John Munro: Debasement as a necessary defense

I like this guy.

At IDEAS I found a paper:

John H. Munro, 2012. "The Technology and Economics of Coinage Debasements in Medieval and Early Modern Europe: with special reference to the Low Countries and England," Working Papers tecipa-456, University of Toronto, Department of Economics.

I didn't get to the intro yet, but this is the second time I'm quoting from the Abstract:

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 princes (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.

To my mind, that is a magnificent paragraph.

It helps, I guess, that I was looking for explanations for the reason debasements occur, and I found in the work of John Munro not only explanations, but explanations that to some degree support the view I am trying to clarify.


I want to revise and repeat something from mine of 2 May 2013:

The Kennedy half dollar issued in 1964 contains $8.42 worth of silver at recent prices. But the Kennedy half issued in 1965 contains only $3.44 silver. Because after 1964 the silver content dropped from 90% to 40%.

The issue of dimes and quarters containing 90% silver also stopped at 1964. I vaguely remember. (I was in high school.)

Clearly, before 1965, the people in charge of issuing our coins knew they could not continue to issue coins containing 90% silver, or people would melt them down for profit. It's Gresham's law: Bad money drives good money out of circulation.

This is a kind of reverse debasement: The government had to take silver out of the coins, because the coins were getting to be worth less than the silver.

Usually, when we think of debasement, we think of the money becoming worth less because the government reduces the silver content. That's not what happened in the 1960s.


I titled that 2013 post "Reverse debasement". That's not right. If debasement reduces the value of currency, then reverse debasement must increase the value of currency -- what John Munro calls "renforcement". That's not what I'm talking about. I'm talking about reverse causality.

Here's a bit of what Wikipedia has on Debasement:

Debasement is the practice of lowering the value of currency...

One reason a government will debase its currency is financial gain for the sovereign at the expense of citizens...

Debasement was also the result of the value of the precious metal content rising above the face value of coins. As the market price of precious metal rose, the intrinsic value of coins would eventually rise above the face value and so a profit could be made from using coins as bullion rather than monetary instrument. This gave an incentive to money changers and mint masters to practice illegal debasement via clipping and sweating. Coins would also be melted down and exported. To anticipate these illegal debasements and preserve the quality and quantity of coins, the king would either debase or cry up the coinage (i.e. raise the face value of coins). Thus, debasement had its legitimate purposes and was welcome by the population if done to preserve the stability of the coinage.

That last part is footnoted to Ralph George Hawtrey (1919). Currency and Credit. Longmans, Green and Co. p. 280-281. Something else I might want to look up.

Okay, so my 'reversed causality' debasement is not as original as I thought. Hawtrey was on the case a century ago. And John Munro was in the neighborhood. Good! That strengthens my argument.

I don't want to say debasement is never caused by princely greed. But I do want to say that debasement (and in the modern, non-precious-metal-money world, inflation) sometimes has causes other than government. Sometimes, as John Munro says, the government's hand is forced.

The only thing you ever hear about debasement and inflation (unless you go looking in the nooks and crannies) is that the government is doing it to us on purpose against our will and contrary to our better judgment. But if the government's hand is forced, that story just doesn't hold water.

The U.S. Federal government had to take silver out of its coinage in the mid 1960s -- just before the start of the Great Inflation -- because inflation had already reduced the value of the coin so much that turning coins into puddles of silver was about to become profitable. The government's hand was forced by the inflation that had taken place before 1965. Comprende?

Yes, taking silver out of the coin probably contributed to inflation. But that's after the fact. We have to look at causes, not consequences. Look not at what happened because the silver content was reduced, but rather at what happened to cause the silver content to be reduced.

It always comes down to the same thing: The government controls the money, but the private sector controls the credit. The quantity of money that we have for spending falls, relative to the amount of stuff we buy...
... and we make up the difference by using more credit.

Just remember, this was already a problem in 1964-65, enough to force the debasement of U.S. coinage. Now, look at where we were in 1964-65 on these two graphs, and look where we are today.

// related post: Red Shift