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Ancient Money Greece Plato speaks of money as a means of exchange ("a symbol for the sake of exchange", Republic, Bk.2), and a measure of value ("reduces what is unequal to symmetry and proportion" Laws, Bk. XI) Aristotle (c.335 BCE) emphasizes
the "measure of value" function in his Ethics (5.5)
as necessary to make things comparable for justice: Less emphasis on means of exchange. But implied in his Politics (1.9) Is money evil? Virgil's "Quid non mortali pectora cogis, Auri sacra fames" (Aenid, Bk.3, x) (Cursed avarice, on what desperate wickedness thy influence drives the minds of men). Aristotle worried about it. (Ethics, Politics, ibid) Use of money leads to the retail trade in which money is the goal of exchange. Prompts accumulation "without limits" (Bk. 9) and confusion of money as wealth. Also gives rise to "detestable usury" (Politics, Bk.10) But also say it binds people and societies together, bringing them from different places, so good. Origins of money? Aristotle suggests that barter precedes
monetary exchange, e.g. Ethics 5.5. Doesn't quite hit on the double
coincidence of wants In Politics (1.9) refers to convenience of carrying around cash rather than other goods ("ease of carriage", I.9). Initially measured by size and weight, and then a stamp placed on it to make weighing unnecessary. Gold/Silver or arbitrary standard of measurement? Plato in Laws (Bk. 5) suggest a pure convention, that token money used for internal trade, gold & silver reserved for foreigners. Aristotle (Ethics 5.5) notes some sort of convention developed to pick a commodity ("not by nature but by law"), but not merely token, but rather something that is actually something "really valuable in itself", something useful for daily life, "as iron or silver" (Politics 1.9). So Aristotle more of a commodity man than Plato or other contemporaries. Value of money Not much thought is given to the value of money. Aristotle implies that, as a commodity, its price is governed as any other commodity. Xenophon in Revenues (Bk 4) talks of silver and gold mines, but turns to discuss their relative value (x), suggests that an increase in supply of gold drives down the price of gold (p.255) but more supply of silver doesn't drive down price of silver as "nobody ever has enough of it" (p.254-5). ROMAN Pliny the Elder (c.77 CE) in Naturalis Historia (Bk. 33, c.14) reiterates Arisotle's notion that money "caused" usury and avarice. Roman jurist Paulus (referred to in Justinian's Digest, Bk. 18 t.1 §1) is first clear indication of double coincidence of wants:
(Thomas, Paul (1899) Essai sur quelques théories économiques dans le Corpus juris civilis. ) Jurist Paulus (c.222 CE)
MEDIEVAL
Aristotle's Categories and Hermenia - survival of logic. Isidore: childish etymologies. (Money = "to adveise, nomisma, numa,
etc.) Isidore: "Money is so called because it warns (''monet'') lest any fraud should enter into its composition or weight. The piece of money is the coin of gold, silver or bronze, which is called nomisma, because it bears the imprint of the name and likeness of the prince.... The pieces of money, nummi, have been so called from the King of Rome, Numa, who was the first among the Latins to mark them with the imprint of his image and name." (Isidore, Etymologies xvi: 18) Moneta appellata est quia monet ne qua fraus in metallo vel in pondere fiat. Nomisma est solidus aureus vel argenteus sive aereus, qui ideo nomisma dicitur quia nominibus principum effigiisque signatur. Prius nummus ἄργυρος nuncupabatur, quia quam plurimum ex argento percutiebatur. Nummi autem a Numa Romanorum rege vocati sunt, qui eos primum apud Latinos imaginibus notavit et titulo nominis sui praescripsit. Folles dicuntur a sacculo quo conduntur, a continente id quod continetur appellatum. In nomismate tria quaeruntur: metallum, figura et pondus. Si ex his aliquid defuerit, nomisma non erit. Tria sunt autem genera argenti et auri et aeris: signatum, factum, infectum. Signatum est quod in nummis est; factum, quod in vasis et signis; infectum, quod in massis; quod et grave dicitur, id est massa. In notitiam autem formarum metalla ita venerunt; dum enim quocumque casu ardentes silvae exquoquerent terram, quae calefactis venis fudit rivos cuiuscumque structurae, sive igitur aes illud fuerat sive aurum, quum in loca terrae depressiora decurreret, sumpsit figuram, in quam illud vel profluens rivus vel excipiens lacuna formaverat. Quarum rerum splendore capti homines quum ligatas adtollerent massas, viderunt in ea terrae vestigia figurata; hincque excogitaverunt liquefactas ad omnem formam posse deduci. (Isidore xvi: 18)
With arrival of Aristotle, things improved. Functions: Store of value now spoken of too - Aquinas says "fidejussor futurae necessitatis." Is money evil? Not dramatically. Often sought as end in crime. Usury is a "misuse" of money, and maybe thus a root of evil. But most agree with Oresme who says, on balance, it is good to the community. And Luther, who says, money is not evil, people are evil. Origin Oresme: Exchange = Divine providence. God divided the earth and scattered people so "men and places" have surpluses which had to be exchanged. Barter first step. Not much discussion of wants. Aquinas explicit about double-coincidence of wants problem (simlar to Paulus, more than Aristotle). Antonine of Florence too. Buridan goes further, and talks about (1) time & distance between sale of surplus and purchase of what is desired; (2) indivisibility of goods problem. Money a great convenience to overcome these problems. Biel repeats Buridan's analysis. Oresme says merely "many
inconveniences". Agreement to use money Aquinas repeats Aristotle (mankind agreed to it). Aquinas repeats Aristotle about avoiding trouble of measuring and weighing as
oriign of stamped coinage. Qualities of money Aquinas repeats that money should be made of useful materials (like Aristotle) but adds that high value also makes them easily portable. Also notes variation of money value,and that this should be minimized,thus stability of material is desirable. Buridan says: should be of precious metal to facilitate transortatioin,durable to serve as store of value, disivisible for small purchases,capable of being impressed with marks for identification. Oresme follows Buridan closely. PRICE Money is commodity, stamped and certified No special properties, no special theory of value. Jurist Pierre Dubois (1308) complain that prices are higher due to debasement, as foreigners only care about gold and silver content. Albertus Magnus and Thomas Aquinas comment on Aristotle without expanding on
it. Aquinas does recognize high value because of rarity, though. Buridan more elaborate, says "value of money must be measured by human need"
Rich need gold and silver for luxury. So value of money = value of metal
content. Coin or bar is the same. VALOR IMPOSITUS Prince can fix value of coin ("valor impositus"). Comes from Arisotle that value of coin is fixed by nomos (convention or "law"). Aquinas says prince is source of law and so state what he wants. Arbitrarily? Early on mention it should be proba or justa,but unclear what that meant. Moneychanging accelerate with debasements, and discussions of its justification. Aquinas justified "secondary" usage of money as an object of exchange and sale itself. Valor impositus less important, bonitas intrinsica greater weight. Buridan try to reconcile the two views, saying prince does not determine value (purchasing power) of money per se, but rather value between different coins. Molinaeus gets rid of the prince. But value of coin is the consent and
usage of the people and custom of commerce. Prince's stamp is purely to
relieve testing and weighing. Its convenience does mean that the money has
greater utility than metal content. Difference between extrinsic and
intrinsic value of money does rest on government, subject to demands on equity
and justice (i.e. facilitating legitimate commerce). "Debasement" first spoken of and condemned by Guibert de Nogent (1110). Why did prices rise from debasement? Because merchant sellers ask for more cash for their wares to make up difference. (Dubois differs: he says debasements make it profitable to export goods (?) rather than cash, leads to greater demand for goods and rise in price. Weird. I don't get it), Standard of Differed Payments: Creditors receive less than they paid out. Can more be demanded in repayment? Jurists say no. It is valor impositus. Repay with nominal coin. (ALthough jurists in Italy allow demand to be repaid in intrinsic metal content; not England nor France though). Molinaeus says firmly repay in legal nominal coin, not real value. BIMETALLISM Oresme: bimetallism necessary as not enough gold to make coins (esp. small change). Proportion in value between golds & silver "by custom" (not precise). Money belongs to people, and only they can alter ratio (and only in cases of supply change). MINTING By Roman law, emperor right to mint. Canon law support this, mint is royal
prerogative. No others might hold it (Aquinas). Seignorage: legal right to charge (e.g. by his effighy, right to tax, coinage is royal patrimony, etc.) No clear limitations on prince's right. Complaints are against abuse of this right, not its principle. Aquinas et al. urge king to be moderate. Because of Estates complaints, promises, etc. gradually became that maybe
there were limitations. Buridan satisfied in Innocent IV. Bartolus (canon jurist) notes that if bullion = coinage value, the coinage
must be free. Coin system: Oreme: money shold be convenient shape and eight for handling counting and carrying, with durable iimpression not easy to counterfeit. Gold and silver should not be used or other purposes until money supply needs are met. Camonists also discuss small coins (oft-subject todebasement). Should it be legal tender? Molinaeus says yes, others say no. e.g.. Albertus Brunus says creditors need not accept inconvenient, bulky small coins to discharge large debts. Small money is for making change, not for carrying commerce. Gresham's Law Disappearance of currrenchy from circulation sometimes mentioned (Arstophanes,Frogs) Oresme complains that everyone sells gold for silver and silver for gold at
different ratios than that set by the prince. Contrary to the purpose of
money. Molinaeus mentions problem, but id not grasp significance. Says that if extrinsic value exceeds intinsic, country will be flooded with bad money for outsider bring in less cash and take more goods for it. So "country will become poorer in the sinews of war and state". Coinage Reforms Oresme: imprint may be changed if it has been countefeited. Names
should never be changged (cause confusion). Coins of new weight should
have new names. Material changed only when not enough of former metal.,
etc. FIRST ECONOMISTS Copernicus (1526) Traditional Themes Functions - allmention along Aristotlean lines. Hales says "store of
value" Oriigns of money = Hales (cubersomeness of barter). Also Agricola:
money superior because equalize values,cheaper totransport, double coincidence. Minting = all agree it is full control by state. Copernicus = indispensable
for acceptability, Bodin includes mint rights in theory of sovereignty.
Davanzati repeats Oresme Deferrred payments problem not really discussed. Follow Canonists. Copernicus recognizes some difficulties. Hales recommends changing old contracts so equal weight given tocreditor. Bodin, Scaruffi says rents and debts should be adjusted after recoinage. Value of Money Minimize valor impositus, and emphasize intrinsic metal value, so debasement
dominated the conversation more and more. Copernicus: value of metal is basis of coin, but value is not exact. Too much coin, men seek bullion. Saxon coinage controversy of 1530. Albertine position: stamp or popular opinion doesn't matter, what matters is content. Merchants charge less when they are paid in good coin. Causes of high prices is too much money. Ernestine position (easy money) blames hgh prices to things like peace, prosperity of mining, good money, bad money, plenty of money, lack of money, and monopoly. Value of coins shold be fixed to match the market price of silver. Price revolution Mid-16th Centry inflation. Hales say rise in prices purely to debasement. This is because foreign merchants don't care about raitng of new money, and raise their prices when cash debased. Same point made by Malestroit's paradoxes. Claim that prices are higher in France than before, but that is deceptive, since they sell for no more gold or silver than before. (because there is less gold or silver in coins) Hints of blame on America supply in Noel du Fail's Balivernes (1548) and Goamara's Annals (1557). "a causa, segun mi juize, de la much plata y oro que de las Indias a nos han venido". Bodin is first to connect American metal to inflation (1568).
Malestroit's debasement thesis not enough. Bodin identify five cases: Bodin almost ignores effect of demand on value (as mentioned by Scholastics). Also, only 1 & 5 are general rise in prices, wherease 2, 3 and 4 are particular sectors. Bodin's thesis had no influence immediately - throught the 1570s debasement was still blamed. But Bodin's thesis begin to appear in (e.g. in 1581 edition of Hales by W.S.) Old Themes Seignorage: Copernicus (1526) :only enough alloy to offset mintigng cost, no more. Opposes profittaking segniorage, even in emergencies (Bodin allows for emergenicies). ===================== It was only in 1568 that the French mercantilist, Jean Bodin, drew attention to the most important economic development in this period: namely, great influx of gold and silver from the Americas into Spain and consequently the rest of Europe. There was, he speculated, thus a direct relationship between the quantity of gold and silver and the price level. Thus was born the first theory of money - the "Quantity Theory" - which has, surprisingly, survived in some form or another until today. [Note: as it turns out, Bodin's explanation was not entirely correct: prices in Europe had been rising since 1480, whereas the great silver mines of Potosi were only discovered in 1545 and took a considerable amount of time to become diffused in European money. There is also the anomaly that during 1570 and 1590, when gold and silver imports were at their height, prices actually declined.] John Locke (1692) took this idea and "stated" the Quantity Theory of Money as a general rule: if the supply of money is increased, the prices of all goods will rise. Locke applied this immediately: if money supply fell and the prices of goods fell, than the prices of foreign goods would rise relative to domestic goods "both of which will keep us poor" (Locke, 1692). Thus, Locke argued the Mercantilist line of maintaining a favorable balance of trade to ensure an inflow of money and thus that the price level of English goods remained higher than that of foreign goods. To most of the other Mercantilists, Locke's theory was peculiar. Should not lower prices for English goods, they asked, increase exports to other countries and make us wealthier? Locke's idea of money increasing prices but not increasing output was peculiar to them. The idea of money as a "veil" was, for them, almost an oxymoron. Nonetheless, Locke's idea has in fact adopted by many economic theorists since then - albeit, each with some difference. The questions that emerged were then "why" and "how" money affected prices without influencing output. To this question, four essential types of answer were given: (1) the original Quantity Theory; (2) the Cambridge Cash-Balance theory, (3) the Wicksellian theories; (4) the Walrasian theories -- all of which differ on several important concepts. But we should also note that the mechanisms underlying the Wicksellian theories were also applied to explain changes in output as well as prices - thereby contradicting the strict precepts of the "Quantity Theory". Indeed, that was one of Keynes's main contributions in his General Theory (1936). Since then, economics has gone back and forth over whether money affects prices or output. We have also recurrently reversed the question and talked about how prices and output in turn affect the quantity of money - a theory that is much more recent reflecting the more contemporary phenomenon of considering bank-created deposits as "money". Before we begin, let us consider some definitions: "neutrality" is the proposition that a change in the supply of money will not change output in the long-run. "Dichotomy" is the proposition that there is a strict division between the "real side" and the "money side" of the economy, i.e. changes in the money do not affect "real phenomena" such as output. Although many people (and many economists) have confused the terms "neutrality" and "dichotomy", there is a difference: neutrality only claims money is a "veil" in the long-run, whereas dichotomy asserts that money is a "veil" both in the long-run and the short-run. Dichotomy implies neutrality, but neutrality does not imply dichotomy. Many varieties of the theory of money have confused these terms. We should also come clear as to what "money" is. There are in fact many definitions of it. The strictest or "narrowest" definition is that money is merely coins, paper notes and reserves held at central banks. This is also referred to as M0 or "high-powered" money. Wider notions of money would include coins, notes and also checking deposits held by the public at commercial banks. This is also referred to as M1. Finally, one can go even wider and consider some savings accounts, money market accounts and even checkable mutual funds accounts as "money". These wider definitions are referred to as M2, M3, etc. depending upon the degree of "liquidity". By "liquidity" we mean the degree to which particular things can be used to settle a wide variety of transactions. Coins and notes are highly liquid as everyone accepts them in exchange for goods. Cheques are also widely (but not as nearly) accepted. (Note: credit cards are excluded because they are "loans" - the transaction is not completed upon using a credit card, but only deferred until the end of the month). The idea of money being defined by its "acceptability" often gives it the term "medium of exchange". But money also has other functions: it is a unit of account (i.e. prices of goods are expressed in terms of dollars, yen, francs as opposed to peanuts, blast furnaces or sewing machines); money is also a store of value: we exchange labor for food, but we rarely do so directly - we get paid in cash for labor and we use that cash to buy food later. In the meantime, the cash has "stored" the value of our labor. Finally, another idea that has gotten recent attention is the idea of money as a record of a credit transaction, but that would take us a bit too far afield. Another question imposes itself immediately: how much cash to we "desire"? Technically speaking, we usually don't "desire" money but only what money can buy. Indeed, one of the fundamental ideas underlying the "dichotomy" is precisely this. But there is a sense in which money facilitates exchange - like "oil in the machine" as our quote from Hume indicates. It is also possible that we actually "desire" money as a hedge against uncertainty, or for speculative purposes in financial markets, or even because it is "wealth" and we always like wealth. These issues have complicated the old idea of money as a "veil" because now it seems that money has indeed some "usefulness" in and of itself. This issue, lurching between seeing money being only a "veil" and then going on to claim it is nonetheless "desirable" has led to many twists and turns in the history of theories of money.
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