Was coin debasement always bad?

Dante's 8th level of hell, which housed counterfeiters, among others. Illustration by Doré

In this post I'll argue that debasement wasn't necessarily a bad thing. Periodic debasements initiated by a prince may have been a wise solution to a certain set of problems imposed on an economy by the nature of coins.*

Debasement is a reduction in the metallic content of a realm's unit of account. Most descriptions of debasement focus on the prince's role in the affair. This is usually a sordid story. The prince would have his mint surreptitiously reduce the amount of silver it put in coin. Next he and his friends would bring some quantity of silver bullion to be coined at this new rate, then quickly spend the coins before the public had the chance to learn about the debasement and defensively raise their prices. The prince and his gang gained at the expense of others.

But the prince was rarely the only debaser. Much like the prince, the public actively tried to improve their position by reducing the silver content of coin. They did so by clipping and counterfeiting coin. The latter is self explanatory. In the former, a clipper used scissors to remove small bits off the edges of each coin he or she received before passing them off. The clipped bits could be melted down and turned back into new coins, earning the clipper a good return.

Though clipping and counterfeiting were fraudulent, the public also engaged in non-fraudulent debasement by contributing to the natural wearing-out of coin. The constant passage of coins from hand to hand, clinking together in pockets and purses, etc steadily reduced the metallic content of coin below its stipulated amount.

To simplify matters, let's assume that the royal mint adopted the practice of milling the edges of coin. A clipp'd coin would quickly be outed if its milled edge was scarred, and therefore would cease to circulate. And say that the prince outfitted the mint with good technology and skilled engravers so as to prevent counterfeiting. Having removed the influence of clipping and counterfeiting, this leaves a natural rate of debasement of a realm's silver coinage due to wear & tear of, say, 1% a year.

Two stylized facts about the medieval economy. Mints fixed the number of coins they would cut from a given weight of silver brought to it by any member of the public. A merchant's pound of silver, for instance, might be coined by the mint into 240 pennies so that each penny held 1/240th a pound of silver. The mint, in other words, set the standard. The second stylized fact is that silver coins usually circulated by tale, not by weight. Just as in modern times, shopkeepers accepted coins by looking at their face in order to ascertain their value, not by weighing them on a scale.

So why might princely debasement be a boon in this environment? A perverse interaction between the mint's fixed standard and the constantly deteriorating coinage might emerge. As the coinage was debased by regular and legitimate public use, prices in terms of the unit-of-account would slowly be bid up. Each year a given coin, which now contained less silver, would buy less consumption than before. The twin demands of a higher price level and population growth required that more coin be produced to satisfy the population's expanding transactional demand.

However, our first stylized fact interfered with this process. Any silver brought to the mint would be turned into new coins at the fixed standard of 1/240th pounds of silver per penny. This meant that new coins would effectively contain more silver in them than already-circulating coins which, having undergone a few years of wear and tear, might contain by then only, say, 1/300th pounds of silver.

Once coined, the new and heavier coins *should* have commanded a premium in the market thanks to their higher silver content. Shopkeepers, for instance, might have quoted a higher price in terms of old coins and a lower price in new coins. However, as per our second stylized fact, coins in medieval times circulated by tale, not weight, and therefore a buyer could not get a better price when paying with new coins.

The inability of new coins to purchase the correct market equivalent in goods meant that they were artificially undervalued. All new coins that were brought into circulation would quickly be hoarded, melted down, and sent overseas where the silver therein could purchase a more appropriate real quantity of goods. The effect this had was that no new coins were put into circulation. It made no sense for a member of the public to bring silver bullion to the prince's mint to be coined since the resulting coin would always purchase less than it would have if left in raw bullion form.

This is Gresham's law. The bad, or artificially overvalued silver coin, pushes the good, or undervalued silver coin, out of the realm.

Since citizens no longer saw it fit to bring their silver to the mint to get coin, coin shortages would develop. To meet transactional demand, existing coins would exchange at ever higher velocities, but this would only debase them further, exacerbating the problem.

One answer to this problem would be for the prince to change the mint price in order to encourage people to once again bring silver bullion to the mint. For this to happen, the old standard of 1/240th a pound of silver per penny had to be reduced to a rate equivalent to the silver content of existing circulating coinage. In essence, to relieve the shortage of coin the prince needed to debase the standard. By reducing the amount of silver in a newly minted coin to, say, 1/300th pounds of silver, citizens would once again find it worthwhile to return to the mint. Since new coins now contained the same silver quantity as old coins, they would circulate together with their older counterparts rather than be subject to Gresham's law.

As long as the prince periodically debased the standard in order to keep up with the natural wear & tear of coins, then the supply of coin would be kept in line with the demand. Princely debasement could be a solution to a very real problem. To say that it could be a good solution, however, doesn't mean that all debasements were benevolent and/or beneficial.**

My justification of princely debasement of coinage as good policy in some way parallels the modern justification for fiat debasement as good policy. Sure, we can always attribute certain malign motives to central bank debasement. A central bank might surreptitiously monetize a government's debt at subsidized prices to help it pay for wars, thus causing high inflation. But there are some very good reasons to ensure that currency is constantly falling in purchasing power. The higher the rate of inflation, the lower the chance of running into the zero-lower bound. And if nominal wages are sticky downwards, then a positive inflation rate will ensure that wages adjust more easily on a real basis should the necessity arise. That debasement could be simultaneously both a good and predatory policy makes it a somewhat difficult topic to unpack.

* Much of this post echoes a comment left by Mike Sproul in my last post on medieval coinage.

**We shouldn't idealize princes as wise monetary doctors. Munro has noted that while princely debasement may have helped solve coin shortages, the motives for debasement were usually personal gain. In medieval times, a large component of a prince's revenues came in the form of seigniorage from his mint. If the standard was kept too high relative to the ever-deteriorating silver content of circulating coin, the mint would do no business and this would impair the prince's revenues. By periodically reducing the standard, the prince could ensure that business would return to the mint and seigniorage restored.