Coinage, Debasements, and Gresham’s Laws

For hundreds of years, supplies of coins in Europe emerged, via a curious mechanism, from voluntary decisions of owners of old coins and bullion to exchange them at mints for new coins. Mints were sometimes private enterprises, licensed to produce on demand a list of coins whose design and neness was speciied by the sovereign. Citizens were free to take metal to the mint 1 to purchase newly minted coins, often bearing less rare metal than was surrendered for them. Private mints covered their costs, which included a per-coin seigniorage tax. Under this mechanism, rates of coinage, and therefore also seigniorage revenues, uctuated over time, with low rates of minting often being accompanied by complaints about shortages of small denomination coins, as well as physical depreciation of the currency. A debasement was a respeciication of the list of coins which could be produced, with the rare metal content (the neness) of coins of each nominal value being reduced. Acts of debasement generated revenues for the sovereign only when they prompted voluntary increases in demand for newly minted coins. As revenue raising devices, debasements often`worked,' being followed by spurts in minting. It seems a puzzle that debasements should have provoked voluntary decisions of owners of metal to line up to pay seigniorage taxes by surrendering more substantial coins for less; it certainly is a puzzle if we use a model of the demand for money in which coins circulated by weight. 2 In this paper, we use a model in which coins circulate by face value or tale to explain this behavior. Modelling circulation by tale elucidates this`debasement puzzle' (a phrase of Rolnick, Weber, and Velde) as well as various doctrines in monetary economics involving Gresham's Law (or, as we shall see, Laws) and the quantity theory of money. A `small country' version of our model has coins circulating by tale domestically and by weight 1 Even when mints were government operated, the government typically had no power to compel agents to engage in coinage. 2 Rolnick, Velde, and Weber (1994) summarize a set of observations from medieval monetary regimes which are \: : : all consistent with the following stylized fact: large debasements are accompanied by unusually large minting volumes that yield unusually large revenues for the sovereign." (p. 1) They frame as a puzzle the fact that large debasements attracted voluntary deliveries of metal to the mints, while small …