Coinage and Fiscal Finagling

In my last post, I considered the emergence of money to facilitate between-group exchange. In this post, I jump ahead several thousand years to the practice of coinage. We can think of coinage as the certification of money. Coinage provides an easy-to-assess standard. Each coin has a given amount of precious metals (mixed with less valuable metals to ensure durability). They are stamped with the insignia of some certifying body to lend credence to their legitimacy. As a social technology, coinage reduced the costs of exchange. It required fewer resources to ascertain the quality and quantity of the (previously existing) money-commodity, such as gold or silver, offered in exchange.

Coinage also presented a significant temptation for the fiscal authority. Coins could be certified by private mints, many of which have existed throughout history. But coinage often became the exclusive prerogative of the local sovereign.  Rulers wanted, and frequently claimed, a monopoly on coinage.  It is not hard to see why. As with all monopolies, forcibly suppressing competition enabled them to earn economic profits---resources which could then be devoted to the things that rulers enjoy, like wars of conquest.

Money, as it actually existed in history, was often dominated by political power to serve as a fiscal instrument for further advancing that power. By forcibly maintaining a monopoly on coinage, rulers could charge a monopoly mint price for turning raw metals into coins. They could also engage in coin clipping---the practice of trimming small amounts of metal from the edges of coins, to be melted down for the purposes of recovering the precious metals. Particularly powerful rulers could even call in the circulation of existing coins, melt them down, and reissue the coins at face value with less precious metal content.  This, too, was a wealth gain for the sovereign---though not for society.

In a perfect world, the regularization of money through coinage would have been a pure wealth gain to society.  In further reducing transaction costs, it enabled a greater degree of exchange, with a wider array of potential trading partners.  Following Smith’s famous dictum, the division of labor would develop further, resulting in more lucrative patterns of specialization and trade.  There is no denying this occurred. However, it was retarded by the fiscal motives of sovereigns, who exploited the new technology of coinage as a means to pursue their own ends at the expense of society.

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Alexander W. Salter

Alexander W. Salter is an Assistant Professor of Economics in the Rawls College of Business and the Comparative Economics Research Fellow with the Free Market Institute at Texas Tech University. His research interests include the political economy of central banking, NGDP targeting, and free (laissez-faire) banking. He has published articles in leading scholarly journals, including the Journal of Money, Credit and Banking, Journal of Economic Dynamics and Control, Journal of Financial Services Research, and Quarterly Review of Economics and Finance. His popular work have appeared in RealClearPolitics and U.S. News and World Report.

Salter earned his M.A. and Ph.D. in Economics at George Mason University and his B.A. in Economics at Occidental College. He was an AIER Summer Fellowship Program participant in 2011.