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Money, Banking, and Inflation An Introduction for Historians HUGH ROCKOFF Most of us like a good story. This is one reason we became historians of one sort or another. What follows is a story about the development of the monetary system in an imaginary economy, tracing the evolution from a pure gold standard to a modern system complete with central bank. The story is intended simply to illustrate some of the important ideas in monetary theory and how working historians might apply them. It does not correspond exactly to the history of any one economy but combines historical features from many. The purpose of the story is to introduce the language of monetary economics to historians. Once they master that language, fruitful dialogue with monetary economists can begin.1 A PURE GOLD STANDARD I begin not at the very beginning, when a commodity such as cattle or salt served as money;2 nor even at some fairly advanced stage when merchants measured prices by weights of gold.3 Instead I pick up the thread 1.1 want to thank Michael Bordo, Stanley Engerman, Susan Mann, and Eugene White for a number of very useful comments on an earlier draft. Of course, they are not responsible for any remaining errors. z. Quiggin 1949 is a fascinating worldwide survey of these early forms of money. 3. The historian working on such early material should not assumethat economists are uninterested in these topics. The basic functions of money are stdl a matter of controversy 177 178 Hugh Rockoff in medieval times. There already exists a dominant form of money: gold coins minted by the king.4 This system, of course, adds greatly to the wealth of the kingdom for reasons that economists have talked about for generations. Money "separates the act of purchase from the act of sale." An artisan who makes furniture and needs shoes does not have to search the kingdom for someone who makes shoes and needs a chair. Instead, our furnituremaker can sell chairs for money to anyone who needs a chair and then later use the money to buy shoes. The king produces coins at his mint setting the mint price of gold at $50.00 per ounce.5 For each ounce of gold bullion brought to the mint the king will return fifty coins each stamped $1.00. The king could perform this service free of charge, paying the expenses of the mint out of some sort of general tax. In this case each coin would contain exactly 1/50 of an ounce of gold. But he need not do so, and like most shrewd monarchs our king does not. Instead, the king makesfifty-fivecoins labeled one dollar out of each ounce of gold brought to the mint, each coin containing 1/55 of an ounce of gold, and keeps five of these coins for himself. This surplus is the seigniorage. He uses it to pay the expenses of the mint and to finance other activities. This important concept, which is very easy to grasp when the monetary system is so simple, is one of the major tools of the monetary historian. There is always a seigniorage, even in complex modern systems. As in any case where there is a profit to be made the historian asks the usual questions. How much seigniorage is being created? Who is getting it? Did the participants in a particular historical episode accurately perceive the answers to thesequestions? Is that what they were really fighting about? For a time the amount of money in our kingdom grew slowly. Each year the demand for money grew as the kingdom expanded, but balancing it was the gold brought to the mint to be minted into new coins. Prices changed little. But then other, richer, gold mines were discovered, and soon the mints were working overtime converting the new gold into new dollars. The result, which seems obvious in the simplified world we have constructed, was an increase in the price level and for a time economic activity. There have been a number of important historical cases in which disamong monetary theorists. Information about how economies moved from barter to money would be of considerable relevance to thesecontroversies. 4. Feavearyear 1931 is a good general history of English money that illustrates many of the points we will touch on m this section. 5. The classic history of the English mint is Craig 1953. [3.15.202.4] Project MUSE (2024-04-19 00:21...

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