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Metallic money and inflation February 11

Explore seignorage methods in France and Austria around 1420 and 1920, analyzing the impact on inflation rates. Learn about historical backgrounds, minting technologies, and coin circulation nuances.

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Metallic money and inflation February 11

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  1. Metallic money and inflationFebruary 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

  2. 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

  3. Similar case: Austria, 1920 1815-1918

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

  5. 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.

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

  7. 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

  8. 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

  9. 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)

  10. 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

  11. Market price of silver P Example % 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 samecoin in 1422 : • Price of silver • Intrinsic value v = 1/2 • Does the coin circulate?

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