Metallic money and inflation February 11

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Presentation transcript:

Metallic money and inflation February 11 Seignorage in France around 1420 Historical context Seignorage method Data A simple model Inflation in Spain in the 16th century Introduction to Habsburg Spain

Seignorage at the time of Joan of Arc Around 1422 (before J. o. A: 1428) National emergency: Invasion right and left No tax base Seignorage Inflation

Similar case: Austria, 1920 1815-1918

Austria Tax base shrunk Large administration concentrated in Austria Expenditures through money creation inflation reached 140 percent between 1922 and 1923

Monetary system in the Middle Age As in the roman empire, bimetallic system (gold, silver) one livre (pound) = 20 sols (shillings) Each sol = 12 deniers (pence/(denarius)) Some additional complications Livre tournois (from city of Tours, on the Loire, SW of Paris) Livre parisis (from Paris), worth 25 percent more, but less used.

Technology Simple technology easy decentralization but: small shop biggest equipement furnace easy decentralization but: variation from mint to mint imitations

Mints 24 mints private activity which is regulated profits turned to the king direct control of the king (no legislation) each mint buys the silver (gold) on the market and pays with the coins it produces makes the coins according to specifications

Seignorage with coins The mint has instructions to make coins (mix of silver and copper), Coins are defined by two numbers Degree of fineness F : fraction of silver in the mix Number of coins N per pound (or unit-weight) of mix. The face value of the coins (written on its face) f Operation of the mint Buy the silver on the market, at the price P Mix with copper using the degree of fineness F Divide each pound (or unit-weight) of silver in N coins. Take one pound of silver The weight of the mix is 1/F The number of the coins is N/F The total face value of these coins is L=f.N/F : the par value of the coin

Profits P market price of silver (for a unit weight of one marc) L - P = gross profit (per marc [ pound ] of silver) Net profit is L - Q - brassage cost (i.e. production cost other than silver)

When does a coin circulate ? (used for exchanges When its intrinsic value is smaller than its face value Suppose the price of silver is P livres Intrinsinc value of the coin: v = F.P / N The coin circulates only if v < f Condition equivalent to P < f.N / F

Example % 1 livre = 240 deniers f = 1/12 Market price of silver P % Mint par L 1 livre = 240 deniers f = 1/12 Intrinsic value of the coin in 1418 : v = F.P / N = 0.444x9/80 = 1/20 < 1/12 the coin circulate Verify L > P Profit (gross) Profit (net) Intrinsic value of the same coin in 1422 : Price of silver Intrinsic value v = 1/2 Does the coin circulate?