel for what it would be like as consumers if we didn't have numbers on our modern money. Let's convert today's standard into a medieval standard using U.S. currency as our example. Start by removing the words "one cent" from all one cent coins. Americans take to calling them Lincolns, since Abraham Lincoln is on the obverse side. Next, let's strip all mentions of "one dollar" and "$1" off the dollar bill, which now goes by the moniker "a Washington." Finally, blank out any incident of "100" and "one hundred" from the one hundred dollar bill. Say that people now call it the Franklin. (For simplicity, assume the $10s, $20s etc don't exist.)

Say we go shopping for groceries and get a bill for $302.15. Without numbers on our bills and coins, how are we to know how many Lincolns, Washingtons, and Franklins we should pay?

We would start off by launching our Federal Reserve app to check how many Lincolns, Washingtons, and Franklins the Fed has decided to put in the dollar unit of account that day. Now it could be that the Fed is rating the dollar as 100 Lincolns, 1 Washington, and 0.01 Franklins, which would correspond to the ratios we are so familiar with. In which case, the grocery bill can be discharged with three Franklins, two Washingtons, and fifteen Lincolns. Easy.

But there is no reason that the Fed couldn't be setting a different definition of the dollar unit of account that day. Say that the Fed has re-rated the dollar so that it is now worth 140 Lincolns, 1.4 Washingtons, and 0.014 Franklins. It would be as if an old dollar bill now had $0.714 printed on it instead of $1 (where 1/$1.4=$0.714). In effect, this increases the value of the dollar unit of account in terms of physical cash or, put differently, reduces the purchasing power of the Washington/Lincoln/Franklin. The $302.15 grocery bill must now be discharged with four Franklins and twenty-three Washingtons, where the Franklins cover the first $285.71 and the Washingtons cover the remaining $16.43.

So that's pretty interesting, no? In a modern version of the medieval monetary system, not only do we need to keep track of the coins and notes in our wallet, we also need to follow the Fed's ratings, say with an app. It's cumbersome system but it seems to have worked.


As for the central banker's perspective, let me repeat my earlier point: if the Fed (or any other central bank) were to adopt a medieval system, it would have far more flexibility in hitting its inflation targets than it currently does. Right now, an inflation targeting central bank like the Fed can only target the CPI by modifying the nature or supply of the physical and electronic tokens in circulation, say by altering the quantity of these tokens, changing their interest rate, or shifting their peg (to gold or some other currency). With denominations effectively etched onto coins and printed onto notes, the ability to directly manipulate the unit of account by adjusting the number of bills and coins per dollar has been taken away from it.

By blanking out the numbers and defining the coin/bill content of the dollar remotely, the Fed gets an extra degree of freedom. If it wants to create inflation, it simply posts an alert on its app that the dollar will now contain fewer Lincolns, Washingtons, and Franklins than before. In response, stores will quickly increase their sticker prices so that they receive the same real quantity of payment media as before. Voila, the CPI rises. To create deflation, the Fed does the opposite and puts more notes and coins into each dollar. Just as it currently schedules periodic interest rate announcements, the central bank might issue these edicts every few weeks or so.

In some sense, central banks already engage in alterations of the bill/coin content of the dollar when they redenominate currency. But redenominations are rare, usually occurring during hyperinflations when a central bank cancels all existing currency and issues new bills and coins with a few zeros lopped off. They aren't a regular tool of monetary policy because a continuous series of small redenominations would involve constant recoinages and printing of new notes, an expensive way of doing monetary policy.

By removing numbers from bills/coins so that only blanks circulate and then defining the value of those blanks remotely, redenominations become a cheap tool of monetary policy, much as they were in the medieval days. The Fed wouldn't have to call in all bills and coins and print/mint new ones, it would simply announce a re-rating on its app.


In any case, I hope you can see now that the medieval monetary system was far more complex than we commonly assume it to be. Because we are so used to having number on our bills and coins, we'd be quite lost if we were transported back to the 1500s. As for the monetary authorities, they had an extra set of powers that today's central bankers don't have, the ability to directly define the unit of account. Hypothetically, these powers could have been used to target stable prices or nominal income. In reality, monarchs had different motives, including the funding of wars, so they used the tool for that purpose. But that's another story.

[1] The Spufford Currency Exchange
[2] Meir Kohn: Medieval and Early Modern Coinage and its Problems
[3] John Munro: The Technology and Economics of Coinage Debasements in Medieval and Early Modern Europe


  1. Control over a non-fixed ratio between units of currency and the unit of account is a useful power, but it's not the same thing as "defining the unit of account".

    After all, if you change your peg on the ratio between the unit of account and the currency, there are two different prices that can adjust in order to reach equilibrium: the price of the currency, and the price of the unit of account.

    Thus the key question is this: if you change the ratio between currency and the unit of account, how much of this change shows up in the price of currency, and how much if it shows up in the price of the unit of account?

    1. Dimitri I think you are asking a very good question about a nominal anchor. You might be interested in posts by Nick Rowe and others on CPI targeting.

    2. "Thus the key question is this: if you change the ratio between currency and the unit of account, how much of this change shows up in the price of currency, and how much if it shows up in the price of the unit of account?"

      Do you mean, how much of it shows up in the price of currency in terms of goods, and how much shows up in the price of the unit of account in terms of goods?

      With medieval coins, when the ratio was changed the silver content of coins stayed the same. So if the monarch went from defining the £ as 30 groats to 20 groats, the salesman who sells horses at £1 is now getting less silver (20 groats instead of 30 groats). So he will raise his price to £1.5 in order to get the same amount of silver.

    3. Yes, prices in terms of goods is what I'm referring to.

      I think your argument re. the salesman raising his price to £1.5 only makes sense in a scenario in which groats have a near-complete monopoly over the functions of money. That may be more or less true in the medieval scenario, but I don't think it holds up for modern money.

      1) If, for example, £-denominated promissory notes also serve as a medium of exchange, couldn't this also cause groats to capture more of the MoE-market and thus gain in value?

      2) More generally, if there is separate demand/supply for UoA-denominated financial assets (most notably government bonds) that is (at least in part) independent of convertibility to groats, won't changing the currency:UoA ratio partly affect the price of currency and not just the price level (i.e. 1/price of UoA)?

    4. Dimitri I think he's assuming that the value of silver remains constant. That's a great feature of Nick Rowe's CPI standard: by opening a gold window, we no longer need to think about supply and demand for base money. Arbitrageurs will use the gold window to keep the price level where we want it.

    5. The value of silver is distinct from the value of silver groats.

      Yes, there is a lower bound from melting silver and an upper bound from counterfeiting, but unless the groat is very easy to counterfeit there's a fair amount of leeway between those bounds.

      By contrast I can agree that a gold window, or some other nominal anchoring scheme, should be sufficient to set the price level. This, however, is not the same thing as setting a ratio between the currency and the unit of account.

      Also, the nominal anchoring scheme can only work if the central bank has both the capacity and willingness to uphold that scheme.

      Many modern central banks are clearly missing at least one of those two things, if not both.

    6. Here's an attempt to pin down my issue here:
      although there are effects in both directions, I think the value of Lincolns, Washingtons and Franklins derives from the value of the dollar more so than the other way around.

      I do agree that decreasing the amount of currency per dollar would cause inflation, but this would be because people would have more dollars than they did before.

      Also, all else being equal, I think the inflationary effect would be quite far from 1-for-1; halving the amount of currency per dollar would not even come close to doubling the price level.

    7. Dimitri, I'm pretty confident in my May 7, 2016 at 8:54 AM example. All things staying the same, the price of coins in terms of horses stays constant at 30 groats because the horse seller wants to preserve the silver content per horse. And so the unit of account in terms of horses does all the adjustment (although it may occur slowly).

      I'm less confident about the application I made to modern money, ie Lincolns, Washingtons, and Franklins. Coins had silver in them, but it's not apparent what the "contents" of a modern banknote are. Coins had an intrinsic value, but do notes have one?

      That being said, we know from observing hyperinflations that 100-to-1 redenominations causes prices to fall to a hundredth of their prior level. Likewise, if a modern central banker says that each Frankin, formerly rated at $100, is to be worth $1, shouldn't that result in prices falling by the same amount?

    8. Even in the case of coins, the actual value of the coin can differ significantly from the intrinsic value of its contents. That said, I do agree with your coins:horses example, because ultimately there is no reason for the demand or supply of groats to change.

      I think the key difference in the case of modern money is that there are quite a lot of financial assets around, and those financial assets have values are denominated in $ rather than in Franklins, Lincolns or Washingtons.

      It appears that $-denominated private-sector-issued financial assets shouldn't play a role in the long run, but government-issued financial assets most definitely do matter.

      For example, since bank reserves are simply $-denominated accounts at the central bank and are not measured in terms of banknotes, they would clearly not be affected in the same way. I think the same also goes for government bonds, since those are also denominated in $.

      By contrast, a redenomination changes the values of financial assets and currency alike.

    9. I remember discussing this with Mike Sproul years ago: what is the backing for government money? What is the backing for bank money? He links to our 2001 conversation on his webpage. In the intervening period I think these questions have been answered pretty well by fiscal theories of backing and the hierarchical understanding of money. If we had a gold window, we would understand why the dollar has its current value. And the government has the option to open a gold window at any time - the only question is what valuation would allow the gold window to remain open, without a run of the type that enriched George Soros. The Fiscal theory handles this question, as well as redenominations, very well.

      Dimitri's questions above clearly ask about the hierarchy and why base money is more important than financial assets in determining the price level. He asks about government debt, but the fiscal theory counts this as part of the base, unlike privately-issued assets.

    10. As, in the example, the retailer receives the same amount of payment media as before, then therefore the CPI has not changed ,as the price of the goods to the consumer is unchanged.

  2. I'm guessing medieval kings didn't change the value of the money all that often at least partly because of the difficulty of communicating the changes across the kingdom. With most money stored electronically this would no longer be a problem and there would be a temptation to change the values as often as necessary to create the desired outcome. Or try and create it, anyway. Pretty sure that a lot of people believe that this is already going on.

    1. Yes, I'd imagine that if the king made too many changes it would get incredibly confusing since not everyone would have the proper definition in mind.

    2. One of the best books on medieval currencies is Lane and Mueller Money and Banking in Medieval and Renaissance Venice vol. 1.

      The real problem was that there wasn't a single king managing a single currency, but multiple authorities managing multiple currencies that were used in each other's territories. Under these circumstances competitive devaluation was hard to avoid, Gresham's law made it difficult for any given sovereign to maintain a high quality currency, and it wasn't unusual for a king to be forced to "cry up" his currency just to keep it in circulation.
      That said, it is fair to say that kings tried not to change the value of the money all that often.


    3. Thanks for the link. I see that John Munro recommends it too:

  3. Good job of clearing up some of the confusion surrounding old time coins. Whenever I read about that era, I'm struck by the constant complaints of coin shortages, of "the last wagon load of coin leaving the colony", and of governments "maliciously" raising the rating on coins in order to attract them from other areas. It sounds like a classic case of price ceilings causing shortages, but when coins are involved it's harder to understand.

  4. Is this a description based on evidence, or speculation? If it is based on evidence, can you tell me what is this evidence? If it is speculation, can you tell me what intuitions are behind your theories? I'm really interested in the subject.

    There is one point that I can't get: "Joe and Æthelred would have simply referred to royal proclamation that sets how many coins of each type comprised a pound and a shilling."
    Why would Joe and Æthelred follow the rules of a royal proclamation? After all, there is little (or nothing) that a king can do to enforce rules in a transactions between private individuals. Private individuals can set their rates at will. Also, people could denominate their prices and debts in shillings (the coin) or in £ (the unity of account). Why would they choose one and not the other?

    Maybe the king decided to denominate tax obligations imposed to the population in the unit of account (£). And also he could denominate in £ the wage he pays to its soldiers, officers and "employees". So the private market maybe would be interested in somehow follow the royal decree because of the taxes and wages. But it is all speculation of my part.

    Also, maybe there are no numbers in the coins, but people treat it like if there were written in it. For example, british pound coins have numbers but it is very difficult for foreigners to find it. People who live in England know the denomination of coins because of the size and design - they don't need to read the numbers. So the lack of numbers actually doesn't seem a big problem and maybe there is no big deal in that...

    1. "Is this a description based on evidence, or speculation?"

      My understanding of medieval coinage comes mainly from reading John Munro as well as Angela Redish, Peter Spufford, Meir Kohn, Francois Velde, and George Selgin. I can give you papers and references if you want to dig further. My description of a medieval-style modern monetary system is of course speculation.

      "Why would Joe and Æthelred follow the rules of a royal proclamation?"

      From what I've read, the convention was for local debts and rents to be denominated in the unit of account; international debts in gold. If the king reduced the content of the £ from 30 groats to 20 groats, it was in the interest of Joe, the debtor, to remind Aethelred of his legal duty to accept just 20 groats to discharge a £1 debt; if not, Joe could bring Aethelred to court.

  5. But in the beginning, that would the time of Charlemagne, a livre or pound was in fact worth a pound of silver. That did indeed change over time, obviously.

  6. I have dabbled in medieval history for a long time, and don't find this credible. For a start, most transactions in medieval times (as in modern0 did not involve coins at all. They involved tally-sticks, exchequer notes, promissory notes and other forms of credit accounting. Secondly, while these were denominated in standard units of account (typically livres tournoises in France, pounds or marks in England), and their sub-units (deniers, shillings, pence), the actual coins in circulation often did not correspond directly. Old coins were worth less, a huge variety of coins, domestic and foreign, circulated, different mints had different standards and re-coinages were frequent (same issue with weights and measures - a Winchester bushel was not a London bushel). So if two parties settled in coin, they either just took the local, well-known, value (so Joe settles in a mix of different shillings, all of which Aethelred accepts as equal to a shilling) or they referred to some common standard (florin, bezant, sequin) and had the local exchange value whatever they had against that. This last was the custom at the great fairs, where trade deals were netted out and the outstanding balances paid in coin.

    1. Those are great details, but I don't see how they change my point. Unlike modern central bankers, medieval monetary authorities could alter the price level by redefining the unit of account via proclamation, and they had this power because denominations were defined remotely rather than on the face of base money.

      A wide variety of credit instruments circulated in the medieval ages. But this would not have impinged on the monarch's macroeconomic powers. After all, credit instruments were denominated in the unit of account, so whenever the monarch altered the definition of that unit, the effect played out over the entire range of circulating credit.

    2. As another comment noted, just one such proclamation would help. I've never come across one. What I have come across are re-coinages, where royal mints called in coins and issued new ones with lower silver content. This was a common practice in France, where direct taxation was difficult (mess of multiple legal jurisdictions, immunities, privileges), so this was used to meet royal expenses instead. One historian noted that this did not seem to have serious economic consequences - the new coins were readily accepted at the same face value as the old.

      In any event, one can only imagine a proclamation as a possibility in England, with its strong central state. The medieval King of France or Castile, or the Emperor, had neither the power not the ability.

    3. Peter, see my comment to Andras below for a specific example.

      You are certainly right that debasements were caused by reducing the silver content of coins. But as John Munro points out, there are two ways to engage in debasement:

      "i) Debasement simply defined means to reduce the precious metal content of the coin; either by weight (smaller coin) or by fineness (by adding more copper in the alloy); or by raising the face value, the money-of-account or official value of the coin."

  7. Fascinting -- but what examples do we have of monarchs actually re-defining the value of money? One good concrete example would help a lot here -- without it, I am actually pretty sceptical. How was such a change communicated effectively across the kingdom? You are talking about rates being printed up on a royal decree -- which dates this pretty much to the 16th c. -- but by then, these ratios were, at least in England, rather stable. The situation is also complicated by foreign coins being in circulation. And then also, coins minted under previous monarchs still in use, sometimes of different metal content, and hence of different value. I think the situation is way more complex, and in fact different, than what is here suggested.

    1. Andras, John Munro talks about a specific example with Philip the Fair:

      See page 3.

  8. I think whta happened was that the reduction of the metal content lead to changes in the definition of specific coins -- but this did not happen by decree. Rather -- the new coins were recognized as worth less because of their smaller silver content. So if it comes to silver and gold coins, the commodity theory is perfectly sufficient as a description, no? (Groats are a different issue -- but there was not much to be gained by re-defining the worth of groats.)

  9. Andreas:
    I've frequently read now that coins functioned often with a different value to their metal content. To ask how that might happen a more fundamental question as ever seems to be that commodity money theory has only one string to its bow which is not 'money of account' (but rather people carry around with them scales, purity test kits etc & a commodity market report listing the current market value of gold) when the plethora of social retaliations, institutions that surround money and the core uses of money need something more sophisticated & historically responsive. The question is more that you show me historical instances of a money system running on barter & commodity weights.
    For the full biscuit try "The Nature of Money" by Geoffrey Ingham. He's not the only one BTW. It's a great story let me tell you - you should love it.

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